Last week the Serious Fraud Office (“SFO”) lost a much-publicised appeal concerning legal privilege. Within days the SFO won a less newsworthy but no less important judicial review concerning extraterritoriality. The principal question in R (on the application of KBR Inc.) v Director of the Serious Fraud Office [2018] EWHC 2368 (Admin) was whether a notice issued under s2(3) of the Criminal Justice Act 1987 is lawful if it requests material held outside the UK from a foreign company. The Admin Court concluded that:
“s2(3) extends extraterritoriality to foreign companies in respect of documents held outside the jurisdiction when there is a sufficient connection between the company and the jurisdiction.”[1]
This is a significant conclusion. It is the first time that an English court has determined the extraterritorial application of any of the compulsory document production powers exercisable by criminal law enforcement agencies in the UK.
Facts
The SFO is investigating suspected bribery at KBR Ltd, a UK company. In April 2017, a s2(3) notice was issued to KBR Ltd for the production of 21 categories of material. In July 2017 two officers of KBR Inc., the US parent of KBR Ltd., attended a meeting with the company’s lawyers at the SFO’s London office. During this meeting the SFO issued one of the KBR Inc. officers with a s2(3) notice addressed to KBR Inc. This second notice sought the production of the same 21 categories of material specified in the first notice, as well as six new categories of material. It was drafted in advance of the July meeting, the SFO being concerned that the KBR Group had refused to produce certain material specified in the first notice. By way of judicial review, KBR Inc. applied for the second notice to be quashed to the extent that it purported to compel the production of material held overseas.
The true construction of s2(3)
S2(3) provides as follows:
“The Director may by notice in writing require the person under investigation or any other person to produce at such place as may be specified in the notice and either forthwith or at such time as may be so specified, any specified documents which appear to the Director to relate to any matter relevant to the investigation or any documents of a specified class which appear to him so to relate […]”
KBR Inc.’s case was that s2(3) does not operate extraterritorially; overseas material held by it need not be produced to the SFO. The SFO’s case was that there was no territorial limit on the application of s2(3).
Faced with these diametrically opposed positions, the Court’s starting point was one of statutory construction. The Court noted that the drafting of s2(3) did not explicitly displace the presumption against extraterritoriality, but nor did it contain words of express jurisdictional limitation. Drawing on recent civil case law, the Court found there was no longer any “universal principle” by which it was necessary to search for express authorisation, or necessary implication, of the extraterritorial effect of a statutory provision. Whether a provision operates extraterritorially depends on the wording of the provision, the statutory purpose and the relevant context.
The Court acknowledged that it was a “strong thing” for a statute of state A to infringe the sovereignty of state B by requiring a citizen of state B, on the territory of state B, to take action, under threat of criminal sanction in state A, should the citizen of state B fail to comply. That is so even if state A can establish personal jurisdiction over the citizen of state B (because, for example, the citizen was physically present in state A when she received a notice purporting to compel her to take action in state B). Whether she can be compelled by state A to take action in state B is a question of subject matter jurisdiction – an extraterritorial exercise of sovereign authority.
Having expressed these concerns, the Court nonetheless reasoned that s2(3) must have an “element” of extraterritorial application, on the basis that it was “scarcely credible” that a UK company could resist a s2(3) notice simply because, for example, it held the relevant material on an overseas server. To suggest otherwise would be to frustrate the SFO’s ability to conduct effective investigations into international fraud. The Court again turned to civil case law to explain how the original policy considerations informing a statutory provision can be amplified by subsequent developments, citing with approval Lord Wilberforce’s dicta that:
“when a new state of affairs, or a fresh set of facts bearing on policy, comes into existence, the courts have to consider whether they fall within the parliamentary intention. They may be held to do so, if they fall within the same genus of facts as those to which the expressed policy has been formulated. They may also be held to do so if there can be detected a clear purpose in the legislation which can only be fulfilled if the extension is made…”[2]
By the Court’s reasoning, the SFO when it was founded in 1987 had a mandate to investigate and prosecute cross-border fraud, and on that basis s2(3) must always have had a degree of extraterritorial application; that conclusion was a fortiori in light of technological developments since 1987 which make it commonplace for documents to be transferred and stored overseas. The Court thus concluded that a UK company can be compelled to produce overseas documents in response to a s2(3) notice.
As to whether a foreign company can be so compelled, the Court re-emphasised the international dimension of the SFO’s mandate. It noted that documents relevant to an investigation of a UK company were increasingly likely to be held overseas by foreign companies in the same group. S2(3) would be frustrated, and the public interest would not be served, if a foreign company could raise a jurisdictional bar to providing documents simply because they were overseas. Once again, the court referred to civil insolvency cases whereby the courts have held that provisions in the Insolvency Act 1986 (such as s213, which makes persons, including foreign persons, party to fraudulent trading liable to contribute to the company’s assets) apply extraterritorially. Noting that the conclusions in these insolvency cases were influenced by policy and public interest considerations similar to those underpinning criminal investigations, but typically absent from private civil disputes, the Court concluded that:
“it would be surprising if the law was more astute to assist inquiries into bankruptcy than investigations into and prosecutions of serious fraud on an international level.”[3]
The test of “sufficient connection”
The Court did not accept wholesale the SFO’s argument that there was no territorial limitation on s2(3) notices served on foreign companies. The court favoured what it described as a “nuanced answer”, which is that s2(3) should extend to foreign companies only when there is a sufficient connection between the company and the jurisdiction. This test of “sufficient connection” is not referred to in the Criminal Justice Act 1987. Derived from a 1993 insolvency decision, the Court considered that this test struck a “principled balance” between facilitating the SFO’s investigation of international fraud and making excessive requirements of foreign companies. The decision whether there is a “sufficient connection” in a particular case will necessarily be fact-specific.
The Court’s conclusion
Applying this framework, the Court dismissed the judicial review because, on the facts, it found there was a sufficient connection between KBR Inc. and the jurisdiction so as to render the overseas documents compellable. The Court was so satisfied in light of the SFO’s evidence, which was that payments central to the SFO’s investigation of KBR Ltd required the approval of KBR Inc. and were paid by KBR Inc. through its US-based treasury function. The mere fact that KBR Inc. was KBR Ltd.’s parent was irrelevant to the sufficient connection test, as was the temporary presence of the two KBR Inc. officers at the meeting in London in July 2017 when the notice was issued.
A troubling judgment?
At first blush, the judgment is the product of common sense. The ease with which multinational companies transfer and hold documents overseas makes it meaningless to suggest they have a fixed location; they can typically be accessed quickly at the click of a button from anywhere in the world. The SFO’s ability to investigate cross-border crime (particularly dynamic conspiracies) is hampered if it has to rely on time-consuming mutual legal assistance treaties to access overseas documents. Little surprise that the Court interpreted an old statute extraterritorially to ensure it is fit for purpose in the digital age.
That said, certain aspects of the judgment are troubling.
First, the Court’s conclusions flow from the premise that “the policy underlying s2(3) required the section to have some extraterritorial application in 1987” and “it cannot be suggested that the international dimension of the SFO’s mandate was unknown or not appreciated at the time of the enactment of s2(3).”[4] Whilst it is true that the SFO carried out some international work in the late 1980s, nothing in the legislative history of s2(3) – and s2 has been amended on ten occasions in the past 30 years – positively supports the view that Parliament intended it to operate extraterritorially. Had Parliament intended s2(3) to operate extraterritorially, clear language could easily have been inserted into the section, as it was when indisputably extraterritorial provisions were created under the Proceeds of Crime Act 2002 (“POCA 2002”) and the Bribery Act 2010.[5] Parliament’s intention can perhaps best be discerned from the SFO’s own actions. Since the enactment of s2(3), the SFO has routinely relied on mutual legal assistance and, more recently, the European Investigation Order, to obtain overseas material, whether belonging to UK or foreign companies. Why would the SFO do this repeatedly for three decades if it had the power to compel overseas material all along? Developments in data storage and the SFO’s relatively recent focus on investigating multinationals have created in 2018 a public interest in interpreting s2(3) extraterritorially in certain circumstances. But it is questionable whether this was the original purpose of s2(3) in 1987, when the world wide web had not been created and when the SFO was primarily concerned with domestic investigations of individuals.
Secondly, the Court’s conclusion creates the anomaly that a s2(3) notice has greater extraterritorial reach than a search warrant, even though a search warrant is an inherently more coercive measure. A search warrant, such as that available under s2(4), compels the production of specified material which is “accessible” from the UK premises named in the warrant.[6] A search warrant cannot compel the production of material held overseas if that material is inaccessible from the premises. Compliance with a search warrant is territorial; it requires people in the premises to access the specified material, even if that material is located overseas. If overseas material is inaccessible from the premises being searched, and the SFO wish to obtain it using a search warrant, the SFO make a request for mutual assistance in which they ask an overseas investigator to execute a search warrant abroad under the relevant foreign law. It is anomalous to suggest that a s2(3) notice, which is an inherently less coercive measure than a search warrant, compels the production of overseas material which cannot be compelled under a search warrant.
Thirdly, the Court relied exclusively on civil cases, primarily from the insolvency context, to fortify its conclusions. The only English case with an overtly criminal flavour cited in the judgment was SOCA v Perry [2012] UKSC 35, which the Court acknowledged required “anxious consideration”. In Perry the Supreme Court examined the jurisdictional scope of SOCA’s (now the NCA’s) powers under POCA 2002 to make property freezing orders (“PFOs”) and disclosure orders (“DOs”) in relation to Mr Perry, who had been convicted of fraud offences in Israel. In relation to both PFOs and DOs, the Court held that POCA 2002 did not displace the presumption against extraterritoriality. On a majority, the Court found that a UK court was not vested with the power to make a PFO which sought to freeze overseas property. In relation to DOs, the Court was unanimous that SOCA had no power to impose on persons outside the jurisdiction positive obligations to provide information and render them subject to criminal sanction in the event of non-compliance.
Perry was not binding on the Admin Court, but it is the closest analogue, in terms of both facts and public policy considerations, to the circumstances of KBR (it is certainly a closer analogue than the insolvency cases cited by the court). Given its significance, the Court’s attempt to distinguish Perry (at para 76) was somewhat cursory. It is no answer to Perry to say that, in relation to s2(3), “the construction issue necessarily involves the extent of extraterritorial jurisdiction”, as that assumes that which must be proved, namely that s2(3) is capable of operating extraterritorially. If the overseas assets of a foreign national cannot be frozen under a PFO because those assets are overseas, why should overseas documents belonging to a foreign company be transferred to the SFO under s2(3)? And if a foreign national cannot be compelled under a DO to provide documents because he is outside the jurisdiction, why should a foreign company be compelled to provide its documents to the SFO under s2(3)? (Indeed, if anything, there is a greater public interest in ensuring that PFOs and DOs have extraterritorial effect in respect of a convicted fraudster, as opposed to a company in KBR Inc.’s position, which is not under investigation).
The Court’s answer to this last question would seemingly be that the two KBR Inc. officers, unlike Mr Perry, were present in the jurisdiction when they were served with the notice. But their presence creates only personal jurisdiction; it does not create subject matter jurisdiction by which a UK law enforcement agency can compel them (or their foreign company) to take action overseas. As noted in Perry, this extraterritorial exercise of subject matter jurisdiction would be a “particularly startling breach of international law”, and unjustified in the absence of clear language that Parliament intended to displace the presumption against extraterritoriality. Because s2(3) contains no such clear language, it is arguable that the Admin Court has, in the words of Perry, engaged in an exercise of “re-writing the statute”, albeit to uphold the public interest in ensuring the effectiveness of the SFO’s investigative powers.
The comparison with Perry also illustrates a practical problem. If, like Mr Perry, the officers of KBR Inc. had remained outside the jurisdiction, KBR Inc. could not have been issued with the s2(3) notice. Officers of foreign companies which hold overseas documents relevant to an SFO investigation now face a choice: do they enter the UK and risk being served with a s2(3) notice, or do they remain outside the jurisdiction, thereby insulating their companies from this risk? This point is particularly relevant where a bank or company has multiple entities in its group structure and where the foreign entities hold the documents likely to be of most interest to the SFO. The effect of the judgment is that these documents cannot be compelled through a UK group company (since this company does not hold the documents) and can only be compelled through the presence in the UK of the foreign company (which may choose to remain outside the jurisdiction).
What is the impact of the judgment?
Despite the significance of the judgment, most foreign companies issued with a s2(3) notice will provide overseas documents to the SFO. Handing over such documents is a valuable hallmark of cooperation, and if the corporate group is seeking leniency from the SFO in the form of a deferred prosecution agreement, it may be unwise to advance overly technical arguments as to why the documents should not be produced. In theory there is scope for judicial review if a foreign company can demonstrate that it has an insufficient connection to the jurisdiction (and the court helpfully outlined circumstances in which no sufficient connection will be established). But in practice such judicial reviews are unlikely to be successful; the SFO will be careful to ensure that its evidence illustrates why there is a sufficient connection.
The judgment will embolden other agencies which have similar compulsory document production powers, such as the FCA, NCA, CMA and police; they too will see little point in drafting cumbersome mutual legal assistance requests and then waiting months for a response. Indeed, the judgment may well signal the slow demise of mutual legal assistance in criminal investigations. The judgment is consistent with a new bill currently making its way through Parliament for an Overseas Production Order (“OPO”), which would compel overseas companies to produce electronic data. The OPO would be served directly on the foreign company that holds the data, without relying on the applicable mutual legal assistance treaty. In their desire to ensure that law enforcement has extraterritorial evidence-gathering powers, the Admin Court and the Government appear to be speaking with one voice.
The future seems clear – greater cross-border sharing of data in criminal investigations, with reduced scrutiny in the state where the data is located. There are safeguards in English law for foreign companies served with compulsory document production notices. The “reasonable excuse” defence under s2(13) (and equivalent statutory powers) and the availability of judicial review will provide a fertile basis for challenging a notice if, for example, it is unduly onerous, disclosing the data would entail the commission of criminal offences in the foreign state, or if the data is held in confidence. None of those concerns was present in KBR’s judicial review. What safeguards exist for a UK company that receives a similar notice from an overseas prosecutor or court in a state crippled by a weak rule of law? Reciprocity has its costs.
In her maiden speech the SFO’s new director, Lisa Osofsky, extolled the virtues of cooperating with overseas prosecutors to ensure that global settlements become more commonplace. Whilst the SFO will no doubt continue to seek this cooperation, the KBR judicial review means that the SFO does not require this cooperation to obtain certain types of overseas evidence. The incoming director will be pleased to learn that her agency has had this power for the past three decades.
