Court rules SFO can require foreign corporates with a “sufficient connection” to the UK to produce overseas documents 

On 6 September 2018, the Administrative Court rejected a judicial review challenge brought by KBR, Inc. (a US company) against the Serious Fraud Office's (SFO) decision to issue a “Section 2 notice” pursuant to s. 2(3) of the Criminal Justice Act 1987 compelling KBR, Inc. to produce documents held outside the UK. It is an offence, without reasonable excuse, to fail to comply with such a notice.

In a rolled-up permission and substantive hearing, the Court granted permission to bring the judicial review, but rejected KBR, Inc.'s substantive challenge that: (i) the SFO was acting ultra vires in issuing the notice; (ii) the SFO made an error of law as to whether the SFO could issue such a notice and/or (iii) the notice was not effectively served by handing it to a senior officer, who was temporarily present in the UK.

This decision has serious ramifications for (1) UK corporates with documents outside the UK and (2) foreign corporates who do not have a presence in the UK, but who have a “sufficient connection” to the UK that they can be required to comply with SFO s. 2 notices compelling production of documents held outside the UK.

Background

KBR, Inc. is incorporated in the US and the ultimate parent of a multinational group of companies, including subsidiaries in the UK (mainly Kellogg Brown & Root Ltd (“KBR UK”)). KBR, Inc. itself does not have a fixed place of business in the UK, nor was it suggested that it carried on business in the UK.

KBR, Inc. is currently under investigation in the US by the Department of Justice and the Securities and Exchange Commission for alleged FCPA violations concerning the use of an agent, Unaoil Group Holdings, in respect of certain projects in Kazakhstan and Azerbaijan. KBR UK and other UK incorporated KBR Group subsidiaries are currently under investigation in the UK by the SFO concerning their use of Unaoil and other agents, allegedly for corrupt purposes.

The July Notice

A meeting was scheduled between the SFO and representatives of KBR, Inc. for 25 July 2017, concerning the SFO’s investigation and the cooperation they were seeking in that regard. The SFO requested that "the clients" should attend in addition to their lawyers. During the meeting, a representative of KBR, Inc. (its General Counsel) was served with a s. 2 notice addressed to KBR, Inc. (the "July Notice"). The July Notice required production by KBR, Inc. of multiple categories of documents, including documents that had previously been sought from KBR UK pursuant to a similar s. 2 notice issued in April 2017, "[t]o the extent that such materials have not already been produced to the SFO by KBR UK".

The Challenge

KBR, Inc. sought judicial review of the SFO's decision to issue the July Notice to KBR, Inc. on three grounds:

1.Ultra Vires

KBR, Inc. argued that s. 2(3) of the Criminal Justice Act 1987 ("CJA") did not operate extraterritorially and so could not be issued to a foreign company to require production of overseas documents. The presumption that lawmakers do not intend UK laws to have extraterritorial effect (to respect international law and comity and avoid conflicts of laws) was not displaced by the proper statutory construction of the CJA. The SFO argued that most of its investigations are international and that if KBR, Inc.'s position was correct, it would "be unlawful to require a UK company to provide documents it holds overseas (for example on an overseas server)". The SFO said that in this case, KBR, Inc. and KBR UK were "inter-dependent" and KBR UK was not independent of KBR, Inc. The SFO contended that there was no express territorial limitation on the application of s. 2(3) of CJA.

The Court considered that, although there was a presumption against extraterritoriality where legislation was silent on territorial application, statutory interpretation involves an assessment of the wording of the relevant provision, the statutory purpose and the relevant context. The Court noted that ss. 2(4) and (5) of the CJA – i.e. the provisions immediately following the power to issue the notice in question – provided for the issue of warrants and were plainly of territorial application only. However, the Court did not accept that s. 2(3) should be construed and confined in the same way as those provisions. The Court distinguished ss. 2(4) – (5) on the basis that those provisions did no more than provide one method of enforcing compliance with a notice.

The Court’s view was that on any interpretation, s. 2(3) must have some extraterritorial application and the policy underlying the power required as much; it was "scarcely credible that a UK company could resist an otherwise lawful s.2(3) notice on the ground that the documents in question were held on a server out of the jurisdiction." Once that was accepted, the issue was only as to the extent rather than the existence of the extraterritorial scope. The question in respect of foreign companies was whether they should be in any different position. The fact that the Court had determined that the section was intended to have some extraterritorial reach and that there were no limiting words on territoriality was significant in considering the application to foreign companies. The legislative purpose of the power was to facilitate the SFO in tackling “top end, well-heeled, well-lawyered crime”. The Court considered that: "there would be a very real risk that the purposes of s.2(3) would be frustrated…if, as a jurisdictional bar, the SFO was precluded from seeking documents held abroad from any foreign company". There was "an extremely strong public interest" in s. 2(3) having an extraterritorial ambit, given it facilitated the investigation and prosecution of "top-end fraud".

The Court concluded that "a careful consideration of the context, the underlying policy consideration and the overwhelming case for s.2(3) having at least some extraterritorial application, would compel the answer that there was no jurisdictional bar precluding the SFO from giving a notice to any foreign companies in respect of any documents held abroad, regardless of their relevance to an investigation into a UK company, and regardless of the degree of connection between the foreign company, the UK and the UK company." However, without any detailed explanation, the judgment then rolled back from that expansive position and concluded instead that s. 2(3) of CJA should extend "extraterritorially to foreign companies in respect of documents held outside the jurisdiction where there is a sufficient connection between the company and the jurisdiction". In reaching that view, the Court adopted the test and reasoning from case law in the context of insolvency proceedings, on the basis that this reasoning, coupled with the ability to challenge the exercise of the power in the courts, provided appropriate safeguards.

The SFO also accepted that the s. 2(3) notice can only be given to a person within the jurisdiction, so the Court considered that there would be sufficient safeguards against a s. 2 notice being "sprung on some unsuspecting corporate entity out of the jurisdiction without prior warning".

In terms of the "sufficient connection" test, the Court said there "would not be a closed list of factors" as to what constituted such a sufficient connection, but they would likely resemble those set out in an insolvency case, Re Paramount Airways Ltd [1993] Ch 223 (in which the judge, Sir Donald Nicholls formulated the test), which considered the following factors as relevant to establish the connection:

• Residence and place of business of the defendant.
• The nature and purpose of the transaction in question.
• The nature and locality of the property involved.
• The circumstances in which the defendant became involved in the transaction or received benefit from it.
• Whether the defendant acted in good faith.

The Court first identified a number of factors that would not be sufficient to provide a sufficient connection to the UK, namely: (i) that KBR, Inc. was the parent company of KBR UK; (ii) that KBR, Inc. had cooperated to some degree with SFO requests for documents; and (iii) that a senior executive of KBR, Inc. had attended a meeting with the SFO in the UK in July 2017. The Court noted that any other conclusion would discourage sensible cooperation with SFO investigations in future. The Court was also somewhat critical of the SFO’s “unappealing” decision to give the notice to the KBR, Inc. representative during her attendance at a meeting to discuss the investigation, having insisted on such attendance in the first place.

The Court concluded that KBR, Inc. had a sufficient connection to the UK on the basis that the evidence of the then SFO case controller, Tom Martin, was that (i) the payments central to the SFO's investigation into KBR UK were actually approved by KBR, Inc. on KBR UK's behalf and processed by KBR, Inc. through its US treasury function and (ii) the contracts and arrangements between KBR UK and Unaoil were approved by KBR, Inc., which led the Court to consider that it was "impossible to distance KBR, Inc. from the transactions central to the KBR [sic] [SFO] investigation of KBR Ltd." In other words, it was KBR, Inc.’s own actions in connection with the underlying subject matter of the investigation that created the sufficient connection to enable the notice to be served on them. A further relevant factor was that a senior corporate officer of KBR, Inc. was based in KBR UK's head office in Leatherhead, Surrey, and carried out his functions from the UK, although the Court considered this factor alone was not sufficient to create a sufficient connection to the UK. The actual impact of having an employee based in the UK was therefore somewhat unclear in this regard.

2. Error of Law

KBR, Inc. argued that the SFO erred in law by issuing the July Notice where it had an option instead to obtain the documents outside the jurisdiction by way of a mutual legal assistance (MLA) request under a relevant treaty between the UK and US. The SFO contended that the MLA regime offers a separate and distinct route from s. 2(3) of the CJA and that the SFO had no obligation to take one route over the other.

The Court agreed with the SFO's argument that MLA offered merely an alternative, additional power to that in the CJA and there was no obligation on the SFO to use the MLA route, where available. The Court was fortified in this view by the fact that the CJA predated the relevant treaty providing the alternative route. There may be good reasons for the SFO to prefer the CJA route in a given case, including speed and simplicity. There was no suggestion here that compliance with the notice would create any difficulty under local (i.e. US) law or regarding any duties owed to third parties, which could have justified the use of MLA instead of the notice. Accordingly, there was no error of law in the SFO opting to issue the July Notice, rather than pursue MLA.

3. Improper Service

KBR, Inc. suggested that service was ineffective on KBR, Inc. as that service was made through its representative when she attended the SFO meeting in London. Her communication of the July Notice to KBR, Inc. must have taken place outside the jurisdiction and therefore, KBR, Inc. was not notified within the territorial limits. To support its argument, KBR, Inc. relied on provisions on service in the Civil Procedure Rules, by analogy.

The Court held that the CPR were irrelevant to service of a s. 2 notice – the CJA did not contain service requirements or any additional formality for giving the notice. The Court further said it was unreal to contend that KBR, Inc.'s representatives were not in the UK representing KBR, Inc. at the meeting in July 2017 and as a result, KBR, Inc. was plainly present in the jurisdiction.

Conclusions

In a week where the SFO faced what is seen by many as a significant defeat on legal privilege, it has won a small, but also significant victory in respect of its statutory powers. It remains to be seen whether KBR, Inc. seek to appeal this decision.

This ruling has the effect of extending the application of s. 2 notices to persons outside of the jurisdiction, as long as the recipient of the notice has a "sufficient connection" to the UK and the notice is given to the recipient (or its representative) in the UK. This means that companies beyond the scope of the SFO's jurisdiction from an investigation or prosecution perspective, could still be faced with an onerous document production obligation where there is a lesser but still sufficient nexus to the UK. The most obvious context in which this may have an impact is investigations involving group companies, as was the case here, where foreign corporates may have to incur the additional expense and strategic complexities of having to deal with complying with requests from the SFO in addition to local authorities and in the face of local law or regulatory requirements concerning data protection and confidentiality. In appropriate cases, it may be possible legitimately not to comply with a notice where there is “reasonable excuse” for not doing so, but companies will need to consider whether this is a legitimate approach carefully with their advisers. This may appear at odds with recent policy statements from the US authorities against so called "piling on" by multiple authorities in multiple jurisdictions seeking to investigate and penalise the same conduct. However, the US authorities were only investigating the conduct of KBR, Inc., whereas the SFO was only investigating the conduct of KBR’s UK group companies and sought documents held by KBR, Inc. outside the UK to assist them in that investigation.

On a practical level, foreign corporates with no presence in the UK should carefully consider the implications of sending representatives to meetings with the SFO in the UK, in order to avoid circumstances where s. 2 notices could be served on them in the territory. As acknowledged by the Court, the SFO may have been short-sighted in taking this approach and that the SFO's behaviour "might impact on the willingness of others to attend such meetings in the future". At very least, such corporates may wish to seek written confirmations in advance from the SFO that they will not take this approach. It remains to be seen whether the SFO would be willing to accede to such requests or claim to be unable to fetter their discretion in that way.

What this case does demonstrate is that the SFO is taking a more aggressive approach to the use of its statutory powers. This has been seen not only in respect of s. 2 document requests, but also recently where the SFO issued a warrant for the arrest of a witness in its investigation into ENRC, where the witness had failed to attend court to give evidence. Although the warrant was subsequently withdrawn, it demonstrates the importance of international businesses understanding the scope of requests made by the SFO and their legal rights and obligations when deciding if or how to respond, in order to avoid the potential criminal penalties associated with failure to comply.