DISPUTE RESOLUTION UPDATE
SFO v ENRC Ltd  EWHC 1017 (QB)
In a test case for litigation privilege in the context of criminal proceedings, the High Court has ordered documents produced in the context of an internal investigation to be disclosed to the SFO.
The decision appears to narrow the application of legalprofessional privilege and adds another dimension to corporate internal investigations and their resulting reputational impact.
The claim arose from an ongoing criminal investigation commenced by the SFO in late April 2013 into the activities of mining company ENRC, its subsidiaries, officers and employees. The investigation focused on allegations of fraud, bribery and corruption in Kazakhstan and Africa.
After being made aware of various allegations, ENRC had initially instructed external advisors to investigate the allegations. Matters eventually reached the ears of the SFO, who commenced its own investigation.
Exercising its powers under s.2(3) of the Criminal Justice Act 1987, the SFO issued notices compelling the production of documents. ENRC resisted on four categories of documents on the basis that they fell within legal professional privilege and were therefore protected from disclosure by s.2(9). The SFO responded by issuing a claim for a declaration that the documents, generated during investigations by solicitors and forensic accountants, were not subject to legal professional privilege.
The documents fell into four categories:
Category 1 – notes taken by ENRC's external lawyers of evidence given to them in interviews with employees, officers, suppliers and other third parties in relation to the events under investigation. These pre-dated the commencement of the SFO investigation.
Category 2 - materials generated by forensic accountants as part of "books and records" reviews they carried out, again prior to the commencement of the SFO investigation.
Category 3 – documents presented by external lawyers to the ENRC's Nomination and Corporate Governance Committee and/or the ENRC Board.
Category 4 - documents referred to in a letter sent to the SFO by external lawyers containing the forensic accountants' reports and emails between ENRC's then Head of Mergers & Acquisitions (previously General Counsel) and a senior ENRC executive.
ENRC claimed litigation privilege in all four categories, and legal advice privilege in categories one, three and four.
Rehearsing the well-known principles of litigation and legal advice privilege, the court found that the claim for litigation privilege fell at the first hurdle, ENRC having failed to show that litigation was "a real likelihood rather than a mere possibility".
Crucially, the court held that the commencement of a criminal investigation does not necessarily equate to a reasonable contemplation of prosecution, that step only arising once there is evidence to support the allegations. This is distinguished from civil proceedings, where aside from costs risk, there is no inhibition against the launch of unfounded proceedings. Prosecutors, however, must be satisfied that not only is there sufficient evidential basis for prosecution, but that the public interest test is met. So a fear of prosecution as a "worst case scenario" does not equate to a reasonable contemplation of litigation. In this case, evidence suggested that "the internal investigation was regarded as a means of reducing the risk of external intervention".
It was also relevant that during the initial liaisons with the SFO, the SFO operated under guidelines issued in 2009, commonly referred to as the 'Self-Reporting Guidelines'. These set out a process encouraging corporates to engage with them at an early stage by offering leniency in return for full and frank disclosure through self-reporting. Had the guidelines applied, ENRC could not have been said to be contemplating litigation, as they were in reality contemplating a form of settlement, an avoidance of litigation. The 2009 guidelines were replaced in 2012, but in any event, for the purposes of this claim it was not necessary to establish whether the ENRC had in fact entered the self-reporting regime.
On the question of legal advice privilege the court's findings were less novel, although equally dismissive, only five of the category three documents being held to be protected. The remaining documents either did not relate to communications between lawyer and client for the purpose of giving and receiving legal advice, or in the case of category four, had not been prepared by the Head of Mergers & Acquisitions in a legal capacity.
For corporations and their in-house lawyers, the decision illustrates the need to identify the stages of internal investigations, remaining alert to whether the exercise is merely a fact finding mission, an attempt to avoid regulatory action, or in genuine contemplation of litigation.
It is also a lesson in the need to document intent at the time of creating privileged documents, few documents having existed to demonstrate what ENRC contemplated at a given time and more importantly, why.
Lastly, the case acts as a sobering reminder of the need to factor reputational risk and crisis management into any internal investigation. The SFO investigation itself appears to have resulted from a report published in The Times in August 2011. At the present time there has been no criminal prosecution and ENRC denies committing any criminal offence. Yet even if ENRC are successful in resisting prosecution, they will still need to turn to restoring their public reputation in the face of brand association with the criminal investigation.
ENRC have announced that they will appeal.
For more information, please contact Mark Rhys Jones (Partner, Commercial Litigation), Jennifer Agate (Senior Associate, Media) or your usual contact at the firm.
The full judgment is available at http://www.bailii.org/ew/cases/EWHC/QB/2017/1017.html.