FCPAméricas Blog

What Private Equity Should Know about Recent SFO Developments

Author: Matteson Ellis

Recent developments at the UK’s Serious Fraud Office (SFO) should be on private equity’s radar. If institutional investors subject to UK jurisdiction fail to ensure that their portfolio companies have anti-corruption compliance programs in place, they risk having the proceeds from their investments seized when those proceeds flow from corrupt acts. This is the case even after the investors have already received the proceeds. It is even the case if the investors have no knowledge of the underlying corrupt activity.

In a recent speech, reported on by the Financial Times and Reuters, the new SFO director David Green announced that the office, which is charged with investigating and prosecuting violations of the UK Bribery Act of 2010 and fraud laws, is being organized into four divisions. One division will focus specifically on proceeds of crime operations, seeking to increase the confiscation of criminally obtained assets and compensation of victims.

One recent SFO case under the UK Proceeds of Crime Act of 2002 (POCA) suggests that private equity should be alert.

In January 2012, the SFO announced that it had recovered approximately $208,000 from parent company Mabey Engineering (Holdings) Ltd. based on the corrupt acts of its subsidiary under Part 5 of POCA. The recovery represented the amount of dividends that the subsidiary had paid to the parent. Of particular note, Mabey had no knowledge that the funds it received came from unlawful activity by its subsidiary.

The subsidiary, in which Mabey owned a majority interest, is a bridge-construction company that self-reported to the UK government and was convicted of corrupt payments in Ghana, Jamaica, and Iraq to win contracts. After the conviction, the company replaced its management, adopted anti-corruption compliance procedures, and appointed an independent monitor.

After concluding that case, the SFO then applied POCA.

POCA actions are against the property itself, not against the individual or company holding the property. They are civil, not criminal. The law allows for seizure of the proceeds of criminal activity, even when the owner has no knowledge of the activity. In addition, as explained in Miller & Chevalier’s FCPA Spring Review 2012, “the Mabey action marks the first time that the SFO used a civil recovery order to target dividends that had already been paid to shareholders in the United Kingdom” (emphasis in original).

What is the relevance to private equity? The SFO is explicitly drawing a link between POCA and institutional investors. The SFO has called on institutional investors to take steps to ensure that their portfolios have compliance mechanisms in place. For example, in the Mabey press release, the previous SFO Director stated the following:

“Shareholders who receive the proceeds of crime can expect civil action against them to recover the money.”

“[S]hareholders and investors in companies are obligated to satisfy themselves with the business practices of the companies they invest in. This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it. The SFO intends to use the civil recovery process to pursue investors who have benefitted from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.”

Miller & Chevalier reports that, during a Transparency International event in late January 2012, the former SFO director added that “institutional investors are not just passive recipients of dividends; they also have regular discussions with the management” of the companies they invest in, and should be asking themselves whether they are satisfied that the companies have “adequate procedures under the Bribery Act.”

Given the new SFO Director’s plan to create a special division focusing on POCA, we can assume that these enforcement priorities will only continue. The takeaway – private equity firms would be smart to ensure that their portfolio companies have anti-corruption compliance programs in place that are fully functioning and up-to-date. This is essential to protecting their investment.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

© 2012 Matteson Ellis Law, PLLC

Matt Ellis

Post authored by Matt Ellis, FCPAméricas Founder & Editor

Categories: Anti-Corruption Compliance, Enforcement, FCPA, Private Equity, UK Bribery Act

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