Serious Fraud Office to pursue shareholders who receive the proceeds of corrupt contracts through dividends
In a presentation at the Law Society in London yesterday, the Head of the UK Serious Fraud Office (SFO), Richard Alderman, spoke of the SFO's intention to pursue shareholders who receive the proceeds of corrupt contracts through dividends. Mr Alderman said that the SFO will particularly be focussing on those with "influence over management", including institutional investors.
Mr Alderman's comments follow news last week that shareholders of a company prosecuted for overseas corruption had been ordered to pay back dividends gained as a result of corrupt contracts to build bridges in Iraq.
In that action the High Court ordered Mabey Engineering (Holdings) Limited, the shareholder of Mabey and Johnson Limited, to pay a penalty of £131,201. This amount is said to represent the amount that Mabey and Johnson had paid in dividends derived through contracts won as a result of corrupt conduct. The order was made under the Proceeds of Crime Act 2002 (POCA). Mabey Engineering (Holdings) Limited was unaware of the corrupt activity. This order follows previous enforcement action against Mabey and Johnson Limited and former directors . (See our previous alerter here)
In a statement accompanying the order last week, Mr Alderman said: "There are two key messages I would like to highlight. First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously".
"The second, broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of companies they invest in." Mr Alderman said that this was "particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.".
This is a concerning development for businesses holding shareholdings, and particularly for institutional investors. The Bribery Act 2010 introduced the risk of strict liability penalties for businesses that fail to prevent bribery, but also introduced a complete defence if it could be shown that "adequate procedures" had been implemented to prevent bribery. This development could effectively sidestep that defence. Mere receipt of tainted dividends, irrespective of "adequate procedures" that the recipient may have put in place to mitigate criminal liability, could expose shareholders to the risk of civil recovery action under POCA. Even though POCA includes safeguards (broadly to protect recipients who act in good faith), a recipient who has no direct knowledge of the underlying corrupt conduct which secured contracts, could find itself subject to civil enforcement action. The concern will be particularly acute for shareholders in companies that operate in overseas jurisdictions that are known to be susceptible to corruption issues.