In January 2012, the highly publicised bribery case against the UK construction company Mabey & Johnson Limited ("M&J") reached a climactic conclusion. The resulting decision has sent shockwaves through the hearts and wallets of shareholders and investors with interests in entities that carry on business in the UK.
In 2009, M&J pleaded guilty to corruption offences and breach of UN sanctions for making payments of over £250,000 to Saddam Hussein's Iraqi government in order to secure bridge-building contracts. In addition to custodial sentences being imposed on the responsible directors, M&J was fined £6.6 million and a comprehensive upheaval of its anti-bribery and corruption policies followed.
In January 2012, the Serious Fraud Office ("SFO") brought a further action in the High Court against the principal shareholder of M&J, Mabey Engineering (Holdings) Limited ("Mabey Engineering"). Under Part 5 of the Proceeds of Crime Act 2002 ("POCA"), the SFO was able to bring a claim for "property obtained through unlawful conduct". Although Mabey Engineering knew nothing of M&J's corrupt practices, the SFO and Court maintained that it had failed to exercise "proper control and due diligence" over its subsidiary. Mabey Engineering has now agreed to pay the SFO a sum of £131,201 to reflect share dividends received from the illegally obtained contracts. This case marks the first time the SFO has attempted to recover proceeds of crime by targeting dividends paid in the UK, and has arguably set a momentous precedent.
What does this mean for investors?
Richard Alderman, the director of the SFO, recently professed that the SFO will "vigorously pursue" civil action against shareholders who have inadvertently received the proceeds of crime. This implies prudent shareholders must now oversee company affairs with great scrutiny, caution and verve - perhaps encroaching on territory previously considered reserved for directors.
The judgment has broadened the scope of POCA, potentially resulting in the unfair treatment of various third parties. Investors and shareholders, be they sophisticated or unsophisticated, ordinary or institutional, are all subject to the same onerous due diligence obligations. Mr Alderman has stressed that the onus is on investors and shareholders to satisfy themselves that the business practices of the companies they invest in are above board.
While the SFO's expectations may be perfectly reasonable for institutional investors with the requisite knowledge and expertise, this may not be quite as practicable for others. For example, the ordinary investor who relies on publicly available information, or those investing in pension funds whereby individuals may have no knowledge of the names of
the companies they are investing in, let alone details of their anti-corruption policies and procedures, are unlikely to have access to the requisite level of information. Alarmingly, this judgment indicates that the SFO will nevertheless be capable of confiscating dividends paid to wholly innocent third party investors, even if they have already been distributed.
That said, if ever pressure were to be exerted on companies to engage in compliance and effective monitoring, this decision certainly motivates investors to do just that. At the same time, companies looking for investment may begin to find themselves, as a matter of course, regularly publishing compliance information. Whilst many will grumble at the extra red tape, if this helps to maximise transparency and minimise the risks of corruption, then ultimately the outcome will be a positive one.©2013 Greenberg Traurig, LLP. All rights reserved.