Maria Cronin, Partner, and Philip Gardner, Trainee Solicitor, discuss the recent case of KBR Inc v SFO and the indications it provides of the SFO’s approach to investigations in the future.
The recent case of KBR Inc v SFO emphasises the prosecuting authority’s increasingly aggressive use of investigative powers and the difficulties faced by the subjects of investigations in challenging these powers.
The case arises out of an investigation by the Serious Fraud Office (SFO) into alleged corrupt payments by KBR Ltd, a UK subsidiary of KBR Inc, in the context of the Unaoil bribery scandal. KBR Inc is the ultimate parent company of a multinational group of companies, which are said to operate within the government services and hydrocarbons sectors.
KBR Inc is based in the United States – where it is under investigation by the Securities and Exchange Commission and the US Department of Justice – and has no place of business in the UK. The allegedly corrupt payments relate to consultancy services provided by Unaoil in the Caspian basin.
The SFO investigation led to a notice pursuant to s.2(3) Criminal Justice Act 1987 being served on KBR Inc’s UK subsidiary in April 2017 (the April Section 2 Notice). Section 2 of the Act gives the Director of the SFO the power to compel a person to attend interview and answer questions, or, as in this case, to produce documents. Failure to comply with such a notice can result in prosecution, and the statutory defences to such a prosecution are narrowly confined. Section 2 is perhaps the most powerful weapon within the SFO’s arsenal. However, before KBR Inc v SFO, these powers were not considered to have extra-territorial effect.
In the case of this Section 2 Notice, the immediate reaction of the KBR group of companies was considered to be cooperative: the SFO was notified by KBR Ltd’s legal representatives that the documents that were provided included documents held other than by KBR Ltd, which KBR Inc was purporting to provide voluntarily to assist the investigation.
In June 2017, the SFO became concerned about the distinction that the KBR group appeared to be drawing between documents held by KBR Ltd, and those outside the jurisdiction and beyond KBR Ltd’s control. A meeting was arranged in July 2017 at which the SFO required that the representatives of KBR Inc attend in addition to KBR Ltd’s legal team. In the course of that meeting, the KBR Inc representatives commented that the company’s board needed more time to consider the SFO’s outstanding requests, in respect of the April Section 2 Notice, for documents outside the jurisdiction. In response, they were served with a Section 2 Notice in the name of KBR Inc (the July Section 2 Notice).
KBR Inc sought judicial review of the decision to issue the July Section 2 Notice, and the quashing of the same, on the grounds that such notices did not operate extra-territorially.
The Legal Issues
KBR Inc argued that:
(1) the July Section 2 Notice was ultra vires in that it sought to exercise extra-territorial jurisdiction (both in relation to the documents and the subject of the notice),
(2) that the SFO should have proceeded by way of Mutual Legal Assistance from the US authorities rather than resorting to its section 2 powers under the Criminal Justice Act 1987
(3) that the mode of service on KBR Inc rendered the Notice ineffective.
Given the time spent by the Court in considering each issue, the MLA and service arguments and conclusions can be addressed relatively briefly.
Mutual Legal Assistance
KBR Inc’s position was that, even if the Court considered that the SFO could properly seek the production of documents held overseas by way of a Section 2 Notice, it was an error of law on the part of the Director of the SFO to fail to consider the MLA regime, and the safeguards this afforded, before exercising his discretion to invoke the Section 2 powers. The Court had little patience for this argument, and – applying the principles of R v Redmond  EWCA Crim 1744 – emphasised that in such circumstances MLA is an additional power that the Director may consider, rather than one the SFO is obliged to use. In those circumstances, the Court held that the practical reasons for serving a Section 2 Notice, including the speed and simplicity, clearly justified it over an MLA request.
Interestingly, the Court also considered the risk of an MLA request being ignored or acted upon only slowly/incompletely as a basis for justifying the SFO favouring a Section 2 Notice. It is notable that the SFO opted to use its compulsory powers despite the very close cooperation between UK and US authorities, and even though KBR Inc was itself under investigation in the United States.
In relation to service, KBR Inc contended that the corporate had not properly been served with the Section 2 Notice, simply by handing the Notice to one of its company executives whilst they were present in the UK. KBR Inc submitted that this did not constitute good service under the Civil Procedure Rules, and that KBR Inc was not within the jurisdiction for the purposes of service. It was common ground between the parties that the notice could only be served within the jurisdiction.
The Court rejected the company’s submissions on service, stating emphatically that the service rules under the CPR were irrelevant for these purposes. Further, the Court held that the attendance by an executive of KBR Inc constituted the company being present within the jurisdiction, particularly in circumstances where the purpose of the executive’s presence was the investigation. Since service was within the jurisdiction, how it was communicated on to KBR Inc was a matter for the company and not for the SFO.
While it is true that the statutory language does not appear to engage any particular requirement beyond the jurisdictional element, it is notable that the Court considered the – admittedly slightly formulaic – Civil Procedure Rules to be of no assistance, despite relying heavily on civil case law to justify its finding on the principal issue that was decided in favour of the SFO. The reasoning as to why guidance can be drawn from the civil arena (and particularly insolvency law) in some contexts, and not others, is not entirely clear. It should be noted, however, that the Court did rebuke the SFO’s decision to serve the July Section 2 Notice in the way that it did, but this did not undermine the overall conclusion.
Extra-Territorial Application of the Section 2 Notice
The issue of territoriality of criminal statutes has been the defining feature of recent legislative changes. The introduction of the Bribery Act 2010, the Criminal Finances Act 2017 and developments in money laundering powers have all increased the previously discreet area of extra-territorial jurisdiction for criminal matters. It is in this context, that the SFO’s attempt to effectively extend Section 2 Notices extra-territorially is clearly of concern.
KBR Inc relied heavily on the Lord Mance construction in Masri v Consolidated Contractors Int that unless a contrary intention appears in a statute, it is presumed to apply only within the relevant jurisdiction, as a matter of ‘international comity and law’. They also relied on the cases of R (Jimenez) v FTT and SOCA v Perry in which the courts quashed analogous notices served on persons outside of the jurisdiction in the context of investigations by HMRC and SOCA.
On KBR Inc’s reading of the jurisprudence, the Criminal Justice Act 1987 did not expressly displace the presumption of territoriality. As such, the July Section 2 Notice was an exercise of authority that was territorial and could not be applied to a foreign company in respect of material held overseas.
The Court disagreed, holding that, in light of the ‘international dimension of the SFO’s mandate’, it was scarcely credible that no extra-territoriality had been contemplated by the Criminal Justice Act 1987. The Court considered that it could not have been intended that a UK company could resist a Section 2 Notice on the grounds that the documents were held on a server outside of the jurisdiction. If that were right, a company would be able to forestall an investigation simply by transferring documents abroad. Therefore, at least some form of extra-territoriality had to be engaged. The issue was the ambit of that extra-territoriality. The SFO itself (and the Court seemed to agree) considered that a Section 2 Notice could not be ‘sprung on some unsuspecting corporate entity out of the jurisdiction without prior warning’.
In the Court’s view, helpful guidance could be drawn from the sufficient connection test enumerated in In re Paramount Airways Ltd, which dealt with powers under the Insolvency Act 1986 in respect of foreign entities making reparations for a transaction at an undervalue to the detriment of the insolvent company. In the judgment, the Court noted that, ‘Trade takes place increasingly on an international basis. So does fraud’, and set out how it could be assumed that the term ‘any person’ in that act displaced the territorial presumption.
In the KBR Inc v SFO judgment, the Court commented that ‘it would be surprising if the law was more astute to assist inquiries into bankruptcy than investigations and prosecutions of serious fraud on an international level’. In so doing, some observers might question whether the Court had sufficient regard for the consequences of a failure to comply with a Section 2 Notice, which carries criminal penalties, as well as the procedural safeguards contained in the rules on service in the CPR.
Nevertheless, the Court concluded that where there was a sufficient connection between the subject of a notice and this jurisdiction, then it was proper to permit service here on that entity. The Court considered that there was a sufficient connection in this case, in light of the US entity’s involvement in approving, funding and providing compliance oversight for certain payments that were under investigation. The Court also noted, though attached less weight to, the fact that a senior corporate officer of KBR Inc was based here and operated from the KBR Ltd offices. The Court also added that the subject of such a Notice would still be able to rely on the s.2(13) ‘reasonable excuse defence’ for non-compliance, if this raised issues of natural justice. This is likely to provide little comfort to corporates operating internationally, where even the prospect of criminal sanction would cause serious reputational damage.
The Prosecutorial Pendulum
Recent confrontations between prosecuting authorities and those under investigation have demonstrated that, notwithstanding judicial oversight, enforcement authorities are taking an increasingly bullish and forceful approach to investigations. While the issue of privilege has recently been helpfully clarified by ENRC v SFO , the first successful defence by the NCA of an Unexplained Wealth Order (NCA v Mrs A), currently subject to appeal, and the KBR Inc v SFO judgment clearly demonstrate a trend that enforcement agencies are more willing to test the limits of the powers available to them, in the combat against serious and transnational crime. This trend is fraught with legal difficulties (as evidenced by this judicial review) and is a further example of the growing extraterritoriality of the UK prosecuting authorities.
In light of recent reports that serious and organised crime costs the UK £37 billion a year, the public may well welcome a more robust approach to the investigation of financial crime. However, this must be counterbalanced to ensure that a person’s fundamental rights and protections are not transgressed. These cases and recent legislative changes suggest a worrying shift in the way that financial crime will be investigated in the future; some commenters may see this as a concerning sign of the erosion to the fundamental principle of ‘innocent until proven guilty’.