SFO Civil Recovery Order Leads to Concerns for Shareholders

In the final act of the Mabey & Johnson case, the UK Serious Fraud Office (SFO) has agreed a civil recovery order (CRO) with the parent of the engineering company, which pleaded guilty to corruption offences and breaches of UN sanctions in September 2009. In a development that has caused a stir in the investment community, Mabey Engineering (Holdings) Ltd is to pay a sum of approximately £130,000 to reflect the share dividends it received from its subsidiary that arose from profits from Iraqi bridge-building contracts won through corruption and sanctions breaches.

Despite the fact that the parent company did not know about Mabey & Johnson’s inappropriate behaviour, the SFO was able to apply Part V of the Proceeds of Crime Act 2002 (POCA) to recover, in civil proceedings before the High Court, the “property obtained through unlawful conduct”.

Richard Alderman, Director of the SFO, has long stressed the responsibility of company owners to ensure that proper standards of governance, including anti-bribery and corruption regimes, form part of the company’s culture. In a June 2011 speech on private equity and the Bribery Act 2010, he was quite clear as to the stance he was adopting:

“Owners should not stand aside and say this is nothing to do with them but is an operational issue for the company. It is not. As owners of companies, private equity (as well as the big institutional shareholders) has a responsibility to society to ensure that the companies in which they have a shareholding operate to the right standards.”

It has become apparent that, even where a shareholder of portfolio does not commit an offence of failing to prevent bribery under the Bribery Act, the SFO will consider what sums of money have been laundered as a result of the criminal conduct and to whom the money has passed. Shareholder dividends may amount to the proceeds of crime and can be clawed back by the authorities even in situations where they have already been distributed.

While this is the first time the authority has recovered dividends already paid to a shareholder, the SFO has been making use of its civil recovery powers since 2008 and last year recovered £7 million from MW Kellogg Ltd, proposed for dividends that stemmed from contracts procured by bribery involving a special purpose vehicle subsidiary company. The investor community has been emphasising the need to put the combating of bribery and corruption on the corporate governance agenda for some time. In early 2009, for example, the International Corporate Governance Network (ICGN) finalised its Statement and Guidance on Anti-Corruption Practices, which explained how corruption is detrimental to share value and listed some key questions that should be asked by investors of companies’ policies.

In the new anti-corruption dynamic, boards, fund managers and senior management should expect many more probing questions from shareholders and prospective investors. Those that are unable to provide the comfort that they are looking for in relation to anti-corruption compliance will encounter stiff opposition; fund managers, in particular, will need to demonstrate that they are actively monitoring investee companies’ governance processes. In the meantime, companies are likely to explore independent verification schemes in order to respond to increasing shareholder pressure.

Sam Eastwood is a litigation partner and Head of the Business Ethics and Anti-Corruption Group at Norton Rose. Sam can be contacted on +44(0)20 7283 6000 or by email: sam.eastwood@nortonrose.com 

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