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BLOG: International investigations, extraterritoriality and the limits of section 2 orders – an analysis of the decision in KBR v SFO

08/02/2021

On Friday, 5th February 2021, the Supreme Court overturned the High Court’s decision requiring the US engineering and procurement company KBR, Inc. to respond to an SFO section 2 notice (R (on the application of KBR, Inc.) v Director of the Serious Fraud Office [2021] UKSC 2). Richard Furlong considers the decision and its implications.


Background

Notices under section 2 of the Criminal Justice Act 1987 are a powerful weapon in the hands of the Serious Fraud Office (SFO). 

Where the SFO is conducting a section 1 investigation into serious or complex fraud, it can require, where there is good reason to do so,  a person under investigation or any other person to produce any specified documents or documents of a specified description which appear to the Director to relate to any matter relevant to the investigation, or if unable to produce them, to state to the best of their knowledge and belief where the documents are. If and when the documents are produced, the Director may take copies, and may require the person producing them to provide an explanation of any of them. In certain circumstances a magistrate can issue a warrant authorising a police officer to enter premises and take possession of them. A failure to comply with a section 2 notice without reasonable excuse is an offence punishable with up to six months imprisonment. 

As part of its investigation into the Monaco-based Unaoil energy business, in April 2017 the SFO gave notice to the UK subsidiary of KBR, Inc., the appellant company, Kellogg Brown and Root Ltd (KBR UK) under section 2, which contained 21 requirements for the production of information and documentation held by the UK company. In responding to that notice, KBR UK indicated that certain material was not in its possession, but rather in possession of the parent company in the United States. 

In the light of that, the SFO asked for a meeting in London with the parent company, not merely through its lawyers but involving officers of the company. At the meeting in July 2017, and following an indication that the Board of KBR, Inc. needed time to consider its position, the SFO gave section 2 notices to the officers of KBR, Inc. KBR, Inc was a company based in the United States, which itself had no fixed place of business in the United Kingdom and which had never carried on business in the United Kingdom. 

The challenge to the s.2 notice

Following an exchange of correspondence, the SFO declined to withdraw the July notice, and KBR, Inc. applied for judicial review to quash the section 2 notice. There were three arguments:

(i)    The notice was ultra vires as it requested material held outside the jurisdiction from a company outside the jurisdiction;

(ii)    The decision to use section 2 rather than mutual legal assistance (MLA) from the US authorities (who were conducting their own investigation into KBR, Inc.) was an error of law; and

(iii)    The notice was not effectively served by handing it to an officer temporarily present in the jurisdiction.

KBR lost on all three grounds in the Divisional Court. The decision is reported at [2018] EWHC 2368 (Admin)

In relation to the first ground, Gross LJ, relying on policy and public interest considerations, established a ‘sufficient connection’ test, holding that where there was a sufficient connection between the company and the jurisdiction, then the provisions of section 2(3) would bite on the US company. A UK company which held material on a server outside the jurisdiction would not be able to resist a section 2 notice, so the section must have some extraterritorial reach. The sufficient connection test provided a nuanced answer to the question of how far the reach might extend. On the facts, it was impossible to distance KBR, Inc. from the transactions central to the investigation of KBR UK.

The Divisional Court dismissed the second ground on the basis that MLA was a power additional to section 2 notices and did not curtail the Director’s discretion. The third ground was rejected on the basis that ‘service’ did not require compliance with the Civil Procedure Rules, that the presence of an executive with authority within the jurisdiction imputed the presence of the company, that the contents of the notice were communicated by the executive to the company, and that no particular formality was required when serving a s.2 notice.

The Divisional Court certified two points of law of general public importance:

(1)    Does section 2(3) of the 1987 Act permit the Director of the SFO to require a person to produce information held outside England and Wales?

(2)    If so, does the Director of the SFO have power to do so by reference to the “sufficient connection” test?

The Supreme Court’s view

(i)    The presumption against extraterritorial effect

Lord Lloyd-Jones, delivering the judgment of the 5-justice Court, considered the starting point to be the presumption against extra-territorial effect, as explained by Lord Bingham in R (Al-Skeini) v Secretary of State for Defence [2007] UKHL 26, at §11, citing Bennion on Statutory Interpretation, and by Lord Rodger at §45 citing Maxwell on the Interpretation of Statutes.

This, however, was tempered by the legitimate interest of States in legislating in respect of the conduct of their nationals abroad, subject to any limits imposed by the sovereignty of the foreign State, to the extent that the presumption may be diminished and may not apply at all, citing Lord Mance at §10 in Masri v Consolidated Contractors International (UK) Ltd (No. 4) [2009] UKHL 43. This reflected the well-established comity of nations principle summarised in Brownlie’s Principles of Public International Law (9th edn. p 21).
The presumption applied to KBR, Inc. because of its domicile and lack of either carrying on of business activity or registered office in the jurisdiction. 

(ii)    Was this rebutted by the language of the statute?

There was no express wording in the statute rebutting the presumption, unlike other criminal statutes such as s.134 Criminal Justice Act 1988 (torture), s.72 Sexual Offences Act 2003 (certain specified sexual offences), or, importantly, s12 Bribery Act 2010.

No Parliamentary intention in favour of extra-territoriality could be inferred from the scheme, context or subject matter of the legislation. Indeed, the difficulty of enforcement through warrants and searches under sections 2(4) and (5) in the event of default tended to point away from an extra-territorial intention, citing Lord Mance (§22) again in Masri (qv.)

Lord Lloyd-Jones dismissed the judgment of the Divisional Court, holding that there was a fundamental difference between imposing a s.2 notice on a UK company in relation to documents abroad which could be brought into the jurisdiction – not, he felt, a truly extra-territorial application given the comity of nations principles – and a company based abroad with no UK presence or activity.

He was more hesitant however, in relation to the submission that extra-territorial intention could be implied if the purpose of the legislation could not effectually be achieved without it; and international instruments such the OECD Bribery Convention 1997 required the effective investigation of complex fraud and corruption.

In order to examine this, Lord Lloyd-Jones was required to consider the provisions, purpose, context and legislative history of the statute.

(iii)    Legislative history

Lord Lloyd-Jones reviewed the history of the 1987 Act. He noted the absence of any power equivalent to s447(1)(d) and 453(1) of the Companies Act 1985 which required the production of documents to the Department of Trade and Industry by “a body corporate incorporated outside Great Britain which is carrying on business in Great Britain or has at any time carried on business there.” The Roskill Report, on which the 1987 Act was based, reflected on the absence of any power at the time to obtain evidence from overseas jurisdictions. The development of mutual legal assistance remedied this. Following a detailed review of the development of mutual legal assistance, Lord Lloyd-Jones observed that it was unlikely that a parallel system for obtaining evidence from abroad had been left in place.

(iv)    Serious Organised Crime Agency (‘SOCA’) v Perry and other jurisprudence

KBR, Inc. relied on the analogous decision in Perry, where P was convicted in Israel of involvement in a pension fraud, and the SOCA brought civil recovery proceedings in the UK. A disclosure order under section 357 of the Proceeds of Crime Act 2002 was made against P and his family, none of whom were resident in the UK although they had assets here. Lord Phillips, speaking for the unanimous Supreme Court at §94, held that to allow a UK public authority the power to impose on persons outside the jurisdiction position obligations to provide information subject to criminal sanction in the event of non-compliance “would be a particularly startling breach of international law”.

Whilst cautious about transposing principles from other statutes, Lord Lloyd-Jones considered that there was a striking similarity between Perry and the present case. The POCA provisions were similar, and the reasoning he considered was strongly supportive of KBR, Inc.’s case.

The Supreme Court then went on to dismiss other authorities relied on by the SFO, notably R (on the application of Jimenez) v First-tier Tribunal (Tax Chambers) [2019] EWCA Civ 51, where the Court of Appeal held that §1 of Sch. 36 to the Finance Act 2008 empowered HMRC to issue a notice requiring a UK taxpayer resident outside the jurisdiction to provide information for the purpose of checking his tax position. The obvious difference was the identifiable relationship between the taxpayer and the UK. Further, there was no criminal sanction for default in that situation.

Cases under the Insolvency Act 1986 relating to the winding up of a company were of no assistance. Whilst the ‘sufficient connection’ test established by Gross LJ in the Divisional Court reflected the case-law on section 221 of the 1986 Act, Lord Lloyd-Jones regarded that statutory framework as providing no basis for the implication of a similar test under the section 2 powers. To do so, he concluded, “would involve illegitimately re-writing the statute.”

Conclusions

This is undoubtedly the most significant development in section 2 litigation since R (Lord) v Director of the Serious Fraud Office [2015] EWHC 865 (Admin) allowed the SFO to limit the right of access to a solicitor in a s.2 interview where to permit it might prejudice the investigation.

In a week when the Financial Times concluded that the $56m fine imposed on Israeli mining magnate Beny Steinmetz by the Geneva Tribunal correctionnel showed how hard it was to prosecute corruption, the decision will not make prosecuting high level financial crime any easier in this jurisdiction. 

When section 2 first came in, it was regarded with horror by many in the defence community. But well-resourced suspects have chipped away at the provision, and there are now many tactics available to defence lawyers to challenge notices issued under this provision. 

***

Richard Furlong is a leading junior in financial crime. He frequently advises both individuals and corporates on the appropriate response to section 2 notices.

08/02/2021

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