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SFO settles with shareholder of convicted company

16 January 2012

On 13 January 2012, the UK Serious Fraud Office (SFO) announced a settlement of civil recovery proceedings by which dividends received from a company convicted of bribery were paid over by the shareholder receiving the dividends.

The SFO took the opportunity to warn investors that they needed to be satisfied with the business practices of the companies in which they invested, or risk facing similar proceedings.  

A copy of the SFO press release can be found here.

Mabey & Johnson Ltd (M&J) was the SFO's first prosecution of a company for bribery offences and followed a disclosure by M&J's parent company to the SFO.  M&J pleaded guilty to the charges on the basis of facts agreed with the SFO and it was sentenced in September 2009 to pay fines of £1.5m  in respect of bribery relating to projects in Jamaica and Ghana, as well as £2m in respect of breaches of sanctions.  M&J also had to pay £1.1m under a confiscation order intended to deprive it of the benefit of its crime, and it voluntarily offered to pay £897,000 to the Jamaican and Ghanaian governments.

The SFO subsequently started civil recovering proceedings against M&J's parent, Mabey Engineering (Holdings) Ltd (MEH).  Civil recovery is a mechanism under the Proceeds of Crime Act 2002 for recovering the benefit of crime, regardless of whether the holder of that property was involved in the crime.  As its name indicates, it involves only civil, not criminal, proceedings.  Although unclear, it appears that the SFO's argument was that M&J's profits were derived from criminal activities and that when those profits were distributed to MEH by way of dividend, MEH then held the benefit of those criminal activities.  These proceedings have now been settled and MEH has agreed to pay approximately £131,000.

The SFO has used the settlement as a platform to say that institutional investors that receive dividends from companies that engage in criminal conduct are at risk of losing those dividends in similar proceedings.  As the Director of the SFO, Richard Alderman, put it:

"…shareholders who receive the proceeds of crime can expect civil action against them to recover the money…shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in…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."

The SFO appears to want to encourage investors to scrutinise the bribery and sanctions compliance of companies in which they invest, with the result that companies will put more time and resources into that area.

However, this was an agreed settlement by the parent of a subsidiary that had been convicted of criminal offences and whose directors had also been convicted.  In contrast, institutional investors, particularly in public companies, may be less inclined to settle any such proceedings.  Whilst each case will depend on its particular circumstances, they may, for example, argue that:

  1. they received the dividends "in good faith, for value and without notice", which would preclude recovery under section 308 of the Proceeds of Crime Act 2002; or
  2. the dividends do not represent the benefit of criminal activity (and are therefore not recoverable under section 304 of the Proceeds of Crime Act 2002), either because it is not possible to trace the benefit of the criminal activity, once mixed with the company's legitimate business, to the dividends or because the benefit has already been recovered from the company itself.

This settlement may nevertheless further increase the pressure on companies to be able to represent to investors that they have good systems in place to prevent corruption and breaches of sanctions.

For further information please contact Arnondo Chakrabarti arnondo.chakrabarti@allenovery.com, or tel +44 (0)20 3088 4424.