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SFO v ENRC privilege ruling restricts privilege in internal corruption investigation

 

18 May 2017

​Enforcement authorities (both criminal and regulatory) have been taking an increasingly combative approach to claims to legal professional privilege in recent years. In Serious Fraud Office (SFO) v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB) (08 May 2017), the UK Serious Fraud Office (SFO) successfully challenged claims to privilege by a company over various documents that were produced by lawyers and forensic accountants during an internal investigation into allegations of bribery and corruption.  It is the first case in which the English court has had to consider a claim for litigation privilege in which the adversarial litigation said to have been reasonably in contemplation was criminal, rather than civil. The ruling suggests that litigation privilege is going to be very difficult to claim in relation to many internal investigation materials.  The company is seeking permission to appeal the decision.

Background

In any assessment of whether a claim to privilege can be made out, or of whether a judgment on privilege applies in other contexts, an understanding of the facts is critical. The facts here were relatively straightforward. In December 2010, ENRC received an email from an apparent whistleblower containing allegations of bribery and financial wrongdoing in relation to its Kazakh subsidiary. This led ENRC to instruct lawyers to carry out an internal fact-finding investigation into the allegations. In 2011, the SFO became involved.  It contacted ENRC, drew its attention to the SFO’s self-reporting guidelines and suggested a meeting. There followed a lengthy period of dialogue between ENRC and the SFO, including a series of meetings in which ENRC updated the SFO on the progress of its internal investigation. The SFO announced that it was commencing a criminal investigation in April 2013.

As part of its investigation, the SFO sought to compel ENRC to produce a range of documents. The SFO’s powers of compulsion do not extend to documents which ENRC would be entitled to refuse to disclose on grounds of legal privilege in proceedings in the English High Court. ENRC refused to disclose four categories of documents on the basis that they were subject to legal advice privilege, litigation privilege or both. According to the judgment, “ENRC [had] repeatedly promised that it would give full and frank disclosure of the results of its internal investigations to the SFO, but then changed its mind”.

As a result, the SFO commenced these proceedings, seeking production of the documents on the basis that they were not privileged.

The disputed documents

The documents that the SFO wanted to see fell into four categories:

  1. Notes taken by lawyers of the evidence given to them by ENRC's employees, former employees, subsidiaries, suppliers and other third parties (Interview Notes);

  2. Materials generated by forensic accountants, as part of a “books and records” review, with a focus on identifying controls and systems weaknesses and potential improvements (Accountants' Reports);

  3. Documents, including slides, indicating or containing factual evidence, used by lawyers to present to a committee within ENRC and/or ENRC's board (Factual Updates); and

  4. Emails between a senior executive and the head of mergers and acquisitions at ENRC, who was a Swiss qualified lawyer (Communications with a Legally Qualified Businessman).

Litigation privilege

Litigation privilege protects communications between clients or their lawyers and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation when, at the time of the communication in question:

  • Litigation is in progress or reasonably in contemplation;

  • The communications are made with the sole or dominant purpose of conducting that anticipated litigation; and

  • The litigation is adversarial, not investigative or inquisitorial.

ENRC argued that the Interview Notes, Accountants’ Reports and Factual Updates were subject to litigation privilege on the basis that their dominant purpose was to enable ENRC to obtain advice or evidence in connection with anticipated adversarial criminal litigation.

The judgment – no litigation privilege

Litigation not in reasonable contemplation  

ENRC’s claim for litigation privilege failed at the first hurdle. ENRC failed to establish on the facts that it was “aware of circumstances which rendered litigation between itself and the SFO a real likelihood rather than a mere possibility.”

The court ruled that a criminal investigation by the SFO is not adversarial litigation for privilege purposes. An SFO investigation is a preliminary step taken, and generally completed, before any decision to prosecute is taken. In practice this means that a claim to privilege can only be made out where a prosecution is in reasonable contemplation. The judge took the view that ENRC did not contemplate a prosecution when the documents in question were produced, so those documents were not protected by litigation privilege. In particular, the judge observed that:

  • whilst not co-operating could lead to criminal proceedings and criminal sanctions, ENRC, on its own case, had planned to co-operate;
  • “prosecution only becomes a real prospect once it is discovered that there is some truth in the accusations, or at the very least that there is some material to support the allegations of corrupt practices”. In this case, there was no evidence that there was anything beyond the unverified allegations themselves: “The difficulty for ENRC in the present case is that there is no evidence that it was ever aware that it had any such problem, or of anything more tangible than a fear that one might emerge”;
  • one “critical difference” between the starting of civil and criminal proceedings is that there is no real inhibition against bringing unfounded civil proceedings, save the cost consequences. However, a prosecution cannot be started unless and until the prosecutor is satisfied that there is a sufficient evidential basis for prosecution and the public interest test is also met. “Criminal proceedings cannot be reasonably contemplated unless the prospective defendant knows enough about what the investigation is likely to unearth, or has unearthed, to appreciate that it is realistic to expect a prosecutor to be satisfied that it has enough material to stand a good chance of securing a conviction.”

Dominant purpose not met 

The court also ruled that, even if a prosecution had been reasonably in contemplation, none of the documents in question were created with the dominant purpose of being used in the conduct of such litigation. There was no evidence to show that the purpose of the internal investigation had anything to do with the conduct of future criminal proceedings in the event that evidence of criminal conduct emerged, and attempts to persuade the SFO to engage in a civil settlement failed.

In the judge’s view, the main purpose of the internal investigation was to establish if there was any truth to the whistleblower allegations, and to prepare for any future SFO investigation. Against a background of co-operation and openness, fact-finding aimed at obtaining legal advice on how to avoid an investigation is not covered by litigation privilege. Even if the fact-finding could have had a dual purpose (ie avoidance of litigation plus, if prosecuted, mounting a defence), there was no evidence of a dual purpose for ENRC.

The fact that ENRC intended to show the vast majority of the fruits of its internal investigations to the SFO was also fatal to its claim for litigation privilege. The judge held that litigation privilege does not apply to documents which are specifically created to be shown to a litigation adversary. The evidence clearly showed that ENRC intended to be fully co-operative and transparent.

Avoiding litigation not sufficient

Whilst accepting that litigation privilege can protect third party documents created with a view to settling litigation once it is in train, the judge rejected the idea that litigation privilege also extended to third party documents created in order to obtain legal advice as to how best to avoid contemplated litigation.

Legal advice privilege

Legal advice privilege attaches to confidential communications between a client and its lawyers, acting in their professional capacity, in connection with the provision of legal advice. There is no need for litigation to be contemplated. Privilege attaches to all material forming part of the continuum of the lawyer-client communications, even if those documents do not expressly seek or convey legal advice.

ENRC argued that the Interview Notes and Factual Updates were subject to legal advice privilege (in relation to the Interview Notes, characterising them as lawyers’ work product). The Communications with a Legally Qualified Businessman, ENRC asserted, were subject to legal advice privilege as they recorded requests for and the giving of legal advice by a qualified lawyer acting in the role of a lawyer.

The judgment – a claim to legal advice privilege could only be made out in relation to some documents

The judge endorsed the approach taken recently by the English High Court in The RBS Rights Issue Litigation.

  • Legal advice privilege attaches only to communications between a lawyer and those individuals within a client entity who are authorised to obtain legal advice on that entity’s behalf (the true client); and
  • The protection afforded to lawyers’ working papers, as a sub-category of legal advice privilege, is justified if, and only if, they would betray the trend of the legal advice. A note of what a solicitor is told by a prospective witness is not, without more, a privileged document, even if the solicitor has interviewed the witness with a view to using the information that the witness provides as a basis for advising his client.

On this basis, the judge rejected ENRC’s claim to legal advice privilege in relation to the Interview Notes.

The judge also agreed with Snowden J in Property Alliance Ltd v Royal Bank of Scotland Plc, that factual information communicated by a lawyer to his client, either in conjunction with the provision of legal advice, or so as to enable the client to take a fully informed decision as to what to do and what further advice to obtain, should be privileged. As a result, she concluded that the Factual Updates were protected by legal advice privilege. 

The judge found that the Communications with a Legally Qualified Businessman were not protected since the person in question was acting as a ‘man of business’ rather than wearing his legal spectacles.

Category of document

Privilege claimed

Result

Interview Notes

Litigation privilege (LP) and legal advice privilege (LAP)

NOT LP: litigation not reasonably in prospect and not dominant purpose

NOT LAP: not with client

Accountants' Reports

LP

NOT LP: litigation not dominant purpose

Factual Updates

LP and LAP

NOT LP: litigation not reasonably in prospect and not dominant purpose

LAP: part of continuum of communications

Communications with a Legally Qualified Businessman

LAP

NOT LAP: acting as a man of business not a lawyer

Impact of ENRC privilege ruling

This decision does not mean that parties can no longer obtain legal advice in the context of an internal investigation. Communications between a lawyer and a client for the purposes of legal advice continue to be protected. But the combination of the judge’s confirmation that fact-finding communications between a lawyer and anyone other than the true client are not privileged with her findings on when litigation can be said to be in contemplation in a criminal context, make it difficult for parties or their lawyers to claim privilege over factual enquiries necessary to allow that advice to be given. Those facts will often be known only to individuals within a client organisation who are not authorised to seek or obtain advice and are therefore not the true client.

The judge’s decision means that particular care must be taken over communications involving so-called “third parties”, including individuals within a client organisation who are not authorised to seek or obtain legal advice, in circumstances where an investigation is carried out to establish whether allegations can be substantiated. 

And, even where litigation can be said to be in contemplation, in order for a claim to privilege to succeed, the documents in question must be produced for the dominant purpose of the conduct (including settlement) of the litigation, rather than avoiding litigation or with a view to being shown to an adversary (although the distinction between settling and avoiding litigation in this context is at best difficult to discern).

The judge’s observation about the difference between criminal proceedings and civil litigation suggests that this decision should not change the current understanding of when litigation can be said to be in contemplation in ordinary civil proceedings (although it may have an impact on the analysis in relation to any attempt to avoid litigation). But it does imply that litigation privilege is going to be more difficult to claim in other criminal contexts. The judge’s reasoning also appears to produce the rather incongruous result that a company threatened with civil proceedings in relation to allegations of misconduct can investigate them protected by litigation privilege (provided the dominant purpose test is met), but a company under criminal investigation for those same allegations cannot. 

The procedures and decision making processes in regulatory investigations (eg Financial Conduct Authority (FCA) or Competition and Markets Authority investigations) are not the same as those in SFO investigations. The judge’s rationale for refusing a claim to privilege in this case does not therefore necessarily apply in the context of a regulatory investigation. In an FCA context, for example, the lower burden of proof and broad nature of the FCA Principles for Businesses may be distinguishing factors. Ultimately, each case will need to be considered on its facts to determine whether a claim to privilege might succeed, including (a) when the regulatory process in question can be said to become adversarial and (b) when that adversarial process can be said to have been in contemplation in that particular case.

ENRC sought permission to appeal from the judge but was refused. We understand that ENRC is now seeking permission to appeal from the Court of Appeal.  For now, however, parties considering whether and how to conduct any internal investigation will need to think very carefully about their strategy and approach.  If you would like to discuss the strategies that may be available, please contact Calum Burnett, Mahmood Lone, Michelle de Kluyver or your usual A&O contact.   

Further information

This article, and any further developments in this area,  will appear in the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. For more information on how to subscribe to this publication please contact Amy Edwards at amy.edwards@allenovery.com

 

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