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Internal Investigations: A Challenging Decision By The English Courts

Judicial Decision

A guest post today from White & Case attorneys Jonathan Pickworth, Alex Davey and Mhairi Fraser.

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In recent years the UK Serious Fraud Office (SFO) has been making aggressive statements regarding assertions of legal professional privilege by corporates and has launched two significant legal cases in this area.

The first of these challenges occurred in the criminal courts regarding the Barclays Qatar investigation, which saw Barclays eventually partially waive privilege and provide the SFO with the documents requested, rather than having an acrimonious court battle on the topic – something the SFO was prepared to do. The second was a civil test case, instigated by the SFO in the UK High Court, to challenge assertions of privilege in the case of The Serious Fraud Office v ENRC.

Privilege

England and the US are both common law jurisdictions which take differing approaches to privilege. Under English law, privilege takes two main forms: legal advice privilege and litigation privilege.

Legal advice privilege covers confidential communications between a designated group within a corporate client – often called the ‘client group’ – and its lawyers for the purpose of seeking or giving legal advice or related legal assistance in a relevant legal context.

Litigation privilege covers confidential communications between a lawyer and their client, or between the lawyer or client and a third party, which have been made for the sole or dominant purpose of litigation that is reasonably in prospect; that litigation must be adversarial in nature.

There have been significant decisions in recent cases; the RBS Rights Issue Litigation, a case which concerned the disclosure of interview notes, was particularly instructive regarding the court’s application of legal advice privilege, but SFO v ENRC is illuminating for its focus on litigation privilege.

The Facts

ENRC instructed lawyers to conduct an internal investigation in December 2010, after receiving an email from a whistleblower about alleged corruption and financial wrongdoing in its Kazakh subsidiary. Following publicity in the media and UK Parliament about ENRC’s dealings, the SFO contacted the company in August 2011 to alert ENRC to its self-reporting process. ENRC and the SFO liaised, while the internal investigation continued, until April 2013 when the SFO opened its own criminal investigation into the matter.

The SFO sought, by its powers of compulsion, disclosure of the following categories of documents:

  • Category 1: interview notes taken (before the SFO opened its criminal investigation) during the internal investigation by ENRC’s lawyers of interviews with ENRC employees, former employees, subsidiary companies, suppliers and other third parties. ENRC asserted litigation privilege and legal advice privilege over these interview notes;
  • Category 2: materials generated by ENRC’s forensic accountants regarding a review of books and records, which aimed to identify improvements that could be made in systems and controls at ENRC and its subsidiaries. ENRC asserted litigation privilege over these;
  • Category 3: documents created by ENRC’s lawyer for presentation to the governance committee and board of ENRC. ENRC asserted legal advice privilege over these, and litigation privilege in the alternative; and
  • Category 4: associated other documents which independent counsel had determined did not attract legal professional privilege (LPP).

The SFO applied to the High Court for a declaration that the documents in the categories listed above were not privileged.

The Findings on Litigation Privilege

The High Court sided with the SFO and declared that the documents in question were not subject to LPP, for several reasons:

  • The dominant purpose test had not been met, as preparation for litigation was not the main reason for the production of the interview notes. The main purpose of the investigation was to find out whether the whistleblowing allegations had merit, and this was not sufficient to attract litigation privilege.
  • Third party documents created with the aim of avoiding litigation are not sufficient to attract litigation privilege. The legal advice ENRC sought as it engaged in a self-reporting process aimed to encourage the SFO to engage in a civil settlement instead of pursuing prosecution; civil settlement was more prevalent under the previous Director of the SFO, Richard Alderman. To some extent it could be said that civil settlements have essentially fallen into disuse under the current Director of the SFO, David Green, with the trend now being towards deferred prosecution agreements. The evidence in this case did not suggest that the documents generated could also have been used for a defence in a future litigation.
  • The ENRC judgment also takes a strict approach to the point of ‘litigation reasonably in prospect’. Mrs Justice Andrews ruled that this standard is not met by the client merely contemplating a criminal investigation; it requires reasonable anticipation of a prosecution. In a corporate investigations context, prosecution only becomes a real prospect when it is discovered there is some truth in the allegations, rather than by the process of investigating those allegations. This is consistent with a previous decision regarding a competition investigation.
  • The threshold for an investigation into suspected criminality is higher than that in civil litigation. Civil proceedings can be commenced whether there is significant merit to the case or not, whereas criminal proceedings cannot be commenced until the prosecutor has assured himself that there is a sufficient evidential basis for prosecution and that the public interest test is met.

Other Findings

Principles of legal advice privilege were also touched upon in the judgment, with the following points being made:

  • Lawyers’ working papers are only privileged if they betray a trend of legal advice; a trend of inquiry is not enough. A list of questions to be asked by lawyers may not be sufficient to reveal the trend of advice, as this may merely reveal a trend of inquiry.
  • The courts are continuing to take a restrictive approach to the client group of a corporate.
  • It is not enough that the person giving advice is legally qualified; at the time of giving the advice, the adviser’s professional duty must be to act as a legal adviser. In this case, legal advice that was given by the Head of M&A (who happened to be legally qualified) did not attract legal advice privilege.
  • Material that would not normally be privileged can still attract legal advice privilege if it is part of the continuum of communications. For example, factual summaries compiled by a lawyer to a client can attract legal advice privilege.

Consequences in Practice

It should be kept in mind that while recent privilege cases are instructive, they are very much decisions on their facts. However, SFO v ENRC has significant, wide-ranging consequences.

The SFO is likely to be emboldened by this judgment, which validates its aggressive approach to, and scepticism of, assertions of privilege. Companies will need to be prepared for the SFO to challenge the basis of ‘contemplation’ and ‘dominant purpose’ in any future cases, and have a heightened awareness of the need to structure an investigation appropriately to ensure maximum privilege protections.

Of course, this is all dependent on the SFO’s future as an agency. This has been called into question by the manifesto of the Conservative party, widely predicted to win June’s General Election with an increased majority, which sets out the intention to abolish the SFO and roll its functions into the National Crime Agency, often referred to as the UK’s FBI.

Nevertheless, the current position is concerning. There is a public policy rationale for companies being able to consult their lawyers and claim privilege. Fears are already being expressed that this decision will dissuade companies from investigating allegations of criminal conduct within their operations. The full impact of this judgment remains to be seen, but what is certain is that companies will have to work closely with their legal advisers to structure investigations wisely going forward, and carefully document their decision-making process.

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