SFO rebuked for overreaching: no power to seek overseas documents from non-UK companies

The SFO can issue a notice requiring a person or entity under investigation or any other person to produce documents which appear to the SFO to relate to any matter relevant to the investigation[1] .  These are commonly called “section 2 notices”. Failure to comply with a section 2 notice without reasonable excuse is a criminal offence.

The territorial scope of this power has been unclear: does it extend to documents held by UK companies overseas (including on an overseas server)?  Does the SFO have power to issue a section 2 notice to a foreign corporation that has no business presence in the UK?

Both questions were answered by the Supreme Court in this case dealing with the validity of section 2 notices issued to:

• an English company: Kellogg Brown & Root Ltd (KBR UK) which carried out business in the UK and was the subject of a criminal investigation run by the SFO.
• its US parent company: KBR Inc (KBR US): the ultimate parent of a multinational group, including KBR UK, providing professional services and technologies. KBR US had no fixed place of business in the UK and did not independently carry on business in the UK; it only did so through its UK subsidiaries.

SFO seeks documents held by KBR US parent and UK subsidiary

The SFO initially issued a section 2 notice to KBR UK compelling it to provide its documents. KBR UK told the SFO that it did not have certain material sought by the SFO, but that if and to the extent that the material existed, it would be held by KBR US.

The SFO then handed a new section 2 notice to an officer of KBR US, who (at the SFO’s insistence) was attending a meeting in the UK with the SFO to discuss the investigation.  KBR US’s application to quash this notice was initially rejected by the Court.  That decision has been reversed by the Supreme Court.

SFO does not have the power to compel documents from extra-territorial parent company

The Supreme Court unanimously held that the SFO’s statutory power to issue compelled production notices was not intended to have extra-territorial effect and therefore the notice could not validly be issued to the US parent.

There is a presumption that legislation is not generally intended to have extra-territorial effect: i.e., it is restricted in operation to the UK.  This reflects the principle that states should not infringe each other’s sovereignty and the concept of international comity.

The Court could not find any clear indication either for or against the extra-territorial effect of the legislation granting the SFO the power to issue compelled notices. The fact that the SFO had broad ranging powers to conduct its investigations, and the public interest in the effective investigation of serious fraud were not sufficient. As such, the presumption was not rebutted and applied to limit the SFO’s extra-territorial power.

The passage of multiple statutory schemes for international reciprocal co-operation with multiple foreign authorities, in particular through the use of Mutual Legal Assistance (MLA) treaties provided strong support for the fact that Parliament did not intend the SFO’s powers to operate as a unilateral extra-territorial power. This would have the undesirable and unintentional effect of removing the statutory safeguards and protections surrounding use and return of documents built into the MLAs and similar statutory schemes. This was not parliament’s intention with the SFO’s section 2 powers, and there had been no basis for the court at first instance to judicially develop an alternative ‘sufficient connection’ test in an attempt to justify reading the power more widely.

Section 2 notice capable of extending to documents held overseas by UK companies

On the other hand, for UK companies, the state does have a legitimate interest in its legislative power extending to the conduct of its own nationals and companies abroad. As such, a section 2 notice issued to a British-registered company would authorise the service of a notice to produce documents held overseas by that British company, and the British company would be required to bring the document into the UK in order to produce it.  This point was accepted by the parties, rather than argued in full, but the Court appeared to support this position.

It was also suggested (but not decided) that a foreign company which has a registered office, a fixed place of business, or which carries on business in the UK would also be a valid recipient of a section 2 notice.  However, the mere presence of an officer of the company in the UK was certainly not sufficient.

Comment

The decision is a blow to the SFO with the unanimous rejection by the Supreme Court of the attempted expansion of the statutory powers to compel documents from foreign parent companies.  It will have similar ramifications for other agencies seeking to compel production of material from parent companies without any domestic presence. It will reassure foreign companies that they will continue to benefit from the protections built into the MLA regimes when information is being required of them in the UK. Although this may slow the pace of UK investigations, the Supreme Court has preferred to recognise the parliamentary intention and safeguards built in to the evidence gathering process as not easily discarded.

However, UK based companies will need to take note that documents in their possession or control, but held overseas, may fall in scope of section 2 notices and, subject to contrary statutory intent, production powers of other authorities. This construction of the SFO’s powers was not challenged by the parties in this case and therefore not decided by the Supreme Court, although the commentary did appear to favour this view.

A&O Involvement

We are happy to note that A&O partner Billy Jacobson represented KBR Inc. in the US with regard to the investigation which is the subject of the Supreme Court’s decision.  The US DOJ and SEC closed their investigations, taking no action against the company.

Footnote:

[1]   Section 2 Criminal Justice Act 1987.