UK: UK Serious Fraud Office Increases The Burden On Institutional Investors

Last Updated: 30 March 2012
Article by Jonathan Pickworth and Karen Coppens

SFO Recovers Dividends from Innocent Shareholder

On 13 January 2012, the UK Serious Fraud Office ("SFO"), using its civil recovery powers under Part V of the Proceeds of Crime Act 2002 ("POCA"), recovered funds from the innocent shareholder of a UK company, which company was convicted in 2009 of various corruption-related offences. The SFO has stated that this case is a signal that it expects shareholders to drive anti-corruption compliance. Where institutional shareholders do not do so, the SFO can seek to recover the proceeds of unlawful conduct already paid out to third parties, even if those shareholders are completely innocent of the wrongdoing that has occurred, and even if they do not hold a controlling interest.

As set out below, fund managers and other institutional investors should sit up and take note of this development. The SFO is sending a clear message to shareholders that they should be pro-active in seeking to ensure compliance within the companies in which they invest. The potential application of POCA is broad and could apply to all types of unlawful activity, not just corruption.


Following a self-report to the SFO, Mabey & Johnson Limited — a privately owned engineering company — pleaded guilty to corruption and sanctions offences in 2009. In doing so, it became the first company in the UK to receive a conviction for corruption under the then existing legislation. More recently, two former directors of Mabey & Johnson and a senior manager were convicted in February 2011 of sanctions offences in connection with the Iraq Oil for Food programme. The sanctions offence proved the basis for the SFO exercising its civil recovery powers.

The Use of the Civil Recovery Regime

This is not the first time that the SFO has used its civil recovery powers against a shareholder company. It recovered Ł7 million from MW Kellogg Limited in February 2011, but that related to funds that had been identified as recoverable property due to the shareholder.

The SFO's action in the Mabey case is the first time that powers have been used to claw back dividends that had already been paid up. The SFO's action against the shareholder may have been seen as having a second bite of the apple because the company had successfully negotiated a plea in relation to the criminal charges in 2009. But the legal basis was quite straightforward as POCA enables the SFO to recover property (such as dividends) obtained by the unlawful conduct of others, from those who had no knowledge of, or involvement in, the unlawful acts. The SFO's rationale is outlined in the statement (below) of its Director, and is clear: it is not to punish further a company or its owners, but rather to send a message to others. If institutional shareholders fail to ensure that compliance within the companies in which they invest is adequate, then they risk past dividends received being recovered through this process.

Potential Implications for Institutional Investors

Although the Mabey case involved a privately-owned company, the principles from Mabey could, in theory, apply to shareholders of publicly traded companies. There have been criticisms levelled in the press that the exercise of such powers is unfair to investors who do not have access to internal compliance procedures of the companies in which they invest. However, the SFO has indicated its intention to use its powers of civil recovery more widely. The Director of the SFO, Richard Alderman, stated:

There are two key messages I would like to highlight. First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously. In this particular case...the shareholder was totally unaware of any inappropriate behaviour....

The second broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity. Where issues arise we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.1

There is little doubt that the SFO could potentially target investors in publicly listed companies, considering the broad scope of powers granted to the SFO under POCA. There are questions, however, as to what shareholders realistically can do, given that such investors, in contrast to private investors, have far less opportunity to conduct detailed due diligence outside what is publicly available.

It is also worth noting that Part V of POCA contains certain important protections for investors. The court has discretion to refuse to order civil recovery against:

  • A third party who obtained the property in question in good faith;
  • Where that third party also took subsequent steps in relation to the property that the third party would not otherwise have taken; and
  • Where recovery against a third party would be detrimental to that third party and would not be just and equitable.

How to Guard Against an Action for Civil Recovery

This recent development brings into focus the steps that investors might consider taking in relation to current and potential investments, including some form of enhanced risk-based due diligence of higher risk companies. It may no longer be enough simply to ask for a copy of anti-corruption policies.

Shareholders can take the following steps to reduce risks:

  • Assess the nature of the company's business and whether it is high risk, including consideration of the jurisdictions in which the company operates and how those jurisdictions rank in the Corruption Perceptions Index2;
  • Ask the company for information about its policies and procedures;
  • Enquire how the company trains its employees and agents;
  • Determine how the company assesses the understanding of employees as to correct behaviour so as to measure the effectiveness of training given; and
  • Assess how the company tests and monitors its processes and controls.

Next Steps

The recent use by the SFO of its civil recovery powers to recover funds from an innocent shareholder is a landmark development in anti-corruption enforcement. However, there are a number of outstanding questions as to the broader applicability of the SFO's power to recover funds from innocent shareholders:

  • How will the SFO be able to trace the proceeds of unlawful conduct?
  • Is it possible to reliably establish that particular dividends are the proceeds of unlawful conduct?
  • What will happen in cases where the shareholder no longer holds the dividend?
  • What will happen where a dividend is paid to numerous shareholders?

A number of points should be borne in mind when considering the concerns identified above:

  • The SFO is sensitive to the criticism voiced in the press. It is our understanding that the SFO has written to a number of the leading trade associations, including the Association of British Insurers, the Investment Management Association and the British Bankers' Association to receive their feedback. This highlights the importance of this development.
  • POCA is an established piece of legislation that came into force in February 2003 but it is the first time that POCA has been used to recover the proceeds of unlawful conduct already paid out to third parties. POCA has extensive application and can be used to recover all property wherever situated acquired further to fraud, tax evasion and money laundering, and which represents the proceeds of crime. Those who have interpreted the scope of POCA narrowly should reconsider whether their actions and property could potentially fall within the scope of POCA in light of Mabey.

Institutional investors, private equity houses and fund managers, amongst others, who choose to do nothing, sit back and hope to rely on the technical difficulties that the SFO faces in tracing the proceeds of unlawful conduct should ready themselves for a legal challenge. Alternatively, a better option would be to elect to be pro-active and ask questions of the companies in which current and potential investments are made, as well as maintaining an accurate record of all the steps taken to ensure that enhanced risk-based due diligence has been carried out and that satisfaction has been obtained that appropriate processes and controls are in place in companies invested in.3

It is abundantly clear that the burden falling on institutional investors, private equity houses and fund managers to be pro-active and ask questions of the companies in which current and potential investments are made, is increasing.


The SFO's recent use of its civil recovery powers to recover funds from an innocent shareholder is a landmark development in anti-corruption enforcement. Some people have suggested that senior members of the SFO may not be keen to follow the initiative of the current Director of the SFO. But David Green QC, the incoming SFO Director, is the former head of the Revenue and Customs prosecution office and may be even more prosecution-oriented than his predecessor.

In addition, recent developments stem from the SFO and UK coalition government's desire to encourage sweeping changes in corporate behaviour, which is a commendable aim. Even if institutional investors are not caught under the strict technicalities of the law, a broader corporate governance point applies. Prudent institutional investors, private equity houses and fund managers should want to know as much as possible about the companies into which they are currently investing or will potentially invest in. A failure to do so may have wide-ranging consequences for both investors and the companies into which they choose to invest. These may include: costly reputational issues, unlimited fines, the imprisonment and disqualification of directors, the imposition of a corporate monitor, debarment from tendering for public contracts, confiscation of turnover, and significant legal expense, amongst others. It is abundantly clear that the burden falling on institutional investors, private equity houses and fund managers to be pro-active and ask questions of the companies in which current and potential investments are made, is increasing.


The authors would like to thank Lloyd Firth for his research for this article.


2 /

3 In the recent Cayman Islands Grand Court decision in Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom, the two defendants, both "independent" directors of the fund in question, were each ordered to pay damages in the amount of US $111 million for wilful neglect or default in carrying out their duties as directors, based in large part upon the fact that the defendants "did nothing and carried on doing nothing for almost six years". For further information regarding the Weavering case, please refer to "Private Fund Directors: Don't Just Sit There – Do Something!", available at /.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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