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watershed defeat on privilege for the Serious Fraud Office in ENRC case - what does this mean for your business?

9 October 2018

Last year’s judgment of the High Court in Director of the Serious Fraud Office v Eurasian Natural Resources Corporation [2017] EWHC 1017 created huge anxiety within the business community and its lawyers.

The judgment gave rise to the fear that communications and documents created within early stage internal investigations, whether undertaken in order to bring an organisation back into regulatory alignment or to arrive at a view as to whether a matter ought to be self-reported to regulators may not benefit from legal privilege and therefore have to be disclosed.

Background to the first instance judgment of the High Court in 2017

In 2010, the mining giant ENRC received an email containing allegations of apparent fraud, bribery and corruption relating to operations in Kazakhstan. External lawyers were instructed to conduct an internal investigation. After a number of meetings with ENRC, during which the progress of the internal investigation was discussed, the Serious Fraud Office (SFO) opened a criminal investigation

In 2017, the SFO successfully sought a declaration that various categories of documents created during the course of ENRC’s internal investigations were not protected by legal professional (and in this case, litigation) privilege and that disclosure of the same could be compelled.

Our article on the original judgment outlining the reasons behind that decision can be found here

Legal professional privilege

The SFO’s powers of compulsion do not extend to documents which can be withheld on grounds of legal professional privilege.

Privilege can take two forms.

Firstly, communications between clients or their lawyers and third parties will be protected by litigation privilege if they are drafted in order to obtain information or advice in connection with existing or contemplated litigation when, at the time that they are made:

  • litigation is in progress or reasonably in contemplation
  • the communications are made with the sole or dominant purpose of conducting that anticipated litigation which includes receiving advice in relation to it
  • the litigation is adversarial.

Secondly, legal advice privilege protects confidential communications (including documents) between a lawyer and a client which are made for the purpose of giving or receiving legal advice, so long as:

  • the communication is confidential
  • it is between a lawyer and an authorised client
  • it has the purpose of seeking or giving legal advice

The 2017 High Court judgment

ENRC refused to disclose the following four categories of documents on the basis that they were protected by privilege:

  • their lawyers’ notes of meetings with ENRC's employees (past and present) and third parties
  • material generated by forensic accountants instructed to undertake a "books and records review"
  • documents prepared by lawyers to update senior persons within ENRC on the progress of the internal investigation
  • reports generated by the forensic accountants and a number of emails /letters enclosing copies of those reports, including emails from and to a lawyer occupying a senior post within ENRC.

Whilst legal advice privilege was successfully claimed over the third category of documents (which included documents passed from a legal advisor to ENRC’s Governance Committee and/or the ENRC board) Mrs Justice Andrews held that the other categories did not attract litigation privilege and therefore fell to be disclosed.

The Court of Appeal judgment

In a significant divergence from Mrs Justice Andrews’ High Court judgment, the Court of Appeal found in Director of the Serious Fraud Office v Eurasian Natural Resources Corporation [2018] EWCA Civ 2006 ('ENRC') that litigation privilege did apply to document categories 1, 2 and 4 (with the exception of two emails sent in October 2010). The documents included notes taken from Dechert LLP of information given to them by individuals, and materials generated by accountants Forensic Risk Alliance as part of the books and records review.

The basis for the ruling was as follows:

  • the Court of Appeal accepted that as a result of the allegations made by the whistle-blower, criminal prosecution would have been contemplated by ENRC. Documents in the first category were only created to resist or avoid these contemplated proceedings. The purpose of heading off, avoiding or settling reasonable contemplated proceedings is within the scope of litigation privilege
  • it was held that the High Court erred in stating that, because ENRC did not have the information to know whether or not the issues raised within the whistle-blower email were likely to be substantiated, it was incapable of contemplating litigation. It may not always be possible for a corporation to know whether it had broken the law; this uncertainty does not mean that there is not an imminent danger of litigation
  • it was expected that a company’s lawyers would undertake an internal investigation before self-reporting to the SFO.

The Court of Appeal held that the High Court:

“was not right to suggest a general principle that litigation privilege cannot attach until either a defendant knows the full details of what is likely to be unearthed or a decision to prosecute has been taken. The fact that a formal investigation has not commenced will be one part of the factual matrix, but will not necessarily be determinative.”

Consideration of Three Rivers

In respect of whether legal advice privilege applied, the appeal judges considered whether it would be appropriate to depart from the judgment in Three Rivers District Council v Governor and Company of the Bank of England (No.5) [2002] EWHC 2730. This has generally been interpreted as authority that, where the client is a corporate entity, legal advice privilege will only protect those communications between the legal adviser and those employees of the corporate client authorised to seek and receive such legal advice.

The judges opined that, if they had the option to depart from Three Rivers, they would. Whilst consideration of the matter has been left to the Supreme Court, it is clear that there is some judicial appetite to depart from the narrow interpretation within the Three Rivers judgment of the application of legal advice privilege.

The importance of the judgment in relation to internal investigations

The Court of Appeal emphasised the public interest in allowing an organisation to be able to investigate allegations of wrongdoing without losing the benefit of privilege in relation to documents and correspondence created during the course of that investigation. It was noted that:

“the temptation might well be not to investigate at all, for fear of being forced to reveal what had been uncovered whatever might be agreed (or not agreed) with a prosecuting authority.”

There are a number of occasions organisations will want to conduct such investigations e.g. following whistle blower allegations or complaints. Indeed when dealing with allegations of financial wrongdoing there is significant pressure upon corporates to act and act decisively. 

For example, entities regulated by the FCA are expected to be open and co-operative with the regulator and to report promptly any matters about which the FCA would reasonably expect notice. Professionals also have obligations to report matters to their regulatory body e.g. the SRA in cases involving solicitors. Likewise the SFO’s self-reporting guidelines present an opportunity for corporates to co-operate with the SFO and potentially avoid prosecution. In addition of course some organisations may have specific duties to report to the regulators eg under the Proceeds of Crime Act 2002 and the anti-money laundering regime. 

What this means for businesses

Seeking to conduct privileged internal investigations and receive legal advice should not be seen as inconsistent with accountability and transparency. It is important that an organisation, like an individual, can seek advice and gather information alongside its lawyers in confidence.

The judgment in ENRC provides welcome reassurance that corporate bodies can conduct such investigations with the protection of privilege. It is, however, extremely important that the investigation is structured and conducted in the proper fashion:

  • most importantly, litigation must be reasonably contemplated. ENRC is a case decided on its facts. The Court of Appeal was at pains to highlight the factual and evidential basis upon which their decision regarding litigation being in reasonable contemplation was based
  • in relation to the above, it is self-evident that when ‘litigation’ and legal advice are part of the test, a corporate body has a stronger basis to assert privilege if lawyers are engaged at the outset, particularly in respect of advising upon internal investigations
  • it is also important that exchanges with lawyers make clear, if it is the case, that communications are for the dominant purpose of conducting litigation, including receiving advice in relation to it
  • on a practical note, lawyers will assist in key early decisions such as who the ‘client’ providing instructions and receiving advice should be, who should investigate and author any report , the purpose and remit of such a report and how that report and its findings are delivered.

It is important to remember that the judgment is heavily fact specific. Organisations must exercise caution if seeking to rely on litigation privilege when conducting internal investigations. The Court of Appeal made clear that the existing principles set out in Waugh v British Railway Board [1980] AC 521 (HL) and Re Highgrade Traders Ltd [1984] BCLC 151 (CA) still apply and that internal restructuring or internal investigations conducted as part of daily business are still unlikely to be protected by litigation privilege.

When considering investigations for the purpose of regulatory compliance, organisations must be clear about the regulatory framework in which they operate and the implications of non-compliance. The Court of Appeal felt it to be crucial that the SFO had the “stick” to enforce regulatory compliance on a civil or criminal footing.

The Court of Appeal placed a significant degree of importance on the SFO’s own 2009 Self–Reporting Guidelines ('the Guidelines'), which applied to ENRC at the time the documents were created. The Guidelines anticipate that corporations will have legal advisors both before and during the self-reporting process and also that a party may have a reason to fear prosecution even if there is a lack of “concrete evidence” to give rise to prosecution.

However It must be remembered that the SFO Guidelines include a statement that:

all supporting evidence including, but not limited to, emails, banking evidence and witness accounts must be provided…as part of the self-reporting process”.

The fullest cooperation is expected and organisations will have difficult decisions to make beyond the investigation process about how best to approach and manage the process of self-reporting. If you have any concerns about whether any documents are privileged, are considering an internal investigation, or have received recent contact from a regulator, you should seek independent legal advice.

Written by Helen Simm and Charlotte Gregory

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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