Serious Fraud Office - targeting dividends

31.01.12

 

This article was written by Tom Ellis, partner in Wragge & Co LLP's Corporate Investigations team, and published in the January/February 2012 issue of PLC magazine.

The Serious Fraud Office (SFO) has for the first time taken action in the High Court to recover the proceeds of crime by targeting dividends gained through unlawful conduct. Shareholders who receive the proceeds of crime as a dividend can therefore expect civil action against them to recover the money. 

The facts

Mabey & Johnson Ltd (M&J) was sentenced at Southwark Crown Court in September 2009 in relation to admitted offences of overseas corruption and breaching UN sanctions. This was the first prosecution brought in the UK against a company for these offences.
The prosecution for corruption arose from the company's voluntary disclosure to the SFO of evidence that the company had sought to influence decision-makers in public contracts in Jamaica and Ghana between 1993 and 2001. The prosecution for breach of UN sanctions during 2001 and 2002, as they applied to contracts in the Iraq "Oil-for-food" programme, arose from an investigation commenced in January 2007.

In February 2011, two former directors and a sales manager of M&J were sentenced for providing kickbacks to the Iraqi government of Saddam Hussein.

The Crown Court adopted the penalties agreed to by the company and the SFO, and M&J was ordered to pay a fine of £750,000 for each of its two corruption offences and £2 million for breaching the sanctions, in addition to a £1.1 million confiscation order. The company also agreed to pay reparations and submit its internal compliance programme to an SFO-approved independent monitor. 

Confiscation of dividends

On 12 January 2012, the SFO took action in the High Court to secure a civil recovery order against Mabey Engineering (Holdings) Ltd (ME Holdings), the parent company of M&J, and part of the Mabey Group. The SFO sought payment of more than £130,000 in recognition of sums ME Holdings received through share dividends derived from contracts won by M&J through its unlawful conduct.    

As a result of the order, ME Holdings will pay £131,201 under Part 5 of the Proceeds of Crime Act 2002 (which deals with the civil recovery of the proceeds of unlawful conduct). The significant point for both the SFO and ME Holdings is that, in civil recovery proceedings, the action is in effect against the property itself and not the company holding the property.

The sum represents the dividends which ME Holdings collected from the contracts at the centre of the UN sanctions prosecutions. It will also pay costs of £2,440.

Implications for investors

Despite the relatively small sum that was confiscated, the order made has potentially far-reaching implications for investors. 

Richard Alderman, director of the SFO, has highlighted two key messages. Firstly, shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will be taking a strong line, stating that it "will pursue this approach vigorously".

Secondly, shareholders and investors in companies will need to conduct appropriate due diligence to satisfy themselves that the business practices of the companies they invest in pass muster. The SFO regards this "as very important and we cannot emphasise it enough".

The warning to institutional investors is clear, with Mr Alderman stating that where "issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect." The SFO has made it plain that it will use the civil recovery process to pursue investors who have benefitted from illegal activity. 

It should, however, be remembered that this appears to have been a relatively straightforward prosecution, with the Mabey Group co-operating with the SFO throughout the process (see below). It is also important to note that this case involved a privately owned company and its corporate parent. Even so, the SFO has emphasised that it would not hesitate to pursue third party investors in listed companies. However, in other cases, where the offences are not admitted and involve independent and innocent third parties, recovery may not be as straightforward. 

While there is a compelling argument that dividends from illegal or criminal activities should be returned, each case will depend on its own facts. More complex cases may prove to be problematic, particularly where the proceeds of crime have been dissipated through a series of actions and entities. Similar to problems that occur in tracing the proceeds of crime, determining what proportion of a dividend was derived from illegal activity is also likely to be a difficult exercise. 

Co-operation and change

From the SFO's perspective, the level of co-operation it received from the Mabey Group resulted in it achieving the necessary prosecutions and orders quickly. The SFO has readily acknowledged that the company played a positive part by recognising the unacceptability of past business practices and by coming forward to report them and engage constructively with the SFO. Indeed, the SFO regarded the pay-back by the shareholder as "the final act in an exemplary model of corporate self reporting and co-operative resolution". 

The publicity and emphasis given by the SFO to the co-operation of the Mabey Group sends a strong signal to other companies that might see some parallels in this case, for them to talk with the SFO and have the matter dealt with quickly and fairly. Whether other companies are as forthcoming and co-operative as the Mabey Group remains to be seen. A failure to do so may, however, result in a more acrimonious prosecution, increased costs and the potential for a more severe punishment. 

Operating in parallel with any self-reporting procedure, or at the same time as any pending or ongoing prosecution, a company should take steps to review its systems and risk profile for unlawful practices and implement any necessary procedures. Indeed, in this case, since the self-referral, Mabey Group has introduced new management and anti-bribery and corruption procedures and has appointed an independent monitor.

Prevention, however, remains the best form of defence and companies should take regular steps to monitor and review the adequacy of all their systems and procedures for unlawful practices, and take any relevant actions immediately. It is also important to remember that each company will have its own unique risks and no one size will fit all.  Different procedures will be appropriate depending on the size of the company, the sectors and jurisdictions in which it does business, as well as the nature of its business partners and transactions. Procedures should be proportionate to the risks faced by the company.

For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Will Harpur on +44 (0)121 685 3819 or Gayle Redding on +44 (0)121 685 2708

This published article may contain information of general interest about current legal issues, but does not give legal advice.