Legal Briefing

How far will the SFO go to recover the proceeds of crime?

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Crime, fraud and licensing | 01 March 2012

With the renewed focus on the criminal law brought about by the arrival of the Bribery Act 2010, in-house counsel may be forgiven for thinking that they are fully up to date with the potential consequences of corporate involvement in illegal activity. However, as we move through 2012, the Serious Fraud Office (SFO) has already taken yet another, perhaps unexpected, step that could have yet further financial consequences for those holding shares in companies that engage in unlawful conduct.

In mid-January 2012, the director of the SFO concluded civil proceedings in the High Court, which resulted in the recovery of share dividends received by Mabey Engineering (Holdings) Ltd (MEH). These dividends had been paid as a result of contracts that were won through unlawful conduct by one of its subsidiaries, the modular bridge manufacturers, Mabey and Johnson Ltd (M&J).

Perhaps, what is most notable about this development is the fact that the SFO decided to target the parent shareholder company for dividends already paid, even though MEH had no direct involvement 
in obtaining, or any knowledge of, the unlawful contracts.

BACKGROUND

In order to win business in 2001-02, senior M&J officials had agreed to pay kickbacks to the Iraqi government amounting to 10% of the contract value for the supply of 13 bridges. At that time it was an offence to pay funds to the Iraqi government without the grant of a licence from HM Treasury. M&J had not applied for such a licence.

In 2008, M&J approached the SFO to 
self-report a number of irregularities identified during an internal investigation, which included the sanctions offences in Iraq and the corruption of public officials in Jamaica and Ghana.

In 2009, as part of a plea negotiation, M&J admitted a number of criminal offences and paid a total penalty of £6.6m.

In 2011 two former M&J company officers and an employee were convicted for their part in breaching sanctions against Iraq.

CIVIL RECOVERY

Although the SFO gave M&J full credit for its co-operative approach and early resolution of the case, it was not content to end the matter with the convictions and financial penalty. It looked higher up the chain and decided that others had benefited from M&J’s unlawful conduct. It therefore decided to confiscate this benefit. In the spirit of ongoing co-operation, MEH agreed to pay the sum of £131,201 plus costs. This amount represented the dividends that MEH collected from the contracts at the centre of the sanctions offences.

In seeking to make this recovery, the SFO was not exercising new powers, rather it relied on existing Proceeds of Crime Act (POCA) 2002 powers, which allow it to recover property obtained by a third party from the unlawful conduct of others. In 
this case, the parties agreed to a consent order under s276 of POCA 2002. However, 
in contested matters, the SFO would only have to show, on the balance of probabilities, that the profits were made as a result of unlawful conduct for those profits to become property that would 
be recoverable. It is important to note 
that it would not have to prove that 
the third party played any part in the unlawful activity.

In seeking to recover what was a relatively modest sum, as compared with the 
financial penalty already imposed on 
M&J, the SFO was clearly determined to signal that it is willing and able to pursue anyone who benefits from the unlawful activity of others.

KEY MESSAGES FROM THE SERIOUS FRAUD OFFICE

Richard Alderman, the SFO director, 
has two key messages that he hopes 
will be recognised as a result of these proceedings:

‘First shareholders who receive the proceeds of crime can expect a civil action against them to recover the money. The SFO will pursue this approach vigorously. In this particular case, however, the shareholder was totally unaware of an 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… 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…’

Going forward, those providing advice to corporate entities on anti-bribery and corruption compliance, particularly in the context of mergers, acquisitions and investments, need to ensure that they convey these key points:

  1. The SFO will continue to pursue the proceeds of crime using all of its available powers, and is willing and able to target innocent shareholders.
  2. There does not necessarily have to 
be a prior criminal conviction before 
Part 5 of POCA 2002 can be used – the SFO also uses civil recovery where it does not have sufficient evidence to bring a prosecution.
  3. Shareholders and investors must take an active interest in the way the companies in which they invest operate, taking all reasonable precautions (including due diligence before the investment is made), to ensure that they have ethical business practices.

By Sarah Marquis, associate, DLA Piper UK LLP.