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SFO Targets Criminal Company Dividends

The UK’s fraud investigator intends to confiscate shareholder dividends paid by companies convicted of criminal offences, after it won approval for a landmark court action.

The Serious Fraud Office won a civil recovery order on Thursday against the principal shareholder of a company that had admitted corruption.

Mabey Engineering Holding agreed to repay the 131,201 pounds ($201,787) dividend it received from Mabey & Johnson, which built bridges in Iraq and admitted corruption and breaches of UN sanctions in 2009. Two former Mabey & Johnson executives went to prison after the company reported their behavior to the SFO. The agreement, approved by the High Court and seen by the Financial Times, marks the first time that the SFO has tried to recover proceeds of crime by targeting dividends paid in the UK.

While the sum confiscated by the SFO is relatively small, lawyers warned that the precedent it set was potentially huge.

“Under the existing proceeds of crime legislation, the SFO is actually able to do this, which is an alarming proposition for innocent third-party investors,” said Jonathan Fisher QC, a barrister specializing in financial crime. “Intellectually it’s unassailable but if it happened on a large scale it could undermine people’s pension funds.”

Although the case involved a privately held company and its corporate parent, the SFO emphasized that it would not hesitate to pursue third-party investors in listed companies.

“Shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in,” said Richard Alderman, director of the SFO. “The SFO intends to use the civil recovery process to pursue investors who have benefited from illegal activity. Where issues arise, we will be much less sympathetic to institutional investors whose due diligence has clearly been lax in this respect.”

Lawyers and investors questioned the SFO’s tactics, arguing that most shareholders can only rely on publicly available information.

“Institutional investors conduct due diligence on companies based on their publicly stated strategy and other public information such as the annual report ,” said one investor. “It is the role of the board, to act on behalf of shareholders in the best long-term interests of the company. Ensuring that the company is not taking part in illegal or improper behavior is clearly part of these responsibilities.”

Peter Lloyd, Mabey Holdings’ chief executive, said: “[The settlement] represents the final chapter in our diligent and painstaking work to root out historic unlawful practices. It represents the culmination of almost four years of close co-operation with the prosecution authorities following our self-referral in 2008.”

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