ENRC fell foul of SFO by doing the right thing

BOARDS know very little in detail about what really goes on in their business, which is why they are very vulnerable when whistleblowers or apparently well-informed outsiders make damaging allegations. They obviously have to deal with the issue if it is serious enough — as ignoring such things in the days of social media is not really an option — and they risk being further publicly embarrassed if they do not do so adequately.

But before they can do anything, they need to establish the facts. To avoid further complaints of a cover-up, it is best for this to be done by someone external and independent — normally a lawyer, accountant or experienced non-executive director. So that person carries out an impartial internal investigation and the board gets a reliable report detailing what, if anything, went wrong and who is responsible. The report is rarely published but it helps the board decide what to do next.

However, this tried and tested process has been tossed in the air by a judgment recently delivered in a London court against Eurasian Resources Group, the Kazakhstan mining company formerly, and perhaps still better known as ENRC, which had a brief and unhappy few years listed on the Lon- don stock market around the beginning of this decade.

At one stage, ENRC — as it then was — suffered from a whistle-blower’s allegation that the business had made corrupt payments to secure mining concessions in Africa. The company did what it thought was the right thing and employed an external lawyer to conduct an inquiry to establish the truth or otherwise of the allegations. Subsequently, the company fell out with this lawyer, whom it believed had gone over the top in how much work he felt should be undertaken, the length of time he thought the investigation needed to take and the huge fees which resulted — but that is not the point at issue.

Rather, what caused ENRC concern was that a little while later, the Serious Fraud Office came calling and demanded that the company hand over all the papers and reports prepared by this investigating lawyer.

The SFO has well-defined legal rights to demand and seize company documents in pursuit of an investigation, and it is hard to see how it might ever successfully prosecute a complex fraud case without them. But ENRC reckoned that the documents specifically connected with the investigation were not the normal business-related internal papers the SFO routinely targets, because they were prepared as a result of its own efforts to get to the bottom of the alleged wrongdoing.

What was in the papers is not publicly known but it is obviously quite possible — though unproven — that they contained information that employees and others might not have disclosed if they had known where it would end up or if they had been interviewed under caution. Disclosing what they said might in theory amount to the company being ordered to incriminate itself. This is naturally speculation but because of the way the papers came into existence, the company reckoned they should be privileged.

This would, of course, mean the com- pany would not be required to hand them over to the SFO.

Understandably, the SFO disagreed and took ENRC to court. There was a four-day hearing in February and then in early May the SFO received a judgment in its favour from the Honourable Mrs Justice Andrews who declared that the documents were not covered by privilege and should therefore be handed over.

THIS was a relatively lowprofile case and, as a result, the judgment went largely unnoticed by the wider world but it deserves close attention because it has huge implications for companies who might one day find themselves in a similar position to ENRC on the wrong end of whistleblower allegations.

Of course, the judgment may yet be overturned on appeal but if not, it will surely give companies pause for thought as to how they might respond, particularly in a world where the SFO is showing a new determination to launch prosecutions designed to hold high-profile individuals to account.

One wonders, for example, if there have been internal inquiries within Barclays into the various aspects of its Middle East fundraising which was put in place at the time of the financial crisis — a process which now sees fraud charges levelled against the bank’s former chief executive John Varley together with three other executives from the time and the bank itself. If these inquiries did take place, might the working papers be seized or indeed have they already been seized by the SFO?

Companies are constantly pressed to be more open and transparent about what they do and be more willing to admit it when they make mistakes. The entire thrust of corporate governance has been moving in this direction for the better part of two decades, to say nothing of the pressure from non-governmental organisations and politicians.

The irony in the ENRC case, however, is that the company resisted the temptation to ignore the whistle-blower or sweep the affair under the carpet, which one might reasonably say would have been the traditional response of a mining company which found itself in this position.

It thought that by having an independent inquiry it was doing the right thing, and now finds itself in trouble for it. That delivers an interestingly ambiguous message to the corporate world.

‘Companies are constantly being pressed to be more open and transparent about what they do’