International - Written by on Sunday, October 2, 2011 23:36 - 0 Comments

Money laundering & bribery: VC’s, private equity & pension funds beware as SFO pushes ethical shareholding

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As we enjoy an Indian summer looking ahead the weather is about to change.

Another change in the air is the move we detect towards putting large scale investors under the spotlight of the Bribery Act and its supporting enforcement legislation.

This would be of some concern if dealt with in the wrong way given the uncertainty that could be created in financial markets.  A potential problem which is amplified given the current global economic situation.

There have been several indicators in the last few weeks that shareholders – investors and corporate groups – are potentially in the cross hairs of the SFO.

We have reported upon Richard Alderman’s intention to drive home the concept of ‘ethical shareholders’.   In several of our meetings with the Director of the SFO, Mr Alderman has been keen to stress that it is one of the SFO’s enforcement objectives set against the back drop of a threat of using the Bribery Act and UK money laundering legislation in appropriate cases.

This intention would, if achieved, mean that the Bribery Act and surrounding enforcement Statutes could go much much further than the FCPA. Global investments, private equity, foreign institutional investors and VC’s would be potential targets of ‘ethical shareholder’ enforcement activity.

In parallel, the recent ‘Draft Due Diligence Guide’ published by Transparency International needs careful consideration.  The guidance set out by TI resonates with some of the views expressed by the SFO and to some extent goes beyond them.  We looked at it in the context of M & A and investment transactions in an earlier article and raised some questions.

For the private equity industry, VC’s and other investors the TI guidance would represent a proposed step-change in the efforts and expenditure required to satisfy  ‘Due Diligence’ procedures prior to investment.

Importantly, the TI guidance does not seem to take into account some of the timetable issues which frequently surround doing deals.

For example, and by way of contrast, helpfully the Director of the SFO has spoken of the pragmatic and useful approach the SFO will take in relation to M&A transactions acknowledging the limited time there often is to undertake due diligence.  The Director of the SFO has also spoken of the importance of delivering certainty to corporates – the likely consultation in relation to Deferred Prosecution Agreements is a product of this objective.

We anticipate that the enforcement route of choice following a perceived breach of “Due Diligence” requirements in investment cases will be Pt5 of the Proceeds Of Crime Act (POCA), Civil Recovery.

The subject of the ‘Recovery’: dividend payments arising from profits stemming from any corrupt activities undertaken by the company invested in.

The settlement in MW Kellogg (16.02.11) which used a Pt 5 POCA  Civil Recovery Order to recover £7 million of dividends representing profits from corrupt contracts of MW Kellogs parent company, was a clear indication of things to come.  The SFO press release said:

“The SFO recognised that MWKL took no part in the criminal activity which generated the funds. The funds due to MWKL are share dividends payable from profits and revenues generated by contracts obtained by bribery and corruption undertaken by MWKL’s parent company and others.  The agreement will lead to the payment of £7,028,077 within fourteen days in full and final settlement of the case.  This sum represents the share dividends due and the interest which has accrued on these sums.”

Inevitably there will be cases, like Kellogg, where a civil recovery order is appropriate in the context of dividends.

But, the risk of market uncertainty arising from such an approach should, in our view, be tempered.

First, the use of Pt 5 of POCA to attack dividends from investments is not a ‘sure thing’.  Each instance will be very much dependant on its own circumstances and there are important legal obstacles to be overcome before an investor or acquirer would be in a ‘Kellogg’ situation.  Put another way, as investment adverts warn, past performance is no guarantee of future returns.

Second, the SFO have been clear about their desire to deliver certainty to corporates and have adopted a pragmatic and sensible approach to date.

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