Editorial

Citation

Nakajima, C. (2012), "Editorial", Journal of Financial Crime, Vol. 19 No. 2. https://doi.org/10.1108/jfc.2012.30919baa.001

Editorial

Article Type: Editorial From: Journal of Financial Crime, Volume 19, Issue 2

“Mabey” may be the bridge we need

On 13 January, the UK Serious Fraud Office (SFO) announced that its director had taken action in the High Court, resulting in an order for the company, Mabey Engineering (Holdings) Ltd, the parent company of Mabey and Johnson Ltd (M&J), which had been convicted of corruption and sanction offences, to pay over £130,000 in recognition of sums it received through share dividends derived from contracts won through unlawful conduct on the part of M&J (SFO, 2012).

Subsequent to the self-referral and co-operation with the SFO’s investigations, M&J pleaded guilty to charges of corruption and breaches of United Nations sanctions and was convicted at Southwark Crown Court in September 2009. The civil recovery order, therefore, was hailed by the SFO director as “the final act in an exemplary model of corporate self-reporting and co-operative resolution”.

The Mabey case had the benefit of the full co-operation of the company in question thereby it also had the advantage of being able to identify the proceeds of crime in the form of share dividends paid to its parent company which wholly owned the company convicted of bribery. Notwithstanding the case’s specific circumstances, Mr Richard Alderman, the Director of the SFO, took this opportunity to fire a warning shot across the bows of investors in a wider context and thus stated:

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. In this particular case, however, the shareholder was totally unaware of any inappropriate behaviour. The company and the various stakeholders across the group have worked very constructively with the SFO to resolve the situation, and we are very happy to acknowledge this.

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 (SFO, 2012).

What Mr Alderman stated would have significant ramifications for the investor community at large and does, indeed, raise a number of questions in regard to the level of due diligence required on the part of shareholders and investors that would be sufficient to protect themselves from civil recovery orders sought by the SFO. In ordinary situations, shareholders and investors, regardless of whether they are institutional or individual, would have access only to publicly available information (Indeed, if they had access to non-public information, they would have to have due regard for insider dealing and market abuse implications). Matters relating to bribery and corruption, let alone other criminal conduct on the part of the company that the shareholder has invested in, or the investor is contemplating investment in, would not ordinarily be made known to the shareholder or investor. It would be a tall order for an average shareholder in a publicly listed widely held company to monitor, let alone influence, the company’s conduct in this regard.

As for shareholders’ responsibility, Mr Alderman stated at a conference on 18 January 2012, “Institutional shareholders are not just passive recipients of dividends; they also have regular discussions with the management of the businesses in which they hold shares”.

He then went on to state:

I am going to have discussions soon with representatives of institutional shareholders. I am going to ask them whether any of them have asked management if they are satisfied that their companies have adequate procedures under the Bribery Act. If they have not asked that question, I shall want to know why not. After all, we all know that a corruption investigation can have a devastating effect on the share price of a company. If institutional shareholders are not concerned about that, then it seems to me that they are not living up to their ownership responsibilities and are not doing what society expects from them (Alderman, 2012).

Of course, institutional shareholders have been the focus of attention in corporate governance debate, particularly since the Financial Crisis and subsequent corporate governance initiatives including the publication of the Stewardship Code. Nevertheless, placing Mr Alderman’s statements in the context of the responsibility of institutional investors, they would appear to have far reaching implication for institutional investors – more than, for example, the Stewardship Code. One of the financial implications would be the potential loss of its investment income in the form of dividends being taken away as a result of a civil recovery order.

Putting together the SFO director’s statements in connection with the Mabey case, it might be construed that the SFO, in considering the recovery of dividends paid by a corrupt company, would focus on institutional shareholders if the corrupt company were a widely held listed company, and on major shareholders in the case of a small private company.

In terms of investors’ exposure to the criminal liability of failure to prevent bribery under section 7 of The Bribery Act 2010, the Guidance, published by the UK Ministry of Justice on 31 March 2011, states, “liability will not accrue through simple corporate ownership or investment, or through the payment of dividends or provision of loans by a subsidiary to its parent” (para. 42, see also Cannon and Smith, 2011, p. 95). Therefore, Mabey Engineering Holding, as the parent company of M&J, which had been convicted of corruption and sanction offences prior to the enactment of The Bribery Act 2010, would not have been liable for the corporate offence of failure to prevent bribery under the Bribery Act had the Act been in force at the time (Ministry of Justice, 2011).

In respect of the application of a civil recovery order under Part 5 of the Proceeds of Crime Act 2002 (PoCA), what is available to the shareholder in receipt of the dividend that is the target of the recovery order? PoCA, enables the enforcement authority to recover, in civil proceedings before the High Court or Court of Session, property which is, or represents, property obtained through unlawful conduct, whether or not any proceedings have been brought for an offence in connection with the property. The standard of proof required for the court to grant a civil recovery order is the civil standard, i.e. on “a balance of probabilities” the matters alleged to constitute unlawful conduct occurred. If this standard is met, the SFO would be entitled to recover “all property wherever situated” (s. 84), including money, real property, personal, heritable or moveable property. There are, nevertheless, some restrictions on such recovery. The court may not make a recovery order if it would not be just and equitable to do so and if all of the following conditions are met:

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  the defendant received the property in good faith (s. 308);

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  he took subsequent (or pre-emptive) steps in relation to the property that he would not otherwise have taken if he had not obtained it;

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  he was not aware that the property was recoverable; and

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  recovery of the property would be detrimental by reason of the steps he took in relation to that property.

In making its decision, the court must have regard both to the degree of detriment to the defendant and to the SFO’s (or other relevant authority’s) interest in receiving the realised proceeds of the property (Qureshi, 2012).

It has been suggested that institutional investors may be well advised, before making investments in a higher risk company, to consider such matters as:

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  the nature of the company’s business and its risk exposure to bribery; jurisdictions within which it operates and their exposure to bribery risk;

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  the company’s anti-bribery policies and procedures;

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  nature and extent of anti-bribery training given to employees and agents; and

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  testing and monitoring of its anti-bribery processes and controls (Pickworth and Lee, 2012).

Of course, there will be the usual dilemma of the more questions you ask, the less of a chance you have of asserting “good faith”. Nevertheless, regardless of whether the investor has a defence to a civil recovery order or not, the fact that there is an investigation by the SFO, or any other investigatory agency for that matter, into allegations of bribery, would impact negatively on the value of the investor’s shareholding in the company in question and its longer term prospects.

While there will be technical and other difficulties standing in the way of the SFO in recovering dividends from shareholders of widely held public companies, the Mabey case may be the key that opens up a much needed debate to persuade those concerned with corporate financial performance to take matters of business integrity into their serious consideration. We may have been given a golden opportunity to bridge the widening gap between corporate governance focused on issues of corporate performance on the one hand and governance concerning issues of corporate integrity on the other – the domain the present journal has striven to tackle extensively, notwithstanding the pressures from other quarters to entertain solely matters of financial performance.

Chizu NakajimaCo-Director, Centre for Research in Corporate Governance, Cass Business School, City University, London 14 February 2012