SFO v ENRC appeal – implications for FRC investigations - DAC Beachcroft

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SFO v ENRC appeal – implications for FRC investigations

Published 25 September 2018

In a highly anticipated decision, the Court of Appeal in Director of the Serious Fraud Office v Eurasian Natural Resources Corporation [2018] has allowed ENRC's appeal, providing welcome guidance on the scope of legal professional privilege, particularly in the context of regulatory and criminal investigations.

We comment on the impact of this decision on FRC investigations.

Background

This decision reverses the High Court's controversial ruling that documents created during internal investigations carried out by ENRC together with its professional advisers were not protected by privilege, and so were liable to be disclosed to the SFO.

ENRC had carried out voluntary internal investigations between 2011 and 2013 following the emergence of corruption allegations by a whistleblower. As part of these investigations, lawyers and other professionals conducted fact-gathering and review exercises. In parallel to this, ENRC and the SFO engaged in a period of dialogue relating to ENRC's operations.

In April 2013, the SFO commenced a criminal investigation, and as part of it sought disclosure of a number of documents generated during ENRC's earlier internal investigations which included documents created by (i) lawyers (including notes of interviews with ENRC employees), and (ii) forensic accountants in the course of their "books and records" review.

Claim for Privilege and High Court Decision

In the High Court, ENRC asserted their right to refuse disclosure of the documents on the basis of litigation privilege and legal advice privilege.

Litigation privilege attaches to communications between parties or their solicitors and third parties where:

  • Litigation is in progress or reasonably contemplated;
  • The communication is made for the sole or dominant purpose of actual or anticipated litigation; and
  • The litigation is adversarial rather than investigative.

It includes all material forming part of the continuum of communications, even those documents, such as lawyers' notes of meetings, which do not expressly seek or convey advice.

Legal advice privilege is far narrower in scope, attaching only to communications made in confidence between lawyers and their clients for the purpose of giving or obtaining legal advice, whether or not litigation is contemplated or on foot.

Mrs Justice Andrews in the High Court held that ENRC's claims for litigation privilege, and most of its claims for legal advice privilege failed.

See our article on the High Court decision here.

Court of Appeal decision

The Court of Appeal took the view that the case should be regarded as one primarily about litigation privilege. Although it commented on them, it chose not to decide the legal advice privilege issues, suggesting these issues, very important as they were, should be decided by the Supreme Court.

Litigation privilege

The Court was asked to address two issues in order to determine whether the documents were covered by litigation privilege: first, whether criminal proceedings were "reasonably in contemplation" (ie. it was a “real prospect” or ”a real likelihood as opposed to a mere possibility”) at the time the documents had been created; and second, whether the “dominant purpose” for creating the documents had been to resist contemplated criminal proceedings.

"Reasonably in contemplation"

On the first question, the Court held that criminal proceedings had been reasonably in contemplation by ENRC, on the basis that "the whole sub-text of the relationship between ENRC and the SFO was the possibility, if not the likelihood, of prosecution". The court's additional observations are of note:

  • Not every "manifestation of concern" expressed in SFO communications should be regarded as indicative of an intention to prosecute. However, when the SFO specifically makes clear to the company that criminal prosecution is possible, and legal advisers are engaged, there is a clear ground for contending that a criminal prosecution is in reasonable contemplation.

  • A party anticipating possible prosecution will often need to make further investigations before it can say with certainty that prosecution is likely. The Court was sympathetic to the difficulties experienced by international corporations in obtaining such certainty given the distribution of relevant knowledge across the organisation, and stated that such uncertainty does not in itself prevent proceedings from being in reasonable contemplation.

"Dominant purpose"

The Court of Appeal held that the documents had been created for the dominant purpose of resisting contemplated criminal proceedings and made the following observations:

  • Mrs Justice Andrews was wrong to suggest that litigation privilege did not apply to legal advice which is given in order to avoid reasonably contemplated proceedings; it should be treated in the same manner as legal advice given for the purpose of defending such contemplated proceedings.

  • The Judge was also wrong to suggest that privilege was waived over documents created with an intention that they may be shown to the SFO. The key point here was that ENRC had never actually agreed to disclose those documents to the SFO, even though ENRC led the SFO to believe that it might in the future do so.

  • The Court characterised the SFO's powers under the criminal (and civil) law as a "stick" to enforce compliance and governance standards in companies. Taken together with the threat of a criminal investigation, it was held that the dominant purpose for ENRC's internal investigation was not merely to investigate facts and to deal with compliance and governance issues, but rather to prevent or deal with possible litigation.

These findings are relevant to regulatory investigations, setting the bar for litigation privilege far lower than that suggested by Mrs Justice Andrews for firms or companies under investigation.

Legal advice privilege

Despite its criticisms of the current law on legal advice privilege, the Court nevertheless considered itself bound by the current position. Pending an appeal to the Supreme Court, it is worth restating the law as it stands:

  • Legal advice privilege applies to communications between a corporation's lawyers and its employee only if that employee was authorised by the corporation to seek and receive such advice.

  • Information obtained by a corporation's lawyers from its ex-employees falls into the same category as information obtained from third parties and is not covered by litigation advice privilege.

The Court deferred any ruling on the above position, together with the question of whether a lawyer's working papers (e.g. interview notes) were covered by legal advice privilege, to the Supreme Court.

Significantly, underlying the Court's judgment was a strongly stated public policy argument that companies should not be deterred from investigating whistleblower and other investigations for fear of losing privilege over the work product of their investigation.

Impact on FRC investigations

The right to seek legal advice under the protection of legal privilege is a recognised human right and should be respected by regulators. At times a regulator may press for fuller disclosure, as the SFO did in its case against ENRC, however, maintaining a legitimate legal right should not be the subject of regulatory criticism.

The Court of Appeal decision has reversed the findings of the Judge at first instance. Its clarifications will give comfort to those under investigation seeking the protection of privilege.

We suggest the following should be borne in mind following the Court of Appeal's decision in the context of investigations by the Financial Reporting Council ("FRC"):

  • Legal advice privilege is narrower than litigation privilege. As was the case before this decision, legal advice privilege will only apply to communications between lawyers and those within the client firm authorised to give instructions or receive advice. Verbatim records of interviews with individuals conducted in response to a Rule 9 or Rule 10 information request, for instance, may not be subject to legal advice privilege, even if conducted by a solicitor. They may only be safe from disclosure if they are covered by litigation privilege.

  • Litigation privilege covers all documents created in contemplation of disciplinary proceedings, which shall for example include records of interviews of staff providing evidence relevant to such proceedings. Correspondence from the FRC indicating the possibility of sanction will be a significant factor in showing that disciplinary proceedings are reasonably in contemplation.

  • Under the Audit Enforcement Procedure (applicable to auditors), we consider it is reasonably clear that litigation is in contemplation and litigation privilege may apply as soon as the FRC gives a Notice of Investigation under Rule 7. That is because Notice is only given when a Case Examiner has concluded that an “Allegation” may be made, namely “there is information about a Statutory Auditor or Statutory Audit Firm which raises a question as to whether they have breached a Relevant Requirement”.

  • For investigations under the Accountancy Scheme, the position is even clearer. The decision to investigate a firm in most cases will follow a decision by the FRC Conduct Committee that there are reasonable grounds to suspect that there has been misconduct on the part of the individual or firm under investigation. A Notice of Investigation indicates disciplinary proceedings are in contemplation.

  • We sound a note of caution for those firms subject to preliminary enquiries by the FRC before a decision to investigate has been taken. Similarly, for those served with Notices requiring disclosure of information relating to the investigation of another. The Court of Appeal suggested that not "every manifestation of concern" by the regulator should be regarded as evidence that adversarial proceedings are in contemplation. For those firms caught up in an investigation where it is not clear that they will be the subject of disciplinary proceedings, careful consideration may need be given to whether or when litigation privilege can be claimed.

  • It may be that a document is created with the intention that it be disclosed to the regulator. However, consideration should be given to how or when that intention is communicated to the regulator. ENRC stopped short of promising disclosure of documents created during its investigations to the SFO and successfully maintained its claim to litigation privilege over them. An intention to disclose documents should be carefully considered before being explicitly stated in correspondence.

  • Finally, consider seeking external legal advice as soon as possible at the outset of the investigation. External lawyers' advice regarding the likelihood of prosecution was an important factor in the Court's decision whether litigation privilege applied in this case.

Postscript

As a postscript, we note the High Court has recently ruled on privilege in the context of Rule 10 Notices in The Financial Reporting Council Ltd v Sports Direct International plc [2018] EWHC 2284 (Ch). The judgment does not deal with the issues in the ENRC decision, but will be of interest to accountancy firms as it concerns an audit client's unsuccessful claim for privilege over documents in the hands of the auditor in the context of an FRC investigation into the auditor's conduct.

The judge held that the production of documents to the FRC for the sole purpose of a confidential investigation by the FRC into the conduct of the auditor was not an infringement of privilege, and ordered the audit client to hand over most of the documents sought by the FRC. Nonetheless, the judge acknowledged that he had not found the issue straightforward and granted permission to appeal.

Authors

Richard Highley

Richard Highley

London - Walbrook

+44 (0)20 7894 6470

Aleksandra Chadzynski

Aleksandra Chadzynski

London - Walbrook

+44 (0) 207 894 6849

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