In a highly anticipated decision, the Court of Appeal in Director of the Serious Fraud Office v Eurasian Natural Resources Corporation  has allowed ENRC's appeal, providing welcome guidance on the scope of legal professional privilege, particularly in the context of regulatory and criminal investigations.
We comment on the impact of this decision on SFO and FCA investigations.
This decision reverses the High Court's controversial ruling that documents created during internal investigations carried out by ENRC together with its professional advisers were not protected by privilege, and so were liable to be disclosed to the SFO.
ENRC had carried out voluntary internal investigations between 2011 and 2013 following the emergence of corruption allegations by a whistleblower. As part of these investigations, lawyers and other professionals conducted fact-gathering and review exercises. In parallel to this, ENRC and the SFO engaged in a period of dialogue relating to ENRC's operations.
In April 2013, the SFO commenced a criminal investigation, and as part of it sought disclosure of a number of documents generated during ENRC's earlier internal investigations which included documents created by (i) lawyers (including notes of interviews with ENRC employees), and (ii) forensic accountants in the course of their "books and records" review.
Claim for Privilege and High Court Decision
In the High Court, ENRC asserted their right to refuse disclosure of the documents on the basis of litigation privilege and legal advice privilege.
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 in the High Court held that ENRC's claims for litigation privilege, and most of its claims for legal advice privilege failed.
See our article on the High Court decision here.
Court of Appeal decision
The Court of Appeal took the view that the case should be regarded as one primarily about litigation privilege. Although it commented on them, it chose not to decide the legal advice privilege issues, suggesting these issues, very important as they were, should be decided by the Supreme Court.
The Court was asked to address two issues in order to determine whether the documents were covered by litigation privilege: first, whether criminal proceedings were "reasonably in contemplation" (ie. it was a “real prospect” or “a real likelihood as opposed to a mere possibility”) at the time the documents had been created; and second, whether the “dominant purpose” for creating the documents had been to resist contemplated criminal proceedings.
"Reasonably in contemplation"
On the first question, the Court held that criminal proceedings had been reasonably in contemplation by ENRC, on the basis that "the whole sub-text of the relationship between ENRC and the SFO was the possibility, if not the likelihood, of prosecution". The court's additional observations are of note:
- Not every "manifestation of concern" expressed in SFO communications should be regarded as indicative of an intention to prosecute. However, when the SFO specifically makes clear to the company that criminal prosecution is possible, and legal advisers are engaged, there is a clear ground for contending that a criminal prosecution is in reasonable contemplation.
- A party anticipating possible prosecution will often need to make further investigations before it can say with certainty that prosecution is likely. The Court was sympathetic to the difficulties experienced by international corporations in obtaining such certainty given the distribution of relevant knowledge across the organisation, and stated that such uncertainty does not in itself prevent proceedings from being in reasonable contemplation.
The Court of Appeal held that the documents had been created for the dominant purpose of resisting contemplated criminal proceedings and made the following observations:
- Mrs Justice Andrews was wrong to suggest that litigation privilege did not apply to legal advice which is given in order to avoid reasonably contemplated proceedings; it should be treated in the same manner as legal advice given for the purpose of defending such contemplated proceedings.
- The Judge was also wrong to suggest that privilege was waived over documents created with an intention that they may be shown to the SFO. The key point here was that ENRC had never actually agreed to disclose those documents to the SFO, even though ENRC led the SFO to believe that it might in the future do so.
- The Court characterised the SFO's powers under the criminal (and civil) law as a "stick" to enforce compliance and governance standards in companies. Taken together with the threat of a criminal investigation, it was held that the dominant purpose for ENRC's internal investigation was not merely to investigate facts and to deal with compliance and governance issues, but rather to prevent or deal with possible litigation.
These findings are relevant to regulatory investigations, setting the bar for litigation privilege far lower than that suggested by Mrs Justice Andrews for firms or companies under investigation.
Legal advice privilege
Despite its criticisms of the current law on legal advice privilege, the Court nevertheless considered itself bound by the current position. Pending an appeal to the Supreme Court, it is worth restating the law as it stands:
- Legal advice privilege applies to communications between a corporation's lawyers and its employee only if that employee was authorised by the corporation to seek and receive such advice.
- Information obtained by a corporation's lawyers from its ex-employees falls into the same category as information obtained from third parties and is not covered by litigation advice privilege.
The Court deferred any ruling on the above position, together with the question of whether a lawyer's working papers (e.g. interview notes) were covered by legal advice privilege, to the Supreme Court.
Significantly, underlying the Court's judgment was a strongly stated public policy argument that companies should not be deterred from investigating whistleblower and other investigations for fear of losing privilege over the work product of their investigation.
Impact on FCA/SFO investigations
Directors face personal exposure and potential liabilities when their company is investigated by a regulator.
The right to seek legal advice under the protection of legal privilege is a recognised human right and should be respected by regulators. At times a regulator may press for fuller disclosure, as the SFO did in its case against ENRC, however, maintaining a legitimate legal right should not be the subject of regulatory criticism. A prudent Board will need to think about privilege and the protection it affords when launching an internal investigation which might prove relevant to regulatory enquiries.
The Court of Appeal decision has reversed the findings of the Judge at first instance. Its clarifications will give comfort to those under investigation seeking the protection of privilege.
We suggest the following should be borne in mind following the Court of Appeal's decision in the context of investigations by regulators such as the SFO or the Financial Conduct Authority ("FCA"):
- Legal advice privilege is narrower than litigation privilege. As was the case before this decision, 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 as part of the SFO self-reporting process or in response to an FCA investigator's request 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.
- In light of the narrow scope of legal advice privilege, if it is important that they are protected by privilege, investigation reports created before it can be safely said that litigation is in contemplation should be drafted by lawyers for the express purposes of obtaining their advice. Further, since confidentiality is a key criterion for privilege, such reports should only be circulated among those individuals within the company that are authorised to instruct lawyers and receive legal advice. Who is the "client" for this purpose requires some thought since it will not necessarily include all management and senior employees.
- Litigation privilege covers all documents created in contemplation of disciplinary proceedings, which shall for example include records of interviews of staff providing evidence relevant to such proceedings. Correspondence from the regulator indicating the possibility of sanction will be a significant factor in showing that disciplinary proceedings are reasonably in contemplation.
- Following the decision in ENRC, we consider it is reasonably clear that litigation may be in contemplation and litigation privilege may apply as soon as the FCA provides the company under investigation with a document setting out its Preliminary Findings. By analogy to the ENRC case, the regulator need not have concluded that it has sufficient evidence in order to prosecute. Further, the regulator need not explicitly refer to the possibility of prosecution for the test for litigation privilege to be met. The position is even clearer at the point at which an FCA Warning Notice is issued.
- The ENRC case indicates that proceedings can be in contemplation as early as at the first instance of correspondence between the SFO and the company's lawyers. Nevertheless, we sound a note of caution for those firms subject to preliminary enquiries by the SFO or FCA before a decision to investigate has been taken. Similarly, for those served with Notices requiring disclosure of information relating to the investigation of another. The Court of Appeal suggested that not "every manifestation of concern" by the regulator should be regarded as evidence that adversarial proceedings are in contemplation. For those firms caught up in an investigation where it is not clear that they will be the subject of disciplinary proceedings, careful consideration may need to be given to whether or when litigation privilege can be claimed.
- It may be that a document is created with the intention that it be disclosed to the regulator. However, consideration should be given to how or when that intention is communicated to the regulator. ENRC stopped short of promising disclosure of documents created during its investigations to the SFO and successfully maintained its claim to litigation privilege over them. An intention to disclose documents should be carefully considered before being explicitly stated in correspondence.
- Finally, consider seeking external legal advice as soon as possible at the outset of the investigation. External lawyers' advice regarding the likelihood of prosecution was an important factor in the Court's decision whether litigation privilege applied in this case.