Extraterritorial Reach of Section 2 Notices
Whilst the attention of practitioners in white-collar crime has for obvious reasons been predominately focused on the significant impact of the decision in ENRC, the important decision of the High Court in The Queen (On the application of KBR Inc) v The Director of the Serious Fraud Office EWHC 2368 (Admin) may have escaped attention. However, it too has significant impact on the scope and powers of the Serious Fraud Office.
KBR Inc is a worldwide organisation with some 34,000 employees, which is incorporated in Houston Texas. It operates through various subsidiaries across the globe including in the United Kingdom. The Serious Fraud Office is conducting an investigation into its activities on the basis of suspected bribery and corruption.
In April 2017, the SFO served a notice pursuant to Section 2(3) of the Criminal Justice Act 1987, on KBR Limited, the UK entity, requiring it to produce documents. In its reply, whilst cooperating and supplying documents, KBR drew a distinction between documents held in the United Kingdom and those held by KBR Inc in Houston. In July 2017, a further Section 2 Notice was served on an employee of KBR Inc who had travelled to the United Kingdom to meet with the SFO.
On the 20th September, 2017, solicitors acting for KBR replied to the SFO setting out that KBR Inc would decline to provide any documents to this employee for onward disclosure to it.
KBR Inc went on to bring judicial review proceedings, challenging the lawfulness of the Section 2 Notice. The crux of the argument advanced was that Section 2 NAotices did not operate extraterritorially and that this was so as a matter of statutory construction according with international law and comity and the English presumption of the conflict of laws.
The Serious Fraud Office argued that the principal question in the case was whether the mere fact of documents being offshore meant that they could not fall within a Section 2 Notice, that KBR Inc was linked to the subject matter of the SFO’s investigation and that the business of KBR Inc and KBR Ltd were interdependent. KBR Limited was not independent of KBR Inc and KBR Inc controlled the documents. It was also argued that Section 2(3) of the Criminal Justice Act 1987, did not contain express words of territorial limitation and significantly, the Notice had been served on KBR Inc via an employee who was in the United Kingdom at the time of service.
The judgment sets out a thorough review of relevant authorities and comes to the following conclusions:
- The policy underlying Section 2(3) pursuant to which the notices were issued required the section to have some extraterritorial effect in 1987 and that should still be the case now particularly in light of the new technological advances
- If the section has extra territorial effect as far as UK companies are concerned and its extraterritorial ambit is capable of extending to some foreign companies but not all.
- The test to be met is whether there is “sufficient connection” between the company and the United Kingdom.
- This test is easily workable and should be applied at the time consideration is given to issuing the notice. The test is fact specific.
- The notice must be served on a company or a person within the jurisdiction.
This judgment is an unequivocal statement that Section 2(3) has some extraterritorial effect in respect of UK companies with documents held outside the jurisdiction. Further, it laid down a test to be applied when considering whether foreign companies fell within the ambit of the legislation.
The Court stated that the mere fact that a foreign company is the parent of a UK company is not necessarily enough to establish “sufficient connection” and the simple attendance at a meeting by employees or officers of the offshore entity with the SFO is not enough either.
The court decided that approaching the legislation in this way and applying the “sufficient connection” test would not create practical difficulties and was a workable solution. Whether that in fact turns out to be the case – only time will tell.