SFO v ENRC: impact on internal investigations
February 2018 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
February 2018 Issue
Following a slew of recent cases on the subject of legal professional privilege, organisations have been finding it increasingly difficult to protect sensitive documents from disclosure to their opponents in litigation. Last year’s High Court decision in Serious Fraud Office (SFO) v Eurasian Natural Resources Corporation Ltd – considering, for the first time, the availability of litigation privilege where the adversarial proceedings in question are criminal in nature – continues this trend in the criminal sphere.
In short, the decision makes it very difficult for those with concerns about possible misconduct within their organisations to carry out their own investigations without fear that the materials generated in doing so will ultimately end up in the hands of enforcement agencies, regulators or any civil opponents.
In early 2011, Eurasian Natural Resources Corporation (ENRC) instructed lawyers to conduct a fact-finding investigation into a whistleblower’s allegations of corruption and financial wrongdoing within one of its subsidiaries in Kazakhstan. The SFO, having been engaged in dialogue with ENRC from August 2011, formally commenced a criminal investigation into the alleged misconduct in April 2013.
During the course of this investigation, the SFO initiated Part 8 proceedings, seeking a declaration from the court that certain documents generated during ENRC’s internal investigation in 2011 to 2013 were not subject to legal professional privilege (as claimed by ENRC) and therefore fell within the scope of the SFO’s powers of compulsion under s.2(3) of the Criminal Justice Act 1987.
The categories of documents at the centre of the dispute, over which ENRC claimed legal professional privilege, included: (i) notes taken by lawyers of the evidence given to them by (current and former) employees of ENRC (as well as its subsidiaries and various third parties); (ii) materials created by forensic accountants during the course of a review conducted to identify controls and systems weaknesses and potential improvements; and (iii) documents presented by ENRC’s lawyers to an internal ENRC committee and the ENRC board indicating or containing factual evidence.
In respect of each of these categories, ENRC claimed litigation privilege, which protects communications between a party or its lawyers and third parties for the dominant purpose of obtaining information or advice in connection with adversarial proceedings which are either on foot or reasonably in contemplation. While legal advice privilege was also asserted in respect of categories (i) and (iii), the significance of the judgment lies principally in its analysis of the scope of litigation privilege (since the court’s decision in respect of legal advice privilege applied existing Court of Appeal authority (Three Rivers No 5) and followed the recent High Court decision in the RBS Rights Issue Litigation).
ENRC’s claim for litigation privilege fell down on a number of grounds, the most fundamental of which was its failure to establish that it “was aware of circumstances which rendered litigation between itself and the SFO a real likelihood as opposed to a mere possibility”.
Whilst the court accepted that ENRC did reasonably contemplate the SFO’s investigation (by no later than August 2011 when ENRC’s dialogue with the SFO began), it held that a criminal investigation by the SFO (even one involving a dawn raid) could not be considered adversarial litigation for the purposes of litigation privilege. Such an investigation simply represents a preliminary step taken prior to the decision as to whether or not to prosecute. The significance of this finding is that documents will only attract litigation privilege (in a criminal context) in circumstances where a prosecution is in reasonable contemplation.
The court held that reasonable anticipation of a criminal investigation is not necessarily tantamount to reasonable anticipation of a prosecution. It is, of course, always possible that a prosecution will follow an investigation. However, in the absence of awareness of circumstances which, if they came to light, would make prosecution likely, it remains simply that: a possibility. In order for a prosecution to have been in ENRC’s reasonable contemplation, ENRC must have had knowledge that the allegations of misconduct were, or at least may well have been, true and applied its mind to the prosecution standard – i.e., that there was sufficient evidence to give rise to a realistic prospect of conviction. However, no evidence was adduced to show that something had emerged from ENRC’s investigation, or that ENRC believed that something was likely to emerge from its investigation, which rendered a prosecution a real likelihood and, for that reason, the prospect of criminal proceedings being brought against ENRC and any of its subsidiaries could not be viewed as anything more than speculative.
Even if ENRC had managed to overcome this first obstacle, its claim to litigation privilege would nonetheless have failed, since it was unable to convince the court that the disputed documents were created for the dominant purpose of deployment in, or obtaining legal advice relating to the conduct of, criminal proceedings. First, to the extent that any legal advice was sought during the investigation, it was in relation to the avoidance of, rather than the conduct of, the litigation said to have been contemplated – i.e., to persuade the SFO to enter into a settlement rather than prosecute. Documents created in order to obtain such legal advice, distinct from those created with a view to settling litigation which has already commenced, were held to fall outside the scope of litigation privilege. Secondly, the majority of information gathered by ENRC’s investigation was material which it intended to share with the SFO at a time when the relationship between the SFO and ENRC was collaborative. The court confirmed that documents created with the intent to show them to a potential adversary cannot be subject to litigation privilege. Further, although ENRC generated the underlying material to enable reports to be prepared for the SFO (i.e., not with the intent of passing the underlying material itself to the SFO), it was held that no distinction could sensibly be drawn between the two categories on the basis that, had the SFO called for the underlying materials, ENRC would have offered them up.
What it means for your organisation
The bar has been set very high for corporates to claim litigation privilege in a criminal case. In effect, unless and until organisations have discovered or expect to discover wrongdoing giving rise to a realistic prospect of a criminal sanction, their investigative materials (outside of the narrow lawyer-client relationship) will not be protected from disclosure. The rather perverse outcome is that organisations which know they have done something wrong are in a better position (from a privilege perspective) than those which do not (and which may, in fact, have done nothing wrong at all). Any organisations which are ‘lucky’ enough to have discovered a problem are, however, faced with the unenviable task of airing just enough of their dirty laundry to establish that there is, in fact, a realistic prospect of their conviction, whilst nevertheless ensuring that they steer well clear of self-incrimination territory.
The good (if, again, somewhat illogical) news is that the threshold for anticipating litigation is lower in civil claims than in criminal proceedings, the crucial distinction being that parties can initiate civil proceedings without any proper basis. A party may therefore reasonably anticipate civil litigation even where it believes any case against it to be without foundation. However, the same comfort cannot be offered in respect of regulatory matters where there is now a risk that the commencement of a regulatory investigation by, for example, the Financial Conduct Authority (FCA) or the Competition and Markets Authority (CMA), will not alone be considered enough to establish reasonable contemplation of adversarial proceedings. If that risk materialises, regulators and civil claimants alike may be able to get their hands on material generated by an organisation during the course of a regulatory investigation.
It is therefore clear that now, more than ever, organisations must take steps to plan their investigations at the outset before committing anything to paper and to consider carefully the scope of any instructions to lawyers. They should, in particular, give consideration to the spectrum of legal risks, and related third party claims, which they might face; this will give at least an indication as to whether the first litigation privilege hurdle of ‘reasonable contemplation’ of adversarial proceedings might be met.
If there is any concern that such a hurdle might not be met (which is more likely to be the case in a purely criminal or regulatory context), factual enquiries into as yet unsubstantiated allegations should, to the extent possible, be made to those within an organisation authorised to instruct or receive legal advice from its lawyers (to engage the protection of legal advice privilege, thereby rendering a trickier claim to litigation privilege unnecessary). It will, however, often be the case that those holding relevant knowledge are not so authorised, in which case in-house counsel should ensure that any materials documenting such enquiries and the fruits of those enquiries – e.g., interview notes, are non-verbatim and betray the trend of their legal advice; such materials can then be considered to form part of their own working papers and accordingly withheld from disclosure. An alternative is to consider instructing external lawyers to conduct any interviews and to take notes of the same; provided that any such notes do not cross the line to the client organisation, it may be possible to resist disclosure on the basis that the documents are not within the organisation’s control (although this line of argument has not yet been tested).
It is worth noting that ENRC’s appeal of the decision, in which the Law Society has sought permission to intervene (stressing just how important the case is to corporations and legal professionals alike), will be heard this summer. Whilst many hope and believe that the Court of Appeal will overturn the High Court’s decision, organisations will, at the very least, have to grapple with the issues described above in respect of any internal investigations conducted in the meantime.
Andrew King is a partner, Stephanie Lee is a senior associate and Alice Childs is an associate at Travers Smith LLP. Mr King can be contacted on +44 (0)20 7295 3222 or by email: firstname.lastname@example.org. Ms Lee can be contacted on +44 (0)20 7295 3465 or by email: email@example.com. Ms Childs can be contacted on +44 (0)20 7295 3257 or by email: firstname.lastname@example.org.
© Financier Worldwide
Andrew King, Stephanie Lee and Alice Childs
Travers Smith LLP