On Friday 13th January 2012 the SFO announced that it had obtained a Civil Recovery Order in relation to dividends paid to a company shareholder resulting from corrupt contracts entered into by the investee company.

The SFO used the opportunity to fire a warning shot across the bows of the institutional investor community.

Speaking following the Civil Recovery Order against Mabey Engineering (Holdings) Limited, the Director of the SFO highlighted that the SFO is looking to target investors:

“There are two key messages I would like to highlight:

First, shareholders who receive the proceeds of crime can expect civil action against them to recover the money. The SFO will pursue this approach vigorously.

The second, broader point is that shareholders and investors in companies are obliged 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.”

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Bribery and money laundering

• The Order made under Section 243 of the Proceeds of Crime Act 2002 highlights the importance of existing money laundering legislation in tandem with the Bribery Act.
• In summary, offences under the Bribery Act can involve dealings in ‘criminal property’ which is at risk of confiscation or recovery under the UK’s money laundering laws.
• The SFO have made it very clear they intend to target investors.

Private equity risk

• In view of the threat to dividends, the additional criminal liability and the adverse implications for valuation, reputation and marketability of investments, Private Equity firms should ensure that they and their portfolio companies are Bribery Act compliant.
• The SFO has previously indicated that they intend to look closely to see if Private Equity firms should be directly responsible for the conduct of their portfolio companies.
• The SFO has also highlighted the potential personal liabilities of Directors and Officers serving as Investor Directors on the Boards of portfolio companies.

What Private Equity firms should do

• Private equity firms should take steps to ensure that they and their portfolio companies are not violating the Bribery Act and should ensure that they have in place Adequate Procedures to prevent bribery. They should also deploy due diligence prior to and immediately after an investment and ensure that any problems uncovered are properly dealt with.

Buying problems?

• Private Equity firms can still acquire businesses with bribery problems. However, they would be well advised to impose a discount giving them time and money to fix problems, which may involve liaison with regulators with consents being obtained under money laundering rules.

Defending Civil Recovery Claims

• There has been significant commentary surrounding the latest move by the SFO. While the SFO has clearly signalled its intent, there may be opportunities to resist SFO claims along these lines in certain circumstances. First, the SFO must prove that the property is recoverable under the Proceeds of Crime Act. This may not always be easy. Second, broadly speaking even if it is, if an institutional investor can satisfy certain conditions there may be circumstances where a court will not make the order.