The U.K. Serious Fraud Office issued a news release on Friday 13th January stating that it has reached a civil settlement with the shareholders of Mabey Engineering (Holdings) Ltd to pay over £130,000 it received in dividends from Mabey & Johnson Ltd, its wholly owned subsidiary. This has occasioned the latest round of excitement in the media regarding the Serious Fraud Office and its mandate to enforce anti-bribery legislation.
The order, which appears to have been made by consent, was granted under Part 5 of the Proceeds of Crime Act 2002. This Act “enables the enforcement authority to recover, in civil proceedings before the High Court, property which is, or represents, property obtained through unlawful conduct”. “Unlawful conduct” is any conduct which is unlawful under the criminal law of the United Kingdom or, if the conduct is undertaken outside the United Kingdom, is unlawful either under local law, or if the same conduct was undertaken in the United Kingdom, would have been unlawful.
For a Court to make such an order it must be satisfied on a balance of probabilities that any matters alleged to constitute unlawful conduct have occurred.
Here, that evidential burden was easy to overcome. The subsidiary and two of its directors had pleaded guilty to bribery offences and, in the individuals’ case, been sentenced to terms of imprisonment.
In publishing the order, Richard Alderman said:
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…
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.
His statements have, of course, been given the widest possible interpretation and, in the case of his first message, the fact base against which it was delivered has been largely ignored.
In Mabey, there was as clear a causal chain as it is possible to envisage between the corrupt activity, profit in the subsidiary and the dividend. Hence the prosecution and the civil action.
His second message has been widely interpreted as imposing on all institutional investors, including pension funds, an obligation to conduct rigorous due diligence before they invest, or risk losing dividend payments as a consequence. I very much doubt that this was what he intended.
Section 7 of the Bribery Act creates a specific adequate procedures defence. The Ministry of Justice’s guidance on this section makes it clear that companies are required to take necessary and proportionate steps to mitigate the bribery risks that their businesses face. They are not required to take all possible steps to mitigate any possible risk. This interpretation has been endorsed many times by the Lord Chancellor.
It would therefore be erroneous if the obligations under the primary anti-bribery statute imposed a lesser burden on the corporate to conduct due diligence than the application of the Proceeds of Crime Act. Indeed, it is difficult to see on what predicate offence such an order might be based.
Aside from this mere legal technicality, there are public interest issues and ultimately judicial control mechanisms which make an over-zealous application of the Proceeds of Crime Act unlikely.
I would suggest that what Richard Alderman was alluding to in his remarks had a great deal more to do with merger and acquisition activity, joint ventures, private equity financing and institutional FDI, and not whether a pension fund takes a short, medium or long term position in an international business listed on a major exchange.
In many cases, companies are very well aware of their obligations to conduct proper and effective due diligence prior to investment. They have had “adequate procedures” or compliance controls for the last ten years or more – not only because of compliance risk – but because it makes eminently good business sense to understand who you are doing business with.
I suggest Mr Alderman’s remarks were a reminder to those who have not yet taken this step.
Bill Waite is a founder of The Risk Advisory Group (a sponsor of the FCPA Blog) and an expert on anti-bribery and corruption legislation. He formerly practiced as a criminal barrister before joining the Serious Fraud Office in 1991 as a prosecutor. He can be contacted here.