In a breakfast meeting on 9 March 2016, Lord Neuberger commented on the increasingly contentious issue of the application of legal professional privilege (LPP) to communications/ documents generated by lawyers in the context of corporate internal investigations (source 1, below). This area of the law is in sharp focus at present and developing swiftly, driven by greater regulatory enforcement, especially in the areas of bribery and corruption, which carry significant fines and prison sentences. Perhaps somewhat counter-intuitively, we turn first to Lord Neuberger’s concluding remarks, in which he empathises with the role of a professional adviser in an increasingly complex and fast moving world:
“.... So often, she is faced with a problem which not only is hard to answer, but is one to which there is no safe answer: go wrong one way, and she will be advising her client to break the law; go wrong the other way and she will be unnecessarily disadvantaging her client” (paragraph 25).
With those learned and cautionary observations in mind, this article considers the main issues for lawyers to note regarding LPP and the tensions which arise from lawyers’ obligations to act in their clients’ best interests when making the crucial judgement call between:
- asserting the protection of privilege/ avoiding self-incrimination; or
- waiving that privilege in favour of self-reporting.
Will LPP apply to afford protection?
A common misconception is that merely involving lawyers to conduct an internal investigation will “cloak” the related communications and documents generated in LPP protection. A more forensic analysis of potential privilege protection, however, typically suggests otherwise.
It must be noted that litigation privilege (LP), as a sub-category of LPP (which affords the broadest protection from disclosure), is unlikely to attach in the context of most internal investigations. That is because litigation is unlikely to be regarded as either:
- the “dominant purpose” of seeking lawyers’ involvement; or
- “reasonably in prospect” (in the sense of being more than a mere possibility) (Dornoch).
For that reason, Lord Neuberger’s address focused solely on the other sub-category of LPP, legal advice privilege (LAP), which also has constraints in the context of internal investigations, given the very narrow construction of whom constitutes the “client” (considered further below). For example, where certain employees of a corporate client are being investigated, they will not necessarily constitute the “client” (especially given the potential conflicts arising in such a scenario).
Below we consider examples of practitioners who got it right, as well as those who got it wrong.
Privilege in context
LAP is a long established doctrine of English common law. It is the cornerstone that ensures clients can rely on the utmost confidentiality from their lawyer. Without LAP, there would be a danger that a client might withhold information from their lawyer, for fear of prejudicing their position, when withholding that information from their lawyer might prove detrimental to the client’s interest.
As Lord Neuberger noted, the doctrine of privilege was developed in an era that differs significantly to the commercial realities of today:
“…these principles are well established, and they appear to be workable and clear. And so they largely were in the world in which they were developed, a world so different from ours in many ways. We now live in a world which has global electronic communications, instantaneous international transactions, criminalisation of bribery and cartelism, detailed regulatory systems, increased investigative powers, large and international and complex corporate structures, and, it must be said, highly sophisticated financial and economic fraud. And we live in a world where the law of privilege as developed by judges is modified on a rather ad hoc basis by legislation, and is subject to a number of different sets of published official guidelines.” (paragraph 8).
Lord Neuberger further noted that “particular problems appear to have arisen from the marked increase in the domestic and international fields when it comes to regulatory and criminal sanctions in the corporate environment” (paragraph 10).
In Property Alliance Group v Royal Bank of Scotland plc (PAG), Snowden J affirmed that the public interest policy is equally applicable in the context of regulatory proceedings: corporate entities should be able to rely on LAP in order to consult their lawyers in absolute confidentiality where they are facing potential regulatory proceedings.
PAG also confirmed that LAP can extend to documents which do not exclusively contain legal advice, provided they form part of the “continuum” of communications between a lawyer and their client, the object of which is the giving of legal advice as and when appropriate.
Who is the client?
A crucial issue considered by Lord Neuberger in his speech, and one that should be at the forefront of any lawyer’s mind when considering whether their advice falls within the protection of LAP is: who is the client?
The identity of “the client” was considered by the Court of Appeal in Three Rivers (No 5), which confirmed that LAP “does not apply to documents communicated to a client or his solicitor for advice to be taken on them, but only to communications passing between that client and his solicitor” (paragraph 19). The implication of this is that LAP only extends to the members of a corporate client who are actually being advised by the lawyer. Lord Neuberger considered that chairmen, CEOs, COOs, CFOs or executive committees were all examples of the types of individual who may be considered to fall within this category (source 1, paragraph 12).
This constitutes a rather narrow interpretation of the “client”. Accordingly, and importantly, confidential communications and documents passing between a practitioner and employees of the client company who do not fall within the above senior categories of employee may not benefit from LAP. It is notable that other jurisdictions have not taken such a restrictive approach and have instead interpreted the “client” to include all employees of a corporate client (Citic Pacific Limited v Secretary for Justice and Commissioner of Police (Hong Kong, 2015)).
As the interpretation of the “client” in Three Rivers (No5) remains the authoritative decision, practitioners must carefully consider the identity of the individuals employed by their client company in order to ensure that advice given falls within the remit of LAP and attracts the necessary protection from disclosure. The definition of the client in retainer letters is therefore of crucial importance. A careful balance must be struck between: (a) ensuring that the definition is not so wide that a court may determine it unreasonably wide; and (b) it is sufficiently wide to ensure that it includes all those individuals within the corporate client who may need to have sight of the advice.
However, as noted by Lord Neuberger, this can be a difficult balancing act as the “bigger the group, the more unwieldy and the greater the risk of loss of confidentiality, and I suppose that if the court thought the group was artificially big, it might hold that not all its members were genuinely the “client”(paragraph 17).
If the client has a general counsel, it may be advisable to appoint them or a head of investigations as the “client” to increase the chances of LAP applying.
Internal investigations prompted by potential regulatory enforcement
The application of LAP is particularly pertinent to confidential communications and documents created as a result of internal investigations in connection with potential action by a regulator or prosecutor.
Ensuring that LAP adequately protects communications and documents from and to lawyers referring to the investigation’s findings, in turn, ensures that the client cannot be forced to disclose those findings. However, with regulators and prosecutors looking increasingly favourably upon self-reporting and disclosures, practitioners and their clients must carefully consider whether, despite the existence of LAP, the best course of action may be to disclose the information and waive privilege. This in turn raises implications regarding the possibility of self-incrimination.
As Lord Neuberger acknowledged in his speech, the SFO has published guidance on self-reporting stating that a company may avoid prosecution by producing a report demonstrating “a genuinely proactive approach… by the corporate management team… involving self-reporting and remedial action, including the compensation of victims” (paragraph 18). The assessment of whether a company has taken a “genuinely proactive approach” requires consideration of whether “it has provided sufficient information, including making witnesses available and disclosing the details of any internal investigation, about the operation of the corporate body in its entirety”.
Deciding whether indeed to self-report, and if so what to report, is therefore a crucially important decision for a lawyer and a client faced with a possible SFO prosecution. Getting it right may lead to the client avoiding prosecution altogether or to receiving more lenient penalties. However, getting it wrong by (a) not disclosing sufficient information; (b) disclosing too much information that may prove self-incriminating; or (c) deciding not to self-report entirely; may lead to an otherwise avoidable prosecution or to the imposition of more serious penalties.
The SFO will not however give any advice on the likely outcome of a self-report until the completion of the process. Unfortunately, the decision whether, and if so, what to include in any self-report, involves risk and must be made without the benefit of hindsight.
Getting it right
In November 2015, the SFO obtained its first deferred prosecution agreement in respect of Standard Bank’s African sister company Stanbic Tanzanie Limted. Within days of discovering an issue, Standard Bank self-reported itself to the SFO and commenced an internal investigation. The bank’s conduct was described by the SFO as “an object lesson in how to co-operate” (source 6). The bank provided access to its electronic and documentary evidence as well as the first drafts of statements of the individuals interviewed. As a result of this, the bank was able to avoid a prosecution.
In 2012 the US Department of Justice elected not to prosecute Morgan Stanley in respect of a former executive who allegedly bribed a Chinese official to win real estate contracts for himself and the bank. In its statement of 25 April 2015, the US Department of Justice provided the following reasoning for its decision not to prosecute:
“After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct. The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation” (source 7).
In 2011 PetroTiger discovered an issue with a “consulting” invoice paid to the wife of an individual with authority to aprove oilfield drilling contracts. On discovering the payment, independent lawyers were immediately instructed to investigate the issue. In July 2011, the company elected to self-report the issues uncovered. On 15 June 2015, the US Department of Justice released the following statement:
“The case was brought to the attention of the department through a voluntary disclosure by PetroTiger, which fully cooperated with the department’s investigation. Based on PetroTiger’s voluntary disclosure, cooperation, and remediation, among other factors, the department declined to prosecute PetroTiger” (source 8).
Getting it wrong
A London based construction company was recently fined £2.25 million after pleading guilty to bribery offences (source 9). This constituted the first conviction under section 7 Bribery Act 2010, for “failure to prevent bribery”. The evidence presented in court revealed that the company had, despite apparently cooperating with the SFO, sought to frustrate the SFO’s investigation. During the SFO’s enquiries, the company relied on LAP to prevent the disclosure of documentation. The SFO publically criticised the company’s approach to co-operation.
In 2013 the SFO launched criminal investigations into the actions of ENRC notwithstanding the fact that the company had already begun the process of self-reporting (source 10). The SFO’s decision to launch its own investigations could have been avoided had the SFO not taken the view that the self-reporting process was not being carried out appropriately. It is reported (source 11) that the SFO has also launched separate civil proceedings to be heard in secret to determine whether certain documents are protected by LAP. The same report refers to the SFO increasingly using secret civil proceedings with the aim of not prejudicing any ongoing criminal investigation.
The comments of Alun Milford, SFO General Counsel, in his speech to an audience of compliance professionals at the European Compliance and Ethics Institute in Prague, on 29 March 2016 provide a useful summary of the SFO’s views on cooperation (source 12):
“…corporates, we can prosecute them successfully if they choose not to co-operate. And as the Standard Bank case shows, we can work with co-operative companies to achieve a DPA that wins judicial approval”.
Privilege and mobile devices
In R McKenzie v the Director of the Serious Fraud Office, Burnett J held that the SFO’s procedures in respect of mobile devices were lawful. In particular it was held that: “The procedure set out in the SFO’s Handbook for isolating material potentially subject to LPP, for the purpose of making it available to an independent lawyer for review, is lawful” (paragraph 41).
The case concerned the confiscation of the claimant’s electronic devices including a USB memory stick, two smartphones and a laptop. The claimant claimed that these devices contained privileged materials. The SFO relied upon its power to seize devices where it is not reasonably practicable to separate the privileged material from the non-privileged material.
The SFO’s Operational Handbook provides that such devices be processed by its own technical experts using search terms agreed with the defendant. The purpose of this is to enable the identification and partitioning of privileged material for review by independent counsel to determine whether privilege exists.
This decision is favourable to the SFO and although the SFO was unable to review the privileged material, it demonstrates the court’s desire to ensure that the SFO is able to access information that is not privileged even if that involves analysis of material that is indeed privileged. Users of mobile devices, which in this day and age is everybody, must not therefore assume that the fact that their device contains privileged material ensures that it cannot be accessed by the SFO or similar regulator.
Privilege and the Investigatory Powers Bill
Although not the subject of this article, it is worth noting the relevance of the Investigatory Powers Bill. The Bill, dubbed the “snoopers’ charter”, raises serious concerns regarding the confidentiality of lawyer and client communications. The UK Government has, however, now agreed to engage with the Law Society and Bar Council in order to consider the Bill’s impact upon privilege.
Regulators are increasingly rewarding those who cooperate with their enquiries. However, practitioners must take care in assisting their clients to walk the tightrope between cooperation and self-incrimination.
Practitioners should ensure that clients are made fully aware of the benefits and risks of each strategy and that clients appreciate the significance of privilege and its waiver.
This article was published in Procurement & Outsourcing Journal in July 2016.