UK Economic Crime Group: Enforcement Update
In this edition of the UK Enforcement newsletter, we cover: the implementation of Unexplained Wealth Orders, the first conviction in the UK of a corporate for failing to prevent bribery; the SFO's charging decision against Barclays regarding its Qatar Holdings loan; the conviction in San Francisco of Autonomy's former CFO; and developments in the ongoing EURIBOR trial in London.
We also review two recent cases on the development of the doctrine of legal professional privilege in the UK, and two important judicial reviews of the SFO's actions regarding disclosure and the exercise of its statutory powers.
Issue of Privilege in internal investigations considered by the Court of Appeal
In R v Jukes the Court of Appeal held that an interview in an internal investigation was not held for the dominant purpose of litigation. This added to the developing caselaw since SFO v ENRC, which was referred to approvingly in the case of Bilta (UK) v RBS in December 2017.
Unexplained Wealth Orders
The first unexplained wealth order was secured by the National Crime Agency, targeting high-value properties.
BarclaysPLC charged Over Qatar Holdings Loan
Barclays PLC has been charged in respect of this loan, the Serious Fraud Office's (SFO) investigation having been ongoing since 2012.
First Conviction for an Offence of Failing to Prevent Bribery
In February Skansen Interiors Limited became the first company to be tried and convicted of this offence, while in April two men were imprisoned after pleaded guilty to bribery offences.
Former Deutsche Bank Trader Pleads Guilty in EURIBOR Prosecution
Christian Bittar pleaded guilty to a conspiracy to defraud, leaving five other former traders from Deutsche Bank and Barclays to stand trial, one of whom has refused to attend.
Former Autonomy CFO Convicted of Fraud
Shushovan Hussain was convicted in San Francisco of multiple counts of fraud for his role in the misstatement of Autonomy's value prior to its sale to HP in 2011.
SFO criticised for disclosure failings
In R (on the application of AL v SFO), the SFO was heavily criticised for its decisionmaking in failing to secure witnesses' first accounts from internal investigations.
SFO Challenged on Its Use of Powers to Obtain Evidence from Overseas
In R (on the application of KBR) v SFO the SFO's frequent use of powers to issue Section 2 Notices demanding overseas evidence has been challenged before the High Court.
Developing the Doctrine of Legal Professional Privilege:
- Bilta (UK) ltd & Ors and (1) Royal Bank of Scotland plc (2) Mercuria Energy Europe Trading Limited  EWHC 3535;
- R v Jukes  EWCACrim 176;
- Comments made by the SFO regarding ENRC appeal
Bilta & RBS
In May 2017, the High Court released its judgment in SFO v ENRC, which was examined in detail in our June 2017 newsletter. The judgment has been widely received as a significant narrowing of litigation privilege in the context of internal investigations. The appeal of ENRC is scheduled to be heard in the Court of Appeal in July this year. However, two subsequent cases have illustrated the issues that are developing around litigation privilege. In Bilta v Royal Bank of Scotland, the High Court considered the scope of litigation privilege over documents created in the course of an internal investigation following allegations by Her Majesty's Revenue and Customs (HMRC). In order to claim litigation privilege three criteria must be satisfied: (1) litigation must be in reasonable contemplation; (2) the documents must be created for the sole or dominant purpose of litigation; (3) the litigation must be adversarial (i.e. not investigative or inquisitorial). In Bilta the court considered the second limb of this test. In 2010, HMRC wrote to the Royal Bank of Scotland (RBS) stating that it was investigating carousel intra-community fraud, and that its investigation might affect input-tax that had been claimed from HMRC by RBS. RBS launched an internal investigation and cooperated fully with HMRC throughout. In 2012, HMRC wrote to RBS and said that it was minded to deny RBS £86 million in input VAT, but that its decision had not yet been made. RBS took legal advice, met with HMRC and agreed to provide a full written report. With the limitation period approaching expiry, HMRC protectively issued an adverse finding against RBS, but reassured RBS that this did not constitute its final decision and that it would take account of RBS' written report.
Bilta was threatened with an adverse assessment by HMRC and made allegations of dishonest assistance against RBS. Bilta wrote to RBS and requested documents that had been created during its internal investigation, such as interview transcripts with ex-employees. Bilta argued that when the documents were created litigation with HMRC was in contemplation, but that the documents had not been created for the sole or dominant purpose of litigation, so did not attract litigation privilege.
The Court held that RBS's notes and transcripts of interviews with employees were covered by litigation privilege. It said that, when assessing litigation privilege, courts should look at the specific facts of the organisation's interactions with the investigating body and see where those facts fall on the continuum forming the road to litigation. It also highlighted the Court of Appeal's judgment in Re Highgrade Traders, which, it said, was not considered by the Court in ENRC and which states that the subsidiary purpose of preparing documents for investigation may be subsumed by a primary purpose of preparing for anticipated litigation.
On the facts, the Court held that the letter from HMRC stating that it was minded to make an assessment against RBS constituted a "watershed moment", and was akin to a letter before action. Although the letter did not formally issue proceedings, from that point onwards RBS were gearing up for litigation and any documents created were created predominantly for that purpose.
R v Jukes
In January 2018 the Court of Appeal heard another key privilege case, R v Jukes.
Paul Jukes was a transport and operations manager at a waste and recycling company. In 2010, an employee at his workplace was fatally injured when he attempted to clear a blockage in a baler machine. The firm launched an investigation, and in his interview, Jukes stated that he was responsible for health and safety. Sixteen months later, Jukes was interviewed by the Health and Safety Executive (HSE) and police as part of their investigation into the death. This time, Jukes denied that he had been responsible for health and safety. At trial, the prosecution relied on his first statement, and he was sentenced to nine months imprisonment.
The Court of Appeal held that litigation privilege did not apply to his first statement and that it could be used in court. It said that, at the time of the interview, no decision to prosecute had been taken by the HSE and that "an investigation is not adversarial litigation".
The Court also had regard to the fact that at the time of the HSE interview, neither Jukes nor his employer knew whether the HSE had sufficient knowledge to have a realistic prospect of securing a conviction.
Whereas Bilta was taken as a signal that courts may be willing to take a more nuanced view of litigation privilege, Jukes has tacked very closely to the High Court's decision in ENRC. As the judgment was given by the Court of Appeal, it may indicate the line that the Court is likely to take when it hears the ENRC appeal later this year.
It is possible to draw two important conclusions from Jukes and Bilta. Firstly, it may be easier to assert litigation privilege in civil litigation, although the court's decisions will very much depend on the facts of each case. Certainly, as stated in ENRC, criminal investigation does not equate to adversarial litigation. Secondly, timing is crucial. In Jukes, the relevant evidence dated from an early point in the investigation, when no prosecution decisions had been taken and the evidence was fairly opaque, so the Defendant could not have known whether litigation was reasonably in contemplation. In Bilta, the relevant evidence had come into existence at a late stage, when the HMRC investigation had been ongoing for several years and there had been a preliminary indication of their findings that led RBS to understand that litigation was likely.
SFO comments on ENRC appeal
Speaking at a Q&A session in Washington DC on 2 March 2018, John Gibson, SFO case controller for the ENRC investigation, described some reporting of that case as "melodramatic".
He reiterated the court's judgment, that privilege would apply if a company knows there is serious wrongdoing and anticipates there will be adversarial proceedings, but rejected the view that the judgment has eroded litigation privilege. When challenged that requiring a company under investigation to demonstrate some knowledge of wrongdoing undermined the concept of litigation privilege, he responded that "this is the tightrope that lawyers and companies will have to walk".
It is likely that, however the Court of Appeal rule in the ENRC appeal to be heard this summer, the case would be appealed to the Supreme Court, so the question of the proper application of litigation privilege is unlikely to be resolved in 2018.
First Unexplained Wealth Orders Secured
Unexplained Wealth Orders (UWOs) came into force in the UK on 31 January 2018 under the Criminal Finances Act 2017 and have the potential to be a powerful tool for the UK enforcement authorities. If served on an individual (or a company / trust linked to an individual) who is a Politically Exposed Person (PEP) or is suspected of being involved in serious crime in the UK or elsewhere, a UWO requires them to provide information about how they acquired the asset(s) (worth over £50,000) referred to within the order. Pending the response, the authorities may apply for a freezing order over the asset(s) to prevent the individual from dealing with or disposing of it. If the individual fails to provide an explanation within a given timeframe, or provides unsatisfactory evidence, it will raise a presumption that the asset(s) constitutes recoverable property for the purposes of a civil recovery order.
The first UWO was secured by the National Crime Agency (NCA) on 28 February 2018 against UK properties (value circa £22m) believed to belong to a politician from central Asia. The two properties, one in London and one in the south-east of England are also subject to a freezing order.
It remains to be seen whether UWOs will be used to target alleged corruption in London in particular, but the NCA have certainly put down a marker. More recently, UWOs have been suggested as a possible response against Russia in relation to the Salisbury poisoning, targeting those with property in London and with close links to the Kremlin. The UK authorities will, however, have to be careful to ensure that there can be no suggestion that UWOs are being used for political gain.
SFO Charges Barclays PLC Over 2008 Qatar Loan
On 12 February 2018 the SFO charged Barclays Bank PLC with unlawful financial assistance in relation to a loan made to Qatar Holdings LLC in November 2008.
The SFO alleges that Barclays made a loan to Qatar Holdings for $3 billion, with the intention that the money be used to purchase shares in Barclays, helping to prop up the bank's share value at the start of the financial crash. The SFO opened its investigation into the Qatar loan in August 2012 and brought charges against Barclays' holding company in June 2017. At that time the SFO also charged four former Barclays bankers, including the former Chief Executive John Varley, with offences relating to the bank's £11.8 billion emergency fundraising activities in 2008, including the Qatar loan. These were the first criminal charges to be brought against a British bank and its employees for actions taken during the crisis, and have been viewed by some as the most significant charging decisions taken by the SFO.
The new charge is significant because it is being brought against Barclays' operating arm, as opposed to its holding company. This means that if found guilty, the bank could face regulatory penalties from the Financial Conduct Authority and the Prudential Regulation Authority, including withdrawal of its banking licenses. Barclays denies the charge and the trial is likely to be heard in 2019.
First Trial and Conviction for Failing to Prevent Bribery Offence: R v Skansen Interiors Limited
This is the first conviction for an offence under Section 7 of the Bribery Act 2010 (failing to prevent bribery). Skansen Interiors Limited SIL) had contested the charge on the basis that the company had adequate procedures in place to prevent bribery but this was rejected by the jury.
The Crown Prosecution Service (CPS) has been criticised for not having pursued an alternative disposal such as a Deferred Prosecution Agreement. There are a number of reasons why, based on what has been published about the facts of the case, an alternative disposal may have been appropriate. SIL is a small/medium enterprise with 30 employees and when the bribery was discovered by the incoming CEO a number of steps were taken. An internal investigation was undertaken to establish the extent of any wrongdoing; Bribery Act compliance procedures were implemented; those involved in the misconduct were dismissed; the matter was reported to the City of London Police; and a suspicious activity report was made to the NCA. Despite these positive steps taken by the company and despite the fact that SIL had no assets, they were not invited to enter into a Deferred Prosecution Agreement. The sentence which the company received, an absolute discharge, is a reflection of the severity with which the court viewed this case. Indeed, the Judge questioned why the prosecution was brought against the company when no financial penalty could be imposed due to their financial position.
The CPS maintains that it was in the public interest to prosecute SIL so that a message was sent to others in the industry. The decision to prosecute may, however, have wider implications by discouraging companies from self-reporting in similar circumstances when they do not consider that doing so will result in a better outcome.
On 23 April 2018 one of the company's directors and another man were imprisoned for 12 and 20 months and disqualified from being company directors for six and seven years respectively. Both had pleaded guilty to bribery offences.
Euribor: Christian Bittar Pleads Guilty
On 2 March 2018, former Deutsche Bank trader Christian Bittar pleaded guilty to conspiracy to defraud in connection with manipulating Euribor, the Eurozon's benchmark for interbank lending rates. He is currently awaiting sentencing.
The trial of five other former Deutsche Bank and Barclays traders commenced on 9 April 2018. Four defendants have pleaded not guilty, while the fifth has not entered a formal plea and refused to appear, claiming that the proceedings in the United Kingdom would not be fair. During the course of the proceedings seven other individual traders have been named as co-conspirators, drawing in other banks, with those traders employed by Barclays, Deutsche Bank, BNP Paribas, Citibank, JP Morgan, Société Générale, Credit Agricole and HSBC.
11 traders were initially charged by the SFO in relation to Euribor manipulation. However, the SFO has struggled to enforce European arrest warrants for five other traders. On 21 February 2018 the Frankfurt state prosecutor's office decided that it would not extradite four other Deutsche Bank traders to face charges in the UK, stating that too much time had elapsed since the alleged crimes under German statutes of limitations. Similarly, a French court ruled that it would not extradite a former Société Générale employee.
On 30 April 2018, the former CFO of software firm Autonomy was convicted of fraud in the US. Shushovan Hussain was found guilty of artificially inflating the firm's financial position before it was sold to HP, by manipulating revenue and quarterly results figures. HP bought Autonomy for £7.1 billion in 2011 but subsequently identified accounting irregularities and was forced to write off most of the value of the software firm.
In addition to the US criminal proceedings, Mr Hussain is facing a civil claim in the UK as HP sues him and Mike Lynch, Autonomy's founder and chief executive, for damages.
SFO Reprimanded Over Disclosure Failings: R (On the Application of AL) v XYZ Ltd & Ors  EWHC 856 (Admin)
The SFO has been reprimanded by the Administrative Court for its failure to make sufficient attempts to obtain the notes of interviews conducted by a company's (named only as XYZ) lawyers' records of interviews conducted with employees.
XYZ instructed external lawyers to conduct an investigation to determine whether or not allegations of bribes by some of its employees should be reported to the SFO. In the course of that investigation, as is normal, the law firm interviewed employees, lawyers made detailed notes of the answers to questions. Following the self-report to the SFO, a Deferred Prosecution Agreement (DPA) was entered into. One of the terms of the DPA was that XYZ would "cooperate fully and truthfully"with the SFO as it investigated the company's employees.
In order to pursue that investigation the SFO requested copies of the interview notes from the employee's internal interviews. XYZ refused, claiming that the interview notes were subject to legal professional privilege. In a course of action at odds with the SFO's position in the ENRC case, the SFO did not challenge XYZ's apparently erroneous claim to privilege in the interview notes. The SFO permitted XYZ's lawyers to present oral summaries of the interviews. The SFO recorded these presentations and disclosed the transcripts to the Claimant in his trial. The Claimant did not accept that these were a full enough account and required the SFO to provide him with the full notes of his lengthy interview with XYZ's lawyers.
The Court did not accept that the SFO had behaved in a way that adequately discharged its disclosure duties in accepting XYZ's offer of providing short oral summaries of what were lengthy witness interviews. The Court noted that the SFO could have sought to obtain the full interview notes through a witness summons, or it could elect to take the more draconian route of instigating breach proceedings against XYZ for breaching the cooperation terms of its DPA. In this case XYZ's failure to provide the witness interview notes seems at odds with the requirement to cooperate.
The Court described the SFO's conduct in the following terms: "the SFO failed to address relevant considerations, took into account irrelevant matters, provided inconsistent and inadequate reasons for its decisions, and applied an incorrect approach to the law. These public law errors were material." The Court also encouraged XYZ to reconsider its refusal to provide the interview notes to the SFO.
The scathing criticism of the SFO's conduct in this case will likely cause the SFO to recalibrate its approach to disclosure and the lengths to which it will now need to go in order to obtain first accounts of witness interviews. The Court's opinion that the SFO had breached the Attorney General's Guidelines on Disclosure will be particularly uncomfortable for the organisation. In addition, the ruling serves as a reminder to corporates considering entering into a DPA that they may leave themselves open to obligations to submit to wide-ranging future cooperation with little ability to limit the requests that the SFO may subsequently make of them.
In a further blow to the SFO, the Court declined its request that the Claimant pay the cost of defending the judicial review, notwithstanding that the SFO had successfully defended the claim for judicial review. The Court observed that despite the Claimant failing to satisfy the Court that there was any legal basis for bringing a claim for judicial review, the SFO's conduct during the investigation to date was sufficiently inappropriate that it would be improper to require the Claimant to foot their bill.
KBR Judicial Review: Challenge to Extraterritorial Reach of SFO's Core Powers
KBR Inc, a company linked to the SFO's investigation into Unaoil, has itself been under formal investigation by the SFO since 28 April 2017. KBR is incorporated in the US where it is under concurrent investigation by the DoJ.
KBR has been issued with notices under s.2 Criminal Justice Act 1987 Section 2 Notices), the SFO's staple mechanism for obtaining evidence once it has opened an investigation. Such notices oblige the recipient (an individual or a corporate) to provide documents or information to the SFO in writing or at interview. The SFO frequently issues these notices in order to secure information held outside the UK.
The Criminal Justice Act 1987 does not express whether Section 2 Notices permit the collection of information or documents outside the UK. Other tried and tested mechanisms exist for the SFO (as for other law enforcement bodies) to obtain evidence from overseas. Mutual legal assistance is used daily by law enforcement bodies for just this purpose. However, those requests take time, require cordial diplomatic relations to exist between the requesting and requested States, require sufficient information to be supplied to the requesting State to satisfy its local requirements (sometimes requiring a court order to be obtained) and so subject the SFO's investigatory decisions to more scrutiny.
Section 2 Notices, in contrast, are a blunt tool threatening a penal sanction for non-compliance and can be issued for immediate response, sometimes by the SFO attending premises at dawn to demand information. Importantly, and in contrast to applications for search warrants, there is no direct judicial scrutiny of the SFO's issuance of Section 2 Notices. Challenges to Section 2 Notices through claims for judicial review seldom succeed. The Administrative Court (to which such claims must be made) is highly reluctant to interfere with the SFO's investigatory discretion.
KBR has challenged the use of Section 2 Notices to obtain information held abroad. Although no judgment has yet been delivered, it is understood that one of KBR's representatives was issued with a Section 2 Notice when she was in the UK. The notice purported to require the production in the UK of data held on servers in the US. The data had previously been held by KBR's UK subsidiary but had been sent to the US for routine archiving.
KBR's lawyers argue that the absence of an extraterritoriality provision in the statute cannot mean that Parliament intended these powers to have extraterritorial reach: other statutes contain just such provisions. It has been suggested that the SFO elected to issue the disputed Section 2 Notice simply to avoid the cumbersome and uncertain process of seeking mutual legal assistance and that this is an abuse of its powers.
In response, the SFO argued that applying the statute only domestically would hamper its ability to investigate serious fraud and corruption.
The Court has indicated that it is unlikely simply to accept an unrestricted interpretation of the statute, whilst noting that material that had at one time been taken out of the jurisdiction could be subject to requests for its return.
No date has yet been fixed for judgment to be delivered.
© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This newsletter is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.