The recent order obtained by the Serious Fraud Office (SFO) in relation to dividends received by Mabey Engineering (Holdings) Limited (MEH) under Part 5 of the Proceeds of Crime Act 2002 has attracted significant publicity.

Tracing

The claim against dividends follows the ‘recoverable property’. In the case of the payment of a dividend, broadly speaking, it will be necessary to trace the proceeds of the corruptly obtained contract through to the payment of the dividend.

Ultimately whether or not ‘recoverable property’ can be traced will be a factual question.  It may well be the case that forensic accountants may be required to follow the money.

Reversal of the burden of proof in practice?

The position in the MEH case was made easy for the SFO.  Due to the ethical culture of the Mabey Group great assistance was given to the SFO in identifying the shareholder, MEH,  who received the representative payment. The Director of the SFO made a point of commending that ethical policy.

If a corporate Self Reports and co-operates with the SFO then a significant evidential burden on the SFO is likely to be removed.  Going forward an SFO claim for a Civil Recovery Order in respect of investor profits may well follow as a matter of course in such circumstances.

Once property has been identified as ‘recoverable property’ the court ‘must’ order its recovery.

Checks and balances

However, there are some potential flys in the SFO ointment when it comes to recovery from investors.

These include a number of exceptions including in respect of property which has been obtained in good faith, for value and without notice that it was a recoverable acquisition.

Even where shares have been gifted POCA gives potential shelter from recovery where it would not be just and equitable to do so.

As we previously identified where a person holding the recoverable property obtained it in good faith and

• took steps after obtaining the property which he would not have taken if he had not obtained it; and
• had no notice that the property was recoverable; and
• if a recovery order were made in respect of the property, it would, by reason of the steps, be detrimental to that person

then the court may not make such an order.

The person in possession of the ‘recoverable property’ will have the burden of proving these various elements.

The SFO have signaled that they are interested in investors who have influence with their investee companies as part of their drive to push ethical investment.

Nevertheless the SFO will still have much work to do in order to trace the money if a corporate does not cooperate.

Even if corporations co-operate with the SFO (and the evidential burden on the SFO to prove that the property is ‘recoverable’ is correspondingly low) if investors decide that they wish to resist such a claim the SFO will also need to deal with arguments raised by investors along the lines described above.

The importance of responsible investing

In such cases it will rest principally with the investor to argue that it should be entitled to hold on to it – a reversal of the burden of proof to avoid a reversal of fortune…

The SFO may seek to neutralise any such defence by arguing that a failure to ask questions about the ethics policies of investee companies over which they have influence prevents an investor from claiming that it has no notice wrongdoing or that it acquired dividends in good faith.  While the success of such an argument is not guaranteed it is an argument which need not be fought.

Investors would be well advised to ensure that their investee companies do not engage in bribery.

On top of potentially removing a defence to a claim for a Civil Recovery Order an investigation into bribery allegations by the SFO (or other investigators) will have a damaging impact on the value of the business (and its shares) as well as significant adverse impact on its long term business reputation.

Investors who do not insist on their investee companies engaging in ethical business may find that they end up repenting at leisure.