Reflection on the recent High Court decision: the SFO can request production of documents held abroad by foreign companies
The Queen on the Application of KBR Inc v The Director of the Serious Fraud Office
A recent High Court decision has ruled on the international application of a section 2 Criminal Justice Act (CJA) 1987 notice. It was held that the notice was enforceable against a non-UK company and it accordingly could be compelled to disclose documents to the SFO held outside of the jurisdiction.
The decision has given clarity on the judicial reach of section 2, and it now appears clear that the SFO can both (i) require the production of documents held outside of the UK by a UK company; and (ii) require the production of documents held outside of the UK by a non-UK company, provided that a "sufficient connection" exists between the company and the UK.
The CJA 1987 gives wide reaching powers to the SFO for the purposes of its investigations.
Such powers include issuing notices under section 2(3) which can compel an individual / company to produce specific documents relevant to that investigation. Non-compliance with a "section 2 notice" has serious consequences and without "reasonable excuse", is a criminal offence.
As part of its ongoing investigation into the Unaoil Group, in early 2017, the SFO commenced a criminal investigation into the UK company, KBR Ltd, regarding suspected bribery and corruption offences.
The SFO served a section 2 notice on KBR Ltd in April 2017 requiring the production of certain documents. Certain documents requested were held by KBR Ltd in the UK and certain documents were held in the US by its parent company, KBR Inc.
Information (located outside of the UK) was handed over, however it was made clear that the cooperation of KBR Inc was voluntary. Concerns were raised regarding the division apparently being made between documents under the control of KBR Ltd and and those held outside of the jurisdiction. At a meeting with the SFO and KBR Inc's representatives in July 2017, the SFO served a second section 2 notice. This second notice (which largely mirrored the first notice save for referring to "KBR" rather than "KBR UK") required the production of documents relating to the SFO's investigation of the UK company which are located in the US (to the extent that such documents had not already been provided). In September 2017, KBR Inc notified the SFO that it did not consider the second notice to be lawful.
KBR Inc applied to court to have the notice set aside. The notice was challenged on the basis that (i) the second notice requested material outside of the jurisdiction from a foreign company (US incorporated) and therefore it was ultra vires; (ii) it was an error on the part of the SFO to use a section 2 notice when the power to seek Mutual Legal Assistance (MLA) from US authorities was available; and (iii) the second notice was not effectively served.
The court rejected each of the three arguments and the notice was held to be valid.
a) UK Companies
In the internet age, it would arguably be illogical to take the view that a company can withhold documents and effectively impede an investigation on the basis that such documents are not technically 'held' in the UK (i.e. they exist on a server overseas). Indeed, the court interpreted the section in this context and confirmed that a section 2 notice is capable of extending to documents held by UK companies but in another location outside of the jurisdiction.
(b) Non-UK Companies
As to documents held outside of the UK by foreign companies, for the purposes of facilitating an investigation into a fraud of this type (i.e. involving multi-national corporations) and in light of the technological developments over the last 30 years, the provision in the CJA would surely require international reach for it to take proper effect. Though such fluidity of information, data and documents perhaps wasn't envisaged in 1987, the court considered that the international angle would have been appreciated to some extent at the time.
Given that the provision would have lacked proper effect if it prevented the production of documents from foreign companies, it was decided that section 2 notices could be issued to foreign companies subject to there being a "sufficient connection" between the company and the UK. Such "sufficient connection" was found between KBR Ltd and KBR Inc.
It is important to note that having a non-UK parent company and UK company under investigation, would not (according to the Judge) on its own meet the required threshold.
In this instance, KBR Inc did not have a fixed place of business in the UK and it was not contended that it carried out business in the UK. However, the SFO was looking into several potentially corrupt payments made by KBR's UK subsidiaries and such payments required the (i) approval of KBR Inc itself; and (ii) processing by its US based treasury function (it was also contended by the SFO that approval was required from KBR's compliance function before any payment could be released).
In the context of those payments it was "impossible to distance" KBR Inc from the transactions central to the KBR Ltd investigation. Further, a corporate officer of KBR Inc was carrying out their function in the UK. On its own, this fact was not sufficient to suggest a "sufficient connection" with the UK, but it provided "further support" for the position.
The "sufficient connection" test essentially relates to the actual connection between the foreign entity and the UK, in the context of the "subject matter" of the investigation and by "reference to the foreign company's own actions linked to the UK".
As to the MLA regime, the court held that the procedure offers an "additional" route, but its availability did not prevent the Judge from "concluding that s.2(3) has an extraterritorial reach".
The court's decision on the question of whether the SFO can use section 2 notices in this way has significant implications, particularly for foreign companies with functions within the UK.
The "sufficient connection" test is to give "sensible effect" to the legislature's intention, and it will be at the Director of the SFO's discretion as to whether to exercise their power under section 2(3). Whilst the judgment offers some guidance regarding what would not bring an entity into the scope of section 2(3), there is still some uncertainty for non-UK companies as to the factual matrix which would meet the "sufficient connection" threshold and therefore trigger the ability of the SFO to request material relevant to their investigation.
Lord Justice Gross offered some reassurance on the matter and made it clear that, for example, the senior officer's attendance at a meeting with the SFO would not be sufficient to bring the parent company within the scope of the "sufficient connection" test nor would voluntary cooperation with the SFO's investigation at the outset. Nevertheless, any entity with operations in the UK should be live to this issue and the SFO's authority regarding documents/information held outside of the jurisdiction.