The Serious Fraud Office (SFO) recently announced that it has reached a civil recovery settlement of £1.2 million with Brazilian resident, Julio Faerman, owner of a property in London worth £4.25 million which the SFO suspected was partly purchased with the proceeds of his criminal conduct in Brazil.
This article explores the SFO's civil recovery investigation into Faerman's UK assets, the criticism the agency faced in relation to their application for the disclosure order and the settlement success.
Faerman was involved in one of Brazil's largest ever corruption investigations, namely "Operation Carwash", which uncovered systematic bribery used to win contracts from the Brazilian state oil company Petrobras. Faerman admitted to paying bribes to win contracts in Brazil and is there subject to a co-operation agreement with Brazilian prosecutors following his payment to them of a staggering $54 million.
Prior to entering into the co-operation agreement with Faerman, the Brazilian prosecutors contacted the SFO to ask for help in identifying and recovering Faerman's assets in the UK. This led to the SFO launching its own civil recovery investigation into assets it suspected were purchased with the proceeds of Faerman's criminal conduct. The SFO's investigation focused on a property Faerman owned in Kensington worth £4.25 million, alongside a number of Swiss bank accounts and offshore companies that were used to fund the property’s purchase.
In January 2019, following an oral hearing conducted in private and without notice, the SFO obtained a freezing order on the Kensington property to prevent it being sold while the investigation proceeded ("Freezing Order"). The SFO also obtained a disclosure order against Faerman under section 357 of the Proceeds of Crime Act 2002 ("POCA") to enable the agency to trace bribe-linked commissions paid to Faerman and seek to establish that Faerman used these sums in the purchase of his Kensington property ("Disclosure Order").
What are disclosure orders?
A disclosure order is, in general terms, an order authorising a request for information. The recipient is obliged to comply and can face penal sanctions for non-compliance.
Disclosure orders are investigative tools available in different types of investigation under POCA and are sought from the court to obtain authority for an "appropriate officer" to give written notices to any person whom they consider has relevant information. Upon receipt of the notice, that person has to provide information, answer questions or produce documents relevant to the investigation.
A disclosure order is an extremely powerful tool as, in accordance section 359 of POCA, it is a criminal offence not to comply with a notice issued under a disclosure order (which may lead to imprisonment for a term not exceeding six months, a fine or both).
SFO admits "oversight" in Disclosure Order application
The original copy of the Disclosure Order which the SFO served a copy on Faerman's solicitors contained a penal notice addressed to "Julio Faerman or any person served with a notice under this order" and set out potential criminal sanctions for failure to comply. A month later, the SFO served the Disclosure Order again requesting information on the origins of certain funds, but attached a copy of the Disclosure Order in which the penal notice was fully redacted.
Faerman refused to provide the information requested and later made an application to discharge the Disclosure Order arguing that it was unauthorised and defective. Faerman's application to discharge the Disclosure Order was made on the following bases:
1. In accordance with the judgment of the UK Supreme Court in Perry, the SFO could not serve an enforceable information notice on him or any other persons outside of the jurisdiction; and
2. The SFO's failure to bring the authority of Perry to the attention of the court amounted to material non-disclosure and an abuse of the disclosure order procedure.
In Perry the Supreme Court held that because it was a criminal offence not to comply with a notice issued under a disclosure order, it would be contrary to international law to compel an answer from an overseas recipient. A notice under a disclosure order made pursuant to section 357 of POCA could not therefore be sent to persons out of the jurisdiction. It is implicit from that judgment that any disclosure order must be tailored to the circumstances of an individual case and should not infringe territorial limits.
During the application hearing, the SFO accepted that it had failed to disclose the Supreme Court judgment in Perry when it made its application for the Disclosure Order, and apologised for this "unintentional oversight".
Despite acknowledging and criticising the SFO for its procedural failings, Mrs Justice Cutts CDE dismissed Faerman's application to discharge the Disclosure Order on 10 July 2020 (a copy of the approved judgment is here). The Judge took the view that even if the judgment in Perry had been disclosed, the SFO's application would have been granted albeit with a clarification that no information notice could be served on Faerman outside the jurisdiction. In making this decision, the Judge considered that the SFO had not acted in bad faith, that Faerman had suffered no prejudice (because he had not supplied any information) and that there was a clear and compelling public interest in maintaining the Disclosure Order.
Although the SFO indicated its intention was to bring a civil recovery claim against Faerman under Part 5 of POCA 2002 in respect to his Kensington property, the authority agreed a settlement whereby Faerman will pay a sum of £1,198,424.78 and £57,000 for the SFO's costs. The Freezing Order and Disclosure Order will remain in place until Faerman pays the agreed settlement amount. A copy of the signed consent order between the SFO and Faerman which contains these settlement terms can be found here.
This settlement is a much-needed win for SFO. It demonstrates a desire to investigate, confiscate and recover criminal assets held in the UK.
The SFO did however, once again, face criticism during the course of this investigation. As discussed above, this criticism came from the court in relation to the SFO's material non-disclosure in its application for the Disclosure Order, and in its service of a notice under the Disclosure Order with the penal notice attached to it despite Faerman being outside of the jurisdiction. Although an application to discharge the Disclosure Order was dismissed, this case demonstrates the need for care in relation to the application of disclosure orders, ensuring that they are tailored to the specific circumstances and that they do not infringe territorial limits.
This case also highlights the use of co-operation between enforcement agencies worldwide. Particular praise must be made to the Brazilian authorities as international cooperation has been a critical feature of their ongoing corruption investigation "Operation Car Wash" which Faerman was linked to, and they have communicated with law enforcement agencies in over 60 jurisdictions. It is important to note that it was the Brazilian authorities who first brought Faerman to the SFO's attention.
The SFO appears to have also worked closely with other agencies in pursuit of civil recovery from Faerman, with specific thanks given in its press release to "the Office of the Attorney General of Switzerland (OAG) and the Dutch FIOD for their co-operation and assistance".
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