UK Court Extends the International Scope of the SFO's Investigatory Powers

By Michael Stocks

09-2018

On 6 September 2018 the UK Administrative Court reached a significant decision extending the extraterritorial scope of the UK Serious Fraud Office's ('SFO's') investigatory powers.[1] The court held that a document request notice made under s.2 Criminal Justice Act 1987 ('CJA 1987') can compel a foreign parent company of a UK subsidiary to provide information relevant to an investigation, provided the foreign company has a 'sufficient connection' to the UK.

Facts

Kellogg Brown & Root Inc ('KBR Inc') forms a part of the KBR Group, of which Kellogg Brown & Root Ltd ('KBR Ltd') is a UK subsidiary.

On 22nd March 2016 the SFO had begun an investigation into the Unaoil Group ("Unaoil") on suspected grounds of corrupt activities. Upon finding Unaoil had engaged KBR Ltd for consultancy services since 1996, on 17th February 2017 the SFO commenced a subsequent investigation into KBR Ltd.

Under s.2 CJA 1987, the SFO has the power to require a person under investigation to produce any specified documents upon service of a written notice – known as a 'Section 2 Notice'.

The SFO served KBR Ltd with a Section 2 Notice on 4th April 2017, which KBR Ltd initially complied with. From around June 2017 however, the SFO grew concerned that KBR Inc had played an important role in KBR Ltd's activities with Unaoil, including the provision of approval to make significant payments to Unaoil. In late July that year, KBR Ltd requested a meeting with the SFO to discuss the progress of their investigation. As a condition for the meeting to take place, the SFO requested representatives from KBR Inc to attend the meeting and "not simply the lawyers". It was during this meeting that the SFO directly served a Section 2 Notice on the KBR Inc representatives.

KBR Inc sought judicial review of the Section 2 Notice on three grounds:

  1. The notice given to KBR Inc was ultra vires as it requested material outside of the UK jurisdiction and s.2 CJA 1987 did not operate extraterritorially.
  2. It was an error in law to serve a Section 2 Notice on a foreign company, as the SFO has alternate powers to request documents from foreign entities, namely via the power to seek Mutual Legal Assistance ("MLA").
  3. The notice served on KBR Inc had not been correctly served as it was simply handed to a representative temporarily present within the UK. To support this argument KBR Inc drew an analogy to the formal service requirements within the Civil Procedure Rules ("CPR") governing civil claims.
Was the Section 2 Notice served by the SFO ultra vires?

The court held that s.2(3) CJA 1987 is capable of extraterritorial application, stating that due to the complex and international nature of cases the SFO investigates, combined with modern technology and ease of document transfer, there is "an extremely strong public interest in the extraterritorial ambit of s.2(3)". The Court concluded therefore that the question is not of existence, but rather of extent of extraterritorial reach.

The court appreciated that the extraterritorial ambit of s.2(3) does not apply to all foreign companies – there must be a 'sufficient connection' between the company and the jurisdiction. It referred to the 'sufficient connection' test formulated by the Court of Appeal in the case of In re Paramount Airways Ltd,[2] as being helpful in the present situation:

"Thus in considering whether there is a sufficient connection with this country the court will look at all the circumstances, including the residence and place of business of the defendant, his connection with the insolvent, the nature and purpose of the transaction being impugned, the nature and locality of the property involved, the circumstances in which the defendant became involved in the transaction or received a benefit from it…whether the defendant acted in good faith. The importance to be attached to these factors will vary from case to case. By taking into account and weighing these and any other relevant circumstances, the court will ensure that it does not seek to exercise oppressively or unreasonably the very wide jurisdiction conferred by the sections".

In the present case, the court was satisfied that there was a sufficient connection between KBR Inc and the UK not least because of evidence that payments made by KBR Ltd to Unaoil required the approval of KBR Inc, and that such payments were made from KBR Inc's US-based treasury function. Additionally, although not enough alone to establish a sufficient connection, the court also appreciated that a senior corporate officer from KBR Inc was based and worked out of KBR Ltd's Leatherhead office, UK.

Could the SFO have used the MLA?

The court held that the MLA procedure is simply an additional power to the Section 2 Notice available to the SFO. In other words, the SFO is not precluded from serving a Section 2 Notice simply because the MLA procedure is applicable on a particular occasion.

Did the SFO serve the Section 2 notice incorrectly?

The court held that the CJA 1987 does not contain any service-related provisions and therefore those in the CPR are irrelevant. Service of a Section 2 Notice bears no additional formalities beyond giving it to the recipient.

What this means for you?

This decision has a significant impact on the international reach of the investigatory powers of the SFO. Providing a 'sufficient connection' can be established, foreign companies with a presence in the UK may find themselves on the receiving end of a Section 2 Notice should a UK-based entity be under SFO investigation.

The court did list some clear factors however, which alone would not bring a foreign parent within the scope of having a 'sufficient connection'; for example, the mere fact that KBR Inc was the parent company of KBR Ltd, the fact that KBR Inc was willing to and did cooperate with the SFO's document requests and the fact that a KBR Inc representative attended the meeting with the SFO in the UK.

The court recognised the ease of transferring documents across borders in this digital age where the world is becoming ever more connected. The court was conscious that if it did decide to prevent the ambit of the Section 2 Notice extending outside of the jurisdiction, the effect of a decision of this kind may have the effect of encouraging companies to transfer documents oversees in order to "forestall" a serious fraud investigation.

Without doubt this decision provides a significant boost to the SFO's investigatory powers at a time when the SFO is considering the impact of the Court of Appeal's recent judgment against it. In that judgment the Court of Appeal upheld a claim to litigation privilege in another investigation the SFO is undertaking, thereby denying the SFO access to documents it claims it should be allowed to see.[3] Whether KBR Inc appeal this decision remains to be seen. If it does so and the decision is reversed we will report further.

For further information, please contact Michael Stocks or Jonathan Edwards.

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[1]The Queen on the Application of KBR Inc v The Director of the Serious Fraud Office [2018] EWHC 2368 (Admin)

[2][1993] Ch 223 page 230-240

[3]To read more about the judgment of the Court of Appeal and our analysis of the decision please click here



 

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