As a result of the Mabey Group’s co-operation with the SFO the Mabey Group is the ethical leader in its industry.

The order last week under Part 5 of the Proceeds of Crime Act 2002 has sparked widespread debate with concerns being expressed as to the aim of the SFO and the routes open to it in actions to recover dividends from institutional investors.

On the point of principle Richard Alderman, Director of the SFO said in publishing the Part 5 Mabey Engineering (Holdings) Ltd Order:

“The second, broader point is that shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.”

So far so good.  But, stick with us – the law is about to get complicated – we’re going to make it simple…

The cat amongst the pigeons

We have read commentaries which express strong doubt as to whether UK legislation can impose an obligation upon institutional investors, such as pension funds, to conduct proper due diligence before they invest or risk losing dividend payments.

Arguments are being made concerning the application of section 7 of the Bribery Act, which requires a corporate to take ‘necessary and proportionate’ steps to prevent bribery as opposed to ‘all necessary’ steps.

So, the argument goes, the SFO Director is saying that the Bribery Act may impose a lesser burden upon the corporate to conduct its due diligence than that shouldered by institutional investors faced with the Part 5 of the Proceeds of Crime Act (POCA).

Order. Order. These arguments miss the point.

It would be a big mistake to get all tangled up with thresholds for the proof of innocence under section 7 of the Bribery Act.

Part 5 of POCA works in a *very* different way.

Proceedings under the Bribery Act, whether under sections 1,2,6,7 or 14, are all criminal in nature. Proceedings under Part 5 of POCA are always Civil.

Criminal proceedings are personal, (whether against individuals or corporates). On the other hand POCA Part 5 proceedings are proceedings against *property*.

Part 5 POCA

The point of Part 5 for present purposes is to enable the SFO to recover property which is, or represents, property obtained through unlawful conduct.

Part 5 makes clear that the powers of civil recovery under this part of POCA extend to any property obtained, or representing property obtained, through unlawful conduct, whether or not proceedings have been brought in relation to a criminal offence.

The Court in Part 5 proceedings is looking initially to the property, not the individual who may have custody of it at the time that the action is brought.

It is both confusing and true that Part 5 proceedings are issued against a named individual be they an individual or a corporate person; notwithstanding this personal reference, the proceedings are in fact against property only.

In looking to the property the court must determine whether it is, or it represents, property obtained through unlawful conduct.

Part 5 of POCA provides that unlawful conduct means that if it occurred in the UK it is unlawful under the criminal law; if the conduct occurred outside of the UK then if it is unlawful according to the criminal law of the country in which it occurred and also would be unlawful had it is occurred in the UK, it qualifies.

The standard of proof to be applied by a court under Part 5 POCA in determining whether there has been unlawful conduct is that of the ‘balance of probabilities’.

Criminal proceedings require proof to a higher standard – beyond reasonable doubt.

Part 5 is firstly not dependent upon a prosecution ever being commenced, needing only to have unlawful conduct established to the civil standard of proof.

So, in Part 5 POCA proceedings, if the SFO can establish on the balance of probabilities that profits were made as a result of corrupt corporate activities then those profits are ‘property’ and have been made as a result of ‘unlawful conduct,’ then they succeed in making the property ‘Recoverable’.

Returning to the words of Richard Alderman and the dividend payments to institutional investors.

If as a matter of evidence the SFO can establish that the ‘recoverable property’ was paid into the corporate who then paid out dividends as a result of the profits made, then they may be able to show that the dividend payments ‘represent’ the recoverable property.

Easier said than done?

Make no mistake; this is not always an easy process for the SFO.

Due to the ethical culture of the Mabey Group great assistance was given to the SFO in identifying the shareholder, Mabey Engineering,  who received the representative payment. The Director of the SFO made a point of commending that ethical policy, important as it was in enabling the SFO to trace the property under Part 5 POCA.

In our other life as ‘guns for hire’ we have to deal with the complexities of ‘Associated Property’ which cannot be recovered by the SFO, an important provision for corporates under Part 5 which is too intricate for this article. This category of property can also cause real problems for the SFO when proceeding under Part 5.

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

Subject to what follows it does not matter who is holding the ‘Recoverable Property’, the action is against the property only.

If the institutional investor, in whose hands the recoverable property/dividend payment has ended up can satisfy all of the following conditions:

• That it obtained the recoverable property in good faith;
• That before or after it obtained the recoverable property, without knowing that it was recoverable property, it took action which it would not have taken if it had not anticipated receiving, or had not received the dividend (for instance it spent its own cash as a result of receiving the recoverable property);
• That the making of a recovery order would be detrimental to the institutional investor due to the action that it had taken in relation to the recoverable property.

then, and only then, *if* the court feels that it would not be just and equitable to make a Recovery Order, it need not do so.

As can be seen, once the property is identified as ‘Recoverable Property’ (in many situations where there is no co-operation not an easy task for the SFO), the burden shifts to the holder of the property to satisfy each condition set out above.

Returning again to the words of the Director of the SFO

Bearing in mind what the institutional investor has to show in relation to dividend payments/recoverable property in its hands, it is clear what the Director of the SFO is indicating.

The SFO see a clear line of argument in relation to ‘good faith’, action taken in relation to recoverable property and the equitable jurisdiction of the Court.

The SFO are saying that the failure to apply proper due diligence by an institutional investor will mean that that investor cannot prove the elements they have to prove under Part 5 in order to be allowed to hold on to ‘Recoverable Property’.

We say that there is clearly a lawful method to warrant such an approach by the SFO.

The application of the provisions of Part 5 POCA to each case will be fact dependent.

In truth actions such as those addressed by the SFO Director against dividends arising from institutional investment will be difficult for both the SFO and any corporate caught in the head-lights.

The indication, from the last two lines of the Directors quote is that proceedings will only commence in a clear case of failure to conduct due diligence.

From our own dealings with the Director we know that the message is aimed to change corporate culture; to promote the ethical application of principles designed to ensure that corruption is excised from business. It is also clear that this may not stop at the establishment of a principle; a clear case is likely to attract a prosecution.

Today at a Transparency International event, the Director of the SFO said this:

“Many of you will have seen the press coverage last Friday of an innovative result by the SFO in which we focused on dividends paid out by Mabey & Johnson to its shareholders. We recovered a portion of the dividends.

I am glad to see that Peter Lloyd is here this morning. It will be very interesting to hear Peter’s comments on this. From my perspective, Mabey and Johnson have behaved in a very proper and ethical way. I believe that they are a stronger company as a result and that they are better placed to win contracts and earn the profits that we all want to see as a country. It is an example that I would commend to other corporates.

I was very interested to see the commentary on the decision. One comment, for example, by the distinguished academic and practising lawyer, Professor Jonathan Fisher QC, was that the SFO was pushing the law to the limits. I was in fact very pleased with that comment. I see the powers that we have been given as being powers to do justice. They are not just formal rules; they are there for a purpose and that purpose is justice. If justice means that we should be pushing the legislation to its limits, then so be it. There are other cases we are looking at where we shall do this again.

There were other comments as well on how wide this decision went. Also, there was criticism about what was seen as a further burden on shareholders, particularly institutional shareholders. I have to say I do not understand that. Institutional shareholders are not just passive recipients of dividends; they also have regular discussions with the management of the businesses in which they hold shares. I am going to have discussions soon with representatives of institutional shareholders. I am going to ask them whether any of them have asked management if they are satisfied that their companies have adequate procedures under the Bribery Act. If they have not asked that question, I shall want to know why not. After all, we all know that a corruption investigation can have a devastating effect on the share price of a company. If institutional shareholders are not concerned about that, then it seems to me that they are not living up to their ownership responsibilities and are not doing what society expects from them.” [our emphasis]

So. If the SFO do ask you this question, keep in mind that the answer you give may turn out to be the cornerstone of an SFO POCA dividend claim…