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Narrow construction of privilege entitles SFO to disclosure of corporation’s internal documents

30.05.2017 Maritime

Michael Volikas

Michael Volikas Partner

The Director of the Serious Fraud Office v. Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB)

The English Court has recently ruled in favour of the Serious Fraud Office (the “SFO”) that it was entitled to disclosure of certain documents from a multinational corporation that was subject to an ongoing SFO criminal investigation resulting from allegations of international fraud, bribery and corruption. The documents in question had been generated by the corporation’s solicitors and forensic accountants during a period of internal investigation into the allegations. The corporation had been in negotiations with the SFO and was co-operating to uncover any wrongdoing within the organisation, in particular by its foreign subsidiaries.

The decision is significant for corporations who may be under investigation by a regulatory or criminal body because it indicates that the mere expectation of a future investigation or eventual prosecution will not be enough to allow them to claim litigation privilege. 

More generally, the case is important to corporations who may be or become involved in litigation or arbitration proceedings because it endorses the recent trend of English courts to construe the scope of privilege narrowly. In practical terms, this can create significant problems for a corporation that wishes to take legal advice with the benefit of privilege because, as matters stand, the courts’ restricted application of privilege may reduce considerably the type and number of communications over which a corporation can claim legal advice privilege.

Privilege under English law

The English law rules on privilege allow an individual or a corporation to withhold disclosure of confidential and sensitive documents in the context of an arbitration, litigation or investigation. Legal professional privilege covers litigation privilege and legal advice privilege. 

Litigation privilege applies to communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation and requires that, at the time of the communication in question:

-  Litigation is in progress or reasonably in contemplation;
-  The communications are made with the sole or dominant purpose of conducting that anticipated litigation; and
-  The litigation must be adversarial, not investigative or inquisitorial.

The purpose of litigation privilege is to enable an individual or corporate entity to prepare for the conduct of reasonably anticipated litigation. 

Legal advice privilege covers all confidential communications passing between the client and its lawyers, acting in their professional capacity, for the purpose of giving and receiving legal advice, even when litigation is not in contemplation. It will extend to documents that form part of these communications, even if they do not expressly request or provide legal advice: the test is whether they are part of that necessary exchange of information of which the object is the giving of legal advice as and when appropriate. 

Legal advice privilege is intended to encourage full and frank communications between lawyers and their clients. However, the English Court has taken a narrow view of who or what constitutes the “client” in this context. In the case of an individual, clearly the client is the individual who instructs the lawyer. However, where a corporation seeks to assert privilege, the Court of Appeal held in Three Rivers (No. 5) [2003] QB 1556 that legal advice privilege attaches only to communications between the lawyer and those individuals who are authorised to obtain legal advice on the corporation’s behalf. Communications between the solicitors and employees or officers of the client, however senior in the corporate hierarchy, who do not fall within that description will not be subject to legal advice privilege. Authorising an employee to talk to the corporation’s lawyers in order to enable the lawyers to advise the corporation will not be enough. If the employee is not actively involved in instructing the lawyers, he will be in the same position as an external party. 

Three Rivers (No 5) was recently applied by the Court in the RBS Rights Issue Litigation [2016] EWHC 3161 (Ch), which found that interviews conducted by a bank’s solicitors with its employees were not covered by legal advice privilege, as the employees in question did not form part of the “client” for the purposes of privilege. The Court confirmed that, where the client is a corporation, the communication with the lawyer must be to or from a person who is authorised to seek and receive legal advice on behalf of the corporation, and the communication must be for the purposes of, or in the course of that person giving or receiving legal advice. Such a communication was to be distinguished from the preparatory work of compiling information undertaken by persons with no authority to seek or receive legal advice, for the purposes of enabling the corporate client to seek and receive such advice. That was so whether the preparatory work was conducted by the client or by the lawyer. As regards lawyers’ working papers, the Court held that these would only be privileged if they betrayed the trend of the legal advice.

The regulatory background

The English Bribery Act 2010 (the “Act”) came into force on 1 July 2011. Section 7 of the Act introduced a corporate offence of failing to prevent bribery by individuals/entities associated with it. This will cover bribery by, among others, employees, subsidiaries and local agents or sub-contractors of a corporation and will apply to offences committed in the UK or abroad. In its defence and in order to avoid prosecution, a corporation must show that it had adequate procedures in place to prevent persons associated with it from bribing others. 

In deciding whether to prosecute, the SFO and the Crown Prosecution Service will first evaluate whether there is sufficient evidence realistically to obtain a conviction and secondly whether a prosecution would be in the public interest. Where a company has self-reported, this may weigh against it being in the public interest to prosecute it, but self-reporting will not of itself be decisive. 

The SFO’s Self-Reporting Guidelines 2009 indicate that, in return for full and frank cooperation by a corporation that discovers a problem concerning overseas corruption and reports it to the SFO, in appropriate circumstances the SFO might agree to a civil settlement in lieu of prosecution, or agree to accept a plea of guilty to a lesser charge than might otherwise be brought. The Guidelines encourage corporations to self-report on the basis that there are considerable advantages to be gained by doing so. 

In February 2014, Deferred Prosecution Agreements (“DPAs”) were introduced in the UK. A DPA is an agreement reached between a prosecuting authority (such as the SFO) and a corporation that is at risk of being prosecuted. The DPA allows a prosecution to be suspended for a defined period provided the corporation meets certain specified conditions. A DPA is intended to enable a corporation to make full reparation for fraud, bribery or another economic crime without being convicted of a criminal offence and suffering reputational or other damage. The DPA can also avoid a costly and lengthy trial. A DPA must be signed off by a judge and it is made public.

The background facts

The defendant corporation was part of a multinational group of companies with mining operations carried out through subsidiaries operating in geographic regions widely perceived as being high risk in terms of public sector bribery and corruption, including  Kazakhstan and various parts of Africa. In 2010, the defendant was alerted by a whistle-blower to alleged corruption and financial wrongdoing by its Kazakhstani subsidiary and started investigating these allegations with the assistance of its lawyers. In 2011, the defendant instructed its forensic accountants to undertake a books and records review to satisfy regulatory and compliance requirements. By July 2011, the defendant was concerned there was a real risk of being investigated by the SFO, partly due to negative press about the activities of the corporation and its overseas subsidiaries. In August 2011, the SFO contacted the defendant suggesting that the corporation might wish to self-report any incidents of corruption and wrong-doing. At that stage, the SFO stated that it was not carrying out a criminal investigation. However, such an investigation was arguably contemplated as a prospect if the defendant did not co-operate with the SFO.

Between 2011 and 2013, there were ongoing discussions between the defendant and the SFO, whereby the defendant undertook to co-operate fully with the SFO. At the same time, internal investigations into the allegations of wrongdoing had continued. However, in August 2011, following on from personnel changes within the SFO, together with the defendant’s dismissal of its lawyers who had been representing them in the self-reporting process and who were conducting the internal investigations, the SFO began an investigation into the corporation. 

The SFO sought disclosure of various documents from the corporation in relation to the investigation. The corporation asserted that the documents requested were covered by either litigation or legal advice privilege. 

The High Court decision

With the exception of one small category of documents, the Court dismissed all the defendant’s claims for privilege. The documents requested were divided into four categories and comprised:

Category 1

Notes taken by the defendant’s lawyers of evidence from employees of the corporation and its subsidiaries and third parties with whom they had dealings in relation to the events being investigated. These interviews were conducted before the SFO began its investigation. 

Category 2

Materials generated by the forensic accountants as part of their books and records review, again before the investigation started.

Category 3

Documents containing factual evidence presented by the partner at the lawyers’ firm to the corporation’s corporate governance committee and/or board before the investigation began. These documents comprised the lawyer’s slide presentation, together with his meeting notes that were said to contain advice as to potential allegations of criminality and the steps the corporation should take in relation to those potential allegations.

Category 4

Documents sent to the SFO by the defendant’s subsequent lawyers after the investigation began, comprising the forensic accountants’ reports. There were also some emails between senior executives of the corporation, one of them the head of M & A and a qualified lawyer, requesting and giving legal advice.

With the exception of the material presented by the lawyer to the governance committee/board and related notes elaborating on his slideshow presentation (i.e. Category 3), which were appropriately described as confidential lawyer-client communications, all the other requested material was held to be not privileged and discloseable.

In relation to the claims for litigation privilege, the Court found that, at the time the relevant documents were generated, litigation was not in reasonable contemplation. A potential criminal investigation, as opposed to a prosecution, does not amount to litigation for these purposes. Furthermore, even if litigation were reasonably contemplated at the time, the documents in question were not prepared for the dominant purpose of that litigation. Rather, the documents were generated for the purpose of investigating the whistle-blower’s allegations and addressing the situation. In addition, the documents were produced not to assist in conducting litigation but in order to decide how best to avoid contemplated litigation. Moreover, documents that were created with the intention of showing them to the other side could not be privileged.

Regarding the books and records review by the forensic accountants, these were generated to meet regulatory and compliance requirements, not for the purposes of litigation.

As regards legal advice privilege, there was no evidence that those interviewed by the lawyers were authorised to seek and receive legal advice on behalf of the defendant and their communications with the lawyers could not be categorised as giving instructions to the lawyers on behalf of the defendant. In relation to the lawyers’ notes, the evidence in this case did not demonstrate that those notes would betray the nature of the legal advice given to the defendant and so they were not privileged. Furthermore, the communications between the senior executives on the giving and receiving of legal advice did not attract privilege just because one of them was a qualified lawyer and had previously been the defendant’s General Counsel. In his role as head of M & A, he acted in a business rather than legal capacity. The Court suggested that the request might better have been made to the acting General Counsel if the defendant had wished to maintain privilege in those communications.

Comment

The Court highlighted that this was the first case in which it had had to consider a claim for litigation privilege against a background in which the adversarial litigation contemplated was criminal, rather than civil. However, given the increasing number of SFO investigations into and prosecutions of corporations since the Act came into force, similar issues might well arise in the context of future regulatory and criminal investigations. Corporations who co-operate with the authorities and self-report may still be compelled to disclose sensitive and confidential information down the line despite their co-operation. In this case, the Court noted that there was a public interest in the SFO being able to investigate and prosecute crime. Furthermore, the defendant had undertaken to give full and frank disclosure to the SFO at the outset of their discussions and should not, therefore, be allowed to back out of its promise to do so.
 
In the context of civil litigation, as opposed to criminal prosecution, it may be easier for a party to successfully argue litigation privilege. In criminal proceedings, a prosecutor will need to be satisfied that there is enough evidence to bring a prosecution. Civil litigation, however, may be commenced by someone even if their claim is unfounded so a defendant may more easily prove that litigation was reasonably contemplated. 

Nonetheless, whether or not a document is privileged will usually be fact-specific. A corporation should remain very careful in dealing with factual internal investigations and should note that it may have more limited scope to obtain confidential legal advice than it might otherwise have thought. 

This decision is being appealed.

Article authors:

Michael Volikas