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17 Sep 2018

Extra-territorial document requests: the long arm of the law just got longer

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Amid the hubbub of the Court of Appeal's decision in Serious Fraud Office v Eurasian Natural Resources Corporation1, another important judgment involving the Serious Fraud Office ("SFO") has not received a great deal of attention.

The Administrative Court's decision in R(KBR INC) v Serious Fraud Office2, published on 6 September, confirmed that the SFO could compel foreign corporates to disclose documents held overseas so long as the corporate had a "sufficient connection" with the UK.

Background

Section 2(3) of the Criminal Justice Act 1987 ("CJA87") empowers the SFO to compel individuals or corporates to "answer questions or otherwise furnish information with respect to any matter relevant to the investigation at a specified place" and/or produce "any specified documents which appear to the Director to relate to any matter relevant to the investigation or any documents of a specified class which appear to him so to relate."

Failure to comply with a notice issued under section 2 CJA87 (a "Section 2 Notice") without "reasonable excuse" is a criminal offence.

KBR, Inc. is a US engineering, procurement and construction company. On 28 April 2017, the SFO announced that it had opened an investigation into the activities of KBR Inc.'s UK subsidiaries, their officers, employees and agents for suspected bribery and corruption offences via an agent, Unaoil Group Holdings.

The SFO served a Section 2 Notice on KBR Ltd in April 2017, compelling production of 21 categories of material (including emails) dating back to 1996. Some of this data was held by KBR, Inc. in the US. According to the Court's judgment, the SFO became concerned that in its responses KBR was seeking to draw a distinction between documents held by, or under the control of, KBR Ltd in the UK and those outside the jurisdiction.

A second Section 2 Notice was therefore served on the company secretary ("CoSec") of KBR, Inc. in July 2017 while she attended a meeting at the SFO's offices in London. The second Section 2 Notice requested production of documents that were held in the US (including emails that had previously been held in the UK before being archived in the US).

KBR, Inc. challenged the July 2017 Section 2 Notice via judicial review ("JR") on three grounds:

  • It was ultra vires as it requested material held outside the UK from a US-incorporated company;
  • It was an error of law on the SFO's part to exercise Section 2 CJA87 powers despite the power to seek Mutual Legal Assistance ("MLA") from the US authorities; and
  • It was not in any event effectively served by the SFO handing it to KBR, Inc.'s CoSec who was temporarily in the UK at the time.

Section 2 CJA87: jurisdiction

KBR, Inc. argued that Section 2(3) CJA87 did not operate extra-territorially. The SFO was, therefore, prevented from issuing a Section 2 Notice to a foreign company, requiring production of documents held overseas. It said that on a proper interpretation of the CJA87, the statutory presumption against extra-territoriality (which operates to preserve international law and comity and avoid conflicts of laws) had not been displaced.

The SFO countered with the fact that a large proportion of its investigations were cross-border. If KBR, Inc. was correct, it would "be unlawful to require a UK company to provide documents its holds overseas (for example on an overseas server)". This was clearly incorrect. Moreover, on the facts of the case KBR, Inc. and its UK subsidiary, KBR Ltd, were "inter-dependent". There was also no express limitation on territoriality.

The Court held that although there was a presumption against extra-territoriality where legislation was silent on the point, it was necessary to consider the precise wording, purpose and context of the provision in question. In that regard, the Court found that Section 2(3) CJA87 must have some extra-territorial application, or else UK companies 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"; and thus prejudice the SFO's ability to tackle complex, cross-border fraud.

After a detailed assessment, in which it appeared to favour a very broad extra-territorial construction, the Court eventually concluded that Section 2(3) CJA87 should apply "extraterritorially to foreign companies in respect of documents held outside the jurisdiction where there is a sufficient connection between the company and the jurisdiction."3  [Emphasis added]

In determining what would qualify as a "sufficient connection" with the UK, the Court held that there was no exhaustive list of factors. It would, however, include the residence and place of business of the defendant, the nature and location of the property involved, the circumstances in which the defendant became involved in the transaction or received benefit from it, and whether the defendant acted in good faith.4

In this case, the Court found that KBR, Incl. approved and processed allegedly corrupt payments (payments that were central to the SFO's investigation) through its US-based treasury function. It similarly approved KBR Ltd's contracts and arrangements with Unaoil. As such, the Court stated that "…it is impossible to distance KBR Inc from the transactions central to the KBR [sic.] [SFO] investigation of KBR Ltd…"5

KBR, Inc. was therefore found to have a sufficient connection with the UK for the purposes of a Section 2 Notice.

Error of law

KBR, Inc. argued that even if Section 2 Notices had extra-territorial effect, the SFO had erred in law by failing to take into consideration MLA (pursuant to the Criminal Justice (International Co-operation) Acts of 1990 and 2003) as an alternative route to obtaining the documents sought. In contrast, the SFO said that the MLA regime was entirely separate from Section 2(3) CJA87 and that it had no obligation to take one route over the other.

The Court agreed with the SFO. The MLA procedure is an additional power to that contained in Section 2(3) CJA87. The availability of MLA gives the SFO additional options; it does not curtail the authority's discretion to use Section 2 Notices. Moreover, even where there is an available MLA regime, there may be good practical reasons for the SFO to prefer using a Section 2 Notice. For example, the MLA route may take longer or the requested state could simply ignore the approach altogether.

KBR, Inc. had not demonstrated any error of law by the SFO in preferring a Section 2 Notice over MLA.

No effective service

KBR, Inc. argued that the SFO's service of the Section 2 Notice on its CoSec was ineffective insofar as KBR, Inc. was concerned. Her communication of the Section 2 Notice to her employer must have taken place outside the UK; accordingly, KBR, Inc. was not notified within the UK.

The Court rejected this argument. Among other reasons, it was plain that KBR, Inc. was present in the UK through its CoSec when she received the Section 2 Notice; she was not in the UK "coincidentally or on some personal frolic"6, but had rather met with the SFO in her capacity as KBR, Inc.'s representative. It was "unreal to contend otherwise"7 .

Consequently, it did not matter where the CoSec communicated the Section 2 Notice to KBR, Inc. The company had been effectively served at the point she received the document. No further formality was required.

Lessons learnt

Although not as attention-grabbing as the ENRC judgment, the Court's dismissal of KBR, Inc.'s JR challenge is nevertheless significant.

We now have judicial confirmation that the SFO can impose document production requirements on non-UK entities in respect of documents held outside the UK. This is, however, tempered by the fact that SFO needs to demonstrate that the non-UK entity has a "sufficient connection" to the UK, and must also serve the Section 2 Notice within the UK. The SFO therefore does not have carte blanche to request documents from foreign companies.

In this case, KBR, Inc.'s connection with the UK was clearly demonstrated through dealings with its UK subsidiary. However, in cases where the evidence is not as clear, the "sufficient connection" test will be ripe for litigation.

Moreover, as the Court itself noted, the SFO's decision to serve KBR, Inc.'s CoSec with a Section 2 Notice during a meeting in London "might impact on the willingness of others to attend such meetings in the future"8. Ambushes might offer immediate benefits for a government agency, but in the long run they erode trust. Companies would therefore be well advised carefully to consider the risks before they send any representatives to the UK.

Finally, it is worth noting the Crime (Overseas Production Orders) Bill (the "Bill") that is currently wending its way through Parliament.9 Designed to expedite the currently long-winded and complex MLA route, if enacted the Bill will enable UK Courts to issue an order for the production of electronic data stored overseas (providing that the host country has signed an international co-operation agreement) (the "Overseas Production Order").

The Bill also contains a controversial provision that would enable the Court to include a non-disclosure requirement in an Overseas Production Order. This prevents the data subject from finding out that an order has been made, leaving them unable to challenge disclosure (including raising claims to legal professional privilege).

It remains to be seen how the Court's decision in R(KBR, Inc.) will affect the Bill. Some have suggested that the decision might mean that the Government has less motivation to introduce the Overseas Production Order. While that is possible, one comes back to the Court's statement in R(KBR, Inc.) that MLA and Section 2 Orders provide the SFO with two alternatives to obtain material held abroad. Overseas Production Orders would be yet another means to that end.

What is clear is that the long arm of the law is getting ever longer, crossing borders and reaching into areas one might have assumed were untouchable. Given the SFO's increasing aggression in evidence-gathering, including a recent arrest warrant against a witness who failed to attend Court to give evidence in the ENRC proceedings, this is set to continue.

 

1 [2018] EWCA Civ 2006

2 [2018] EWHC 2368 (Admin)

3 R(KBR, Inc.) v Serious Fraud Office at [71]

4 This list was formulated by Sir Donald Nicholls in Re Paramount Airways Ltd [1993] Ch 223 when deciding whether provisions relating to transactions at an undervalue (Section 238 of the Insolvency Act 1986) applied to foreign residents based outside the UK.

5 R(KBR, Inc.) v Serious Fraud Office at [82]

6 R(KBR, Inc.) v Serious Fraud Office at [99]

7 R(KBR, Inc.) v Serious Fraud Office at [99]

8 R(KBR, Inc.) v Serious Fraud Office at [100]

9 As at 13 September 2018 the Bill is at the House of Lords Report Stage (please see:

https://services.parliament.uk/bills/2017-19/crimeoverseasproductionorders.html)

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