BLOG: The SFO’s powers of compulsion pursuant to section 2

In light of the upward trend and growing concern over the SFO’s tendency to require individuals to answer questions or produce documents, Sean Curran (Partner, Arnold & Porter) and John Carl Townsend shine a spotlight on the SFO’s surprisingly broad Section 2 powers and recap the restrictions in place which moderate them.

According to a report commissioned by Pinsent Masons last year, the number of Section 2 notices issued by the Serious Fraud Office (“SFO”) has more than doubled in the five years leading up to 2017/2018. Unlike the application process to obtain a search warrant under Section 2(4) of the Criminal Justice Act 1987 (“CJA”), no judicial oversight is required for the SFO to exercise its powers to require individuals to answer questions or produce documents under Sections 2(2) and 2(3) of the CJA. 

The Powers

In 1987, the SFO was brought into being by the CJA with much fanfare surrounding how the organisation would revolutionise the investigation and prosecution of large fraud trials. There was, however, a sound basis for those bold assertions because, under Section 2 of the CJA, the SFO had been bestowed with a set of investigatory powers that would allow it to examine the inner workings of corporate entities as never before.

The Section 2 powers were revolutionary because, for the first time, a prosecuting organisation had the power to serve a notice (a “Section 2 notice”) which would force individuals and companies to supply evidence that might secure the company’s conviction for a criminal offence. 

There are three Section 2 powers:

A power to require a person to answer questions ‘or otherwise furnish information’ – Section 2(2);
A power to require a person to produce any ‘specified documents, or documents of a specified description’ – Section 2(3); and
A power to apply to a Justice for a search warrant – Section 2(4). 

It is no surprise that the SFO is increasingly resorting to the use of Section 2; there are huge advantages to using it. One central advantage to the SFO in using a Section 2 notice is that it sweeps away the confidentiality obligations of a company’s professional advisers and representatives. Another obvious advantage is that a failure to comply with a notice constitutes a separate offence (see below for further information) and can lead to imprisonment – a strong driver for ensuring full and frank disclosure of relevant information.

Indeed, recent high-profile uses of the SFO’s Section 2 powers include the SFO’s attempts to access 21 years’ worth of documents held by KBR’s US arm in the Unaoil investigation, as well as, famously, the use of Section 2(3) to require the production of categories of documents which ENRC later claimed were privileged in The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Limited [2018] EWCA Civ 2006. (For a thorough analysis of that ruling we refer you to Arnold & Porter’s article, here).

Section 2(2) CJA – Recent Updates to Guidance

Following the decision in R (Lord and others) v SFO [2015] EWHC 865 (Admin), the SFO rewrote its guidance for lawyers on Section 2 interviews. There have been several iterations of this guidance since then, including, most recently in February 2019. This time the SFO amended its guidance to allow not just one legal adviser to be present at a Section 2 interview, but to also allow an additional lawyer to be present for the sole purpose of taking a hand-written note of the interview. This small but welcome change will relieve the interviewee’s primary legal adviser of his or her responsibility to simultaneously give sound legal advice and take an accurate record of a Section 2 interview for immediate use following the interview. It remains the case, however, that a lawyer will only be allowed to attend the interview if the case controller believes it likely they will assist the purpose of the interview and/or investigation, or that they will provide essential assistance to the interviewee by way of legal advice or pastoral support. To see the SFO’s full note on this topic, please see here.  

Formalities

Prior to the SFO exercising its Section 2 powers, certain requirements must be met and formalities complied with. There must be:

An investigation that is being conducted under Section 1 of the CJA;
A request that has been accepted from an overseas authority which is entitled to make that request; or
A decision by the Director of the SFO as to whether to start an investigation into a corruption offence (wherever committed).

Furthermore, practically speaking, a notice issued subject to Sections 2(2) or 2(3) must be in writing and must specify a time and date for compliance. If banking information is required the notice must have been authorised by the Director of the SFO. The notice should contain the name(s) of the person(s) under investigation. 

The Consequences of Failing to Comply

There are three Section 2 offences which include:

Failing to comply with a Section 2 requirement (without any reasonable excuse) – Section 2(13);

Knowingly or recklessly making false or misleading statements in a material particular in purported compliance with a Section 2 requirement – Section 2(14); and

In the knowledge that an investigation by the police or SFO is ongoing, falsifying, concealing, destroying, or otherwise disposing of documents which, to the knowledge of the perpetrator, would be relevant to such an investigation – Section 2(16).

The above offences are punishable by imprisonment or fines of varying lengths and amounts, respectively (for further details, please see Sections 2(13), (15) and (17) CJA here). Whilst convictions under the above offences have been extremely rare (in fact, only one person has ever been convicted under the Section 2 offences), it is plain that there are serious consequences for failing to comply with the provisions.

Restrictions on the Use of the Section 2 Powers

The Rule Against Self-Incrimination

The rule against self-incrimination is sacrosanct in UK criminal procedure and means that a person cannot be compelled to produce documents or provide information which might incriminate them. For that reason, the SFO’s investigatory powers are subject to a number of important safeguards.

There is undoubtedly a tension between the rule against self-incrimination and the SFO’s power to compel an individual to answer questions under Section 2(2). That tension is somewhat resolved by the following rules:

The purpose of a Section 2 notice is not to obtain evidence for use in court, it is limited to obtaining evidence to assist either (1) the SFO in an existing investigation; or (2) the Director of the SFO in deciding whether an investigation should be commenced in respect of a corruptions offence. The purpose of a Section 2 notice is certainly not to obtain evidence for use against the interviewee at a criminal trial. If the interviewee is believed to have committed a criminal offence, the interview must be conducted under caution and not pursuant to the powers of Section 2.

An individual who is the subject of a Section 2 notice is entitled to rely on the protections of the Human Rights Act 1998. It follows that any interference with convention rights (such as the right to private and family life under Article 8) must be proportionate and necessary for the purposes of the SFO’s investigation.

A Section 2 notice should only be used where the information sought would otherwise be confidential and where the investigation is at such an early stage that the SFO cannot determine which individuals are likely to be witnesses and which individuals are likely to be suspects.

Finally, and most importantly, the strongest statutory protections for individuals are contained within Section 2(8) CJA, as amended following the European Court of Human Rights ruling in Saunders v UK. Section 2(8) provides that a statement made by a person in response to a Section 2 requirement may only be used in evidence against him (a) on a prosecution for an offence under Section 2(14) (false statements); or (b) on a prosecution for some other offence wherein giving evidence he makes a statement inconsistent with it. Section 2(8AA) CJA provides, however, that the  statement may not be used against that person by virtue of Section 2(8)(b) unless evidence relating to it is adduced, or a question relating to it is asked, by or on behalf of that person in the proceedings arising out of the prosecution. It follows that it is only in very rare circumstances that material obtained via a Section 2 notice can be served as hearsay evidence in a subsequent criminal trial. In any event, such an application would be subject to the hearsay provisions contained with the Criminal Justice Act 2003.

The Protection of Legal Privilege

It should also be noted that while the duty of confidentiality is overridden by the Section 2 powers, the protections of legal privilege are not. This is undoubtedly the most litigated and complex area of the law relating to the SFO’s Section 2 powers and merits an entire book on the relevant law. Here we seek only to provide the briefest of outlines of the two most common types of privilege in English law: legal advice privilege and litigation privilege. 

Legal Advice Privilege: protects a confidential communication between a client and his or her professional legal adviser that is made for the purpose of seeking or giving any legal advice or related legal assistance. Legal advice privilege protects all qualifying communications made between client and lawyer irrespective of their subject matter.

Litigation Privilege: protects a confidential communication made between either the client or his legal adviser and a third party (such as a factual or expert witness), where such communication comes into existence for the dominant purpose of being used in connection with actual, pending or contemplated litigation – for example, to assist with the provision of legal advice in relation to the proceedings or the obtaining of advice to be used therein. This head of privilege can also protect communications between the client and his non-legal representative, such as the client’s tax accountant, even where the representative is giving legal advice on fiscal law.

The definition of a “lawyer” is confined to a qualified lawyer. The lawyer need not be a lawyer within England and Wales (for example, communications with a lawyer qualified in the United States would be subject to privilege if the communications are related to advice or litigation privilege). Legal advice privilege is, however, confined to counsel, solicitor and attorney (advice from an accountant, for example, would not qualify).

Privilege belongs to the client and the client alone. For the purposes of an SFO investigation, it is very important to note that the term “client” applies equally to individuals and corporate entities. A lawyer is under a duty to protect his client’s privilege.

As already mentioned, the most recent and relevant authority in respect of the tension between the section 2 powers and legal privilege is The Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Limited [2018] EWCA Civ 2006, Arnold & Porter’s analysis of which can be found here.

The Future

There is no doubt that the SFO will continue to make extensive use of the powers available under Section 2 and, as will be seen from the decision in SFO v ENRC, attempt to redefine the parameters of when the protections of legal privilege can be claimed. In that context, no competent lawyer should advise in respect of a Section 2 notice without a thorough understanding of the statutory framework and the constantly developing authorities that underpin the application of legal privilege.