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Unpacking Compliance and Governance: Privilege for internal investigations

19 September 2018
The recent Court of Appeal decision ([2018] EWCA Civ 2006) in the extensive litigation involving Eurasian Natural Resources Corporate (ENRC) strengthens firms' ability to undertake confidential internal investigations – in particular into potentially criminal activity that could result in regulatory prosecutions.

The decision emphasises that: "It is … obviously in the public interest that companies should be prepared to investigate allegations from whistle blowers or investigative journalists, prior to going to a prosecutor … without losing the benefit of legal professional privilege for the work product and consequences of their investigation. Were they to do so, the temptation might well be not to investigate at all, for fear of being forced to reveal what had been uncovered …"

While the case relates to SFO prosecutions, it is relevant to prosecutions that could be brought by other authorities, such as the Financial Conduct Authority, for instance in relation to change of control notification failures under the Financial Services and Markets Act 2000 (FSMA) s.191F, or carrying on regulated activities without authorisation or exemption under FSMA s.19.

ENRC is a mining and natural resources group. In December 2010 ENRC received a 'whistle blowing' email alleging bribery and corruption at a key subsidiary. ENRC engaged a law firm to investigate (the "Investigating Lawyers"). A few months later, ENRC instructed Forensic Risk Alliance (“FRA”), a forensic accountancy firm, to review its records to identify and address evidence of potential breaches of statutory duties. FRA's review had a further "compliance-related" purpose: to assist another law firm that ENRC had retained for advice on its compliance programme (the "Compliance Lawyers"). FRA’s scope of work expanded: it became formally instructed by the Investigating Lawyers in July 2011.

Over the course of time, three principal categories of document came into being:
1. The Investigating Lawyers' notes of evidence given to them by current and former employees of ENRC and others (eg suppliers);
2. materials generated by FRA ("FRA Materials");
3. documents setting out the factual evidence that the Investigating Lawyers had collated from their notes and which they presented to ENRC.

(the "Key Documents").

At first instance, the judge ruled that the Key Documents failed to meet the essential thresholds for attracting litigation privilege: they were produced when litigation with the SFO was not reasonably in ENRC's contemplation, but even if it was, they were not created with the dominant purpose of being used in relation to such prosecution.

The judge ruled that ENRC had instructed the Investigating Lawyers not to provide advice in relation to a prospective prosecution, but for "fact-finding" with a view to working out if prosecution could or would ensue. The judge held that "Avoidance of a criminal investigation cannot be equated with the conduct of a defence to a criminal prosecution."

The Court of Appeal disagreed with the judge's assessment of the evidence surrounding the creation of the Key Documents, noting in particular that:
"…By March 2011, ENRC’s general counsel had made clear that he thought from his … contacts that ENRC was firmly on the SFO’s radar and that he expected an investigation in due course …
… In April 2011, the Investigating Lawyers advised that the “internal investigation … [related] to conduct that is potentially criminal in nature” and that “[a]dversarial proceedings might occur out of the internal investigation and … both criminal and civil proceedings can be reasonably said to be in contemplation …

… the SFO … wrote to ENRC on 10th August 2011 [and] asked [it to] consider the SFO Guidelines", which "plainly envisaged … that [a] company considering self-reporting to the SFO would be in receipt of professional legal advice, both before and during the process …"

On 22nd September 2011, the Compliance Lawyers told ENRC that, "if it engaged in the voluntary disclosure regime, it would lose privilege in relation to the documents that it provided to the SFO …"

"… At the first meeting between ENRC and the SFO on 3rd October 2011, the SFO said that could give no assurance that it would not prosecute …"

On its view of the evidence, the Court of Appeal held that:

  • "ENRC was actually being told in this case that, if it did not cooperate and allow its professional advisers to undertake an investigation, prosecution would be even more likely. It would be wrong for it to be thought that, in a criminal context, a potential defendant is likely to be denied the benefit of litigation privilege when he asks his solicitor to investigate the circumstances of any alleged offence …" and;
  • proceedings "were in reasonable contemplation when [ENRC] initiated its investigation in April 2011, and certainly by the time it received the SFO’s August 2011 letter."

A vital factor in the first instance refusal to regard certain Key Documents as litigation-privileged was the "conclusion … that there was overwhelming evidence that [they] were created for the specific purpose of being shown to the SFO." The Court of Appeal rejected this conclusion: "looking fairly at the documentation as a whole, one can see that ENRC never actually agreed to disclose the materials it created in the course of its investigation to the SFO. It … gave the SFO repeated indications that it would make “full and frank disclosure” and … would produce its eventual report … But it never actually committed to producing its interviews and intermediate work product …"

The first instance judge had also found that the dominant purpose of the FRA Materials was "compliance and remediation". The Court of Appeal rejected this finding "… by unpacking the words ‘compliance’ and ‘governance’. Although a reputable company will wish to ensure high ethical standards in the conduct of its business for its own sake, it is undeniable that the ‘stick’ used to enforce appropriate standards is the criminal law and, in some measure, the civil law … where there is a clear threat of a criminal investigation, even at one remove from the specific risks posed by [a prosecuting authority's starting] an investigation, the reason for the investigation of whistle-blower allegations must be brought into the zone where the dominant purpose may be to prevent or deal with litigation."

Moreover, "… even if litigation was not the dominant purpose of [ENRC's] investigation at its very inception, it is clear from the evidence that it swiftly became the dominant purpose …"
The ENRC case contains immediately useful guidance for maintaining privilege over internal investigations, especially as to ensuring that from as early a stage as possible after a potential breach of regulatory rules is identified there are:

  • explicit records as to the assessment of the potential for resultant litigation; and
  • no indications that investigatory work products will be shared with potentially adversarial parties, but only the substance of the evidential findings of investigations will be shared.

In addition, the ENRC case highlights the overlap between 'compliance risk' (in particular, the risk of coming into conflict with a regulator) and 'legal risk' (in particular, the risk of unexpected adverse outcomes from litigation). This overlap reinforces the importance of compliance, and can be seen as putting the roles of internal and external legal and compliance advisers and managers into a combined function for protecting the continued effective functioning of business operations more generally.

This article was first published by ThomsonReuters Accelus on 18 September 2018.

Further Reading