The judgment of Mrs Justice Andrews handed down on 8 May 2017 in SFO v Eurasion Natural Resources Corporation Ltd ("ENRC") has proven to be controversial with legal commentators and is under appeal. It strictly follows the restrictions placed by the House of Lords on claims to privilege by entities facing regulatory or criminal investigation (ref. Three Rivers No 51). We comment briefly on its application to FRC investigations below.
ENRC operates in the mining and natural resources industry. Following the emergence of allegations of corruption by a whistle-blower, between 2011 and 2013 ENRC and the SFO engaged in a period of dialogue relating to ENRC's operations in Asia and Africa. During this period ENRC carried out internal investigations, employing solicitors and other professionals to conduct fact-gathering and review exercises. At the time, they were considering "self-reporting" if corruption was uncovered.
The period of dialogue ended in April 2013 with the commencement of a criminal investigation into ENRC relating to allegations of fraud, bribery and corruption. As a part of its criminal investigation, the SFO sought disclosure of four categories of document generated during ENRC's internal investigations:
Notes taken by the solicitors instructed by ENRC of interviews with various individuals (including employees and former employees of ENRC and its subsidiaries, suppliers and other third parties);
Materials generated by forensic accountants as part of the "books and records" reviews carried out between 2011-2013 to identify controls and systems weaknesses and potential improvements;
Documents indicating or containing factual evidence presented by ENRC's solicitors to its Board and sub-committees in 2013; and
Documents referred to in a letter sent to the FRC by ENRC's solicitors.
Claim for privilege
ENRC asserted privilege over all four categories of document.
Litigation privilege attaches to communications between parties or their solicitors and third parties where:
Litigation is in progress or reasonably contemplated;
The communication is made for the sole or dominant purpose of actual or anticipated litigation; and
The litigation is adversarial rather than investigative.
It includes all material forming part of the continuum of communications, even those documents, such as lawyers' notes of meetings, which do not expressly seek or convey advice
Legal advice privilege is far narrower in scope, attaching only to communications made in confidence between lawyers and their clients for the purpose of giving or obtaining legal advice, whether or not litigation is contemplated or on foot.
Mrs Justice Andrews rejected all but one of the ENRC's claims for privilege, holding that the claims for litigation privilege failed for a variety of reasons which included her conclusions that (i) litigation was not in reasonable contemplation at the time, (ii) the initial dialogue with the SFO was not "adversarial " and (iii) the documents were not created for the sole or dominant purpose of anticipated litigation. Furthermore, legal advice privilege did not apply, in particular because, for each category of document, those communicating with the lawyers were not authorised to, and therefore did not, seek legal advice, they were merely employees or agents of ENRC in communication with lawyers. The only documents to which privilege attached were slides prepared by ENRC's solicitors for use at Board meetings.
Further, the judge drew a distinction, which has proved to be controversial, between when a party might be found to have reasonable anticipation of proceedings in civil cases (where a prospective defendant might anticipate facing even a wholly meritless claim), and criminal cases (when a prosecution will only be brought when there is a realistic prospect of conviction). The judge found that up until March 2013, ENRC did not reasonably anticipate criminal prosecution. The question of whether an anticipation of a criminal investigation equates to anticipation of prosecution depended upon whether there was "at the very least…some material to support the allegations of corrupt practices". ENRC's investigations were undertaken at a time when criminal investigation was anticipated, but it could not be said that they anticipated prosecution as a consequence.
Application to accountants facing investigation
This decision serves as a reminder to accountancy firms facing investigation that they should not assume that all communications, or documents created, with the involvement of lawyers will be protected by privilege. In the context of investigations by the Financial Reporting Council (FRC"), the following should be borne in mind:
Legal advice privilege will only apply to communications between lawyers and those within the client firm authorised to give instructions or receive advice. Verbatim records of interviews with individuals conducted in response to a s14 (2) Accountancy Scheme Notice, for instance, may not be subject to legal advice privilege, even if conducted by a solicitor. They may only be safe from disclosure if they are covered by litigation privilege.
Litigation privilege will only apply where adversarial proceedings are on foot or contemplated. Disciplinary proceedings brought by the FRC are adversarial in nature but before a Formal Complaint is served commencing those proceedings, there may be a lengthy period of investigation by the FRC. Wide-ranging powers are given to the FRC to conduct an investigation under s14 (2) of the Accountancy Scheme and compel members and member firms to provide information and documents. Each investigation must be looked at on its own facts, and consideration should be given to whether litigation privilege can be claimed at a point in time when a member firm may not believe that an investigation will lead to a Formal Complaint. As the judge said in ENRC:
"[Previous cases] do not support the contention that as a matter of policy, where the lawyer is carrying out, or directing others to carry out, a fact-finding or evidence gathering exercise in circumstances where litigation is not in contemplation, the fruits of his or their labours should be privileged from disclosure, independently of any communication of them by the lawyer to the client, simply because the purpose of that exercise is to enable advice to be given to the client".
In conclusion, it should not be simply assumed that litigation privilege starts to apply as soon as the FRC announces that an investigation of possible acts of professional misconduct is underway. Following the decision in ENRC, that is doubly true of investigations by the SFO/police.