UK SFO unable to compel US company to produce documents held outside the UK

In R (on the application of KBR, Inc) v. Director of the Serious Fraud Office (“KBR”) [2021] UKSC 2, the UK Supreme Court recently unanimously ruled that a US company was not compelled to produce documents it held outside the UK to the UK Serious Fraud Office (“SFO”).

KBR is significant for jurisprudential and practical reasons. The decision represents a firm endorsement and broad application of the presumption against interpreting legislation as having exterritorial effect. This principle is being tested in a variety of contexts and jurisdictions, including Canada, as government agencies attempt to adapt to the increasingly transnational and interconnected nature of business. Practically, KBR requires the SFO to rely on mutual legal assistance (“MLA”) regimes, when seeking evidence from a company that does not carry on business in the UK, even if the company has an affiliate carrying on business in the UK.

Background

The appellant, KBR Inc, was a company incorporated in the US and had no fixed place of business in the UK, however, it had UK subsidiaries, including KBR UK which was under investigation by the SFO (related to the SFO’s ongoing investigation into Unaoil).

The SFO had issued a notice under Section 2(3) of the Criminal Justice 1987 Act (“Section 2(3) Notice”) to KBR UK (the “UK Notice”). KBR UK provided various documents in response to the notice, but made it clear that some of the material requested pursuant to the notice was held by KBR Inc in the US, if and to the extent that any existed.

The SFO subsequently met with officers of KBR Inc in the UK and served a further notice on KBR Inc (the “US Notice”).[1] The notice contained multiple requirements for the production of material held by KBR Inc outside the UK.

KBR Inc judicially reviewed the US Notice submitting that it was ultra vires as Section 2(3) of the 1987 Act did not permit the SFO to require a company incorporated in the US to produce documents it holds outside the UK. The Divisional Court refused KBR Inc’s application and ruled Section 2(3) extended extra-territorially to foreign companies in respect of documents held outside the UK if there was a ‘sufficient connection’ between the company and the UK. On the facts, the Divisional Court held there was such a sufficient connection between KBR Inc and the UK, so the US Notice was valid.

Judgment

The Supreme Court unanimously allowed KBR Inc’s appeal for the following reasons:

  • The starting point in construing Section 2(3) was the presumption that UK legislation is generally not intended to have extra-territorial effect. The Supreme Court explained the scope of the presumption as follows:

“The presumption reflects, in part, the requirements of international law that one State should not by the claim or exercise of jurisdiction infringe the sovereignty of another State in breach of rules of international law. Thus, for example, legislation requiring conduct in a foreign State which would be in breach of the laws of that State or otherwise inconsistent with the sovereign right of that State to regulate the activities within its territory, may well be in breach of international law. There is clearly a compelling rationale for the presumption in such cases. However, the rationale and resulting scope of the presumption are wider than this. They are also rooted in the concept of comity. The term “comity” is used here to describe something less than a rule of international law…certain usages are carried on out of courtesy or comity and are not articulated as legal requirements. ‘International comity is a species of accommodation: it involves neighbourliness, mutual respect, and the friendly waiver of technicalities.’”

  • The presumption against extra-territorial effect was held to apply with respect to KBR Inc as it was not a UK company, never had a registered office, or indeed carried on business in the UK.

  • The Supreme Court disagreed with the SFO’s submission that Section 2(3) conferred a power whereby a UK authority could unilaterally compel, under threat of criminal sanction, the production of documents held abroad by a foreign company. Rather the Supreme Court emphasized that there was nothing in the legislative history of the 1987 Act that indicated that Section 2(3) should have extra-territorial effect. Rather Parliament intended that evidence of crime should be secured from abroad by international co-operation and reciprocal arrangement with foreign countries, such as the mutual legal assistance agreement between the UK and the US.

  • The Supreme Court referred to its previous reasoning in Serious Organized Crime Agency v. Perry, [2012] UKSC 35 as being instructive by analogy. In Perry, the Supreme Court held that section 357 of the Proceeds of Crime Act 2002 did not permit a disclosure order to be imposed on persons outside the UK. This supported the view that Section 2(3) was likewise not intended to have extra-territorial effect due to close similarities between the two provisions.

  • There was no basis for the Divisional Court’s finding that the SFO could use the power in Section 2(3) to require foreign companies to produce documents held outside the UK if there was ‘sufficient connection’ between the company and the UK. Implying a ‘sufficient connection’ test into Section 2(3) was inconsistent with the intention of Parliament and would involve illegitimately re-writing the statute.

Jurisprudential significance

In KBR, the presumption against extraterritoriality is applied strictly. The UK Supreme Court rejects the ‘sufficient connection’ test endorsed by the Divisional Court.

The presumption against extraterritoriality is not always applied with the same rigour as in KBR. In particular, the presumption may not prevail when the context involves electronic or virtual connections that cross borders. While general principles are entrenched, their application to particular circumstances is increasingly nuanced, as transnational technological connections between businesses and their affiliates multiply.

Canada’s Supreme Court has held that, generally speaking, Canadian authorities cannot seek to enforce Canadian laws in respect of matters falling within the exclusive territorial jurisdiction of another State. Since investigative powers are an aspect of enforcement, Canadian authorities should not exercise investigative powers in another State, absent consent of that State or a rule of international law. These general principles were addressed in R v Hape, [2007] 2 SCR 292, albeit in relation to the extent of the application of the Charter to conduct outside of Canada

Increasing electronic inter-connection that crosses borders may blur the line between what evidentiary material is considered as being in Canada versus what is regarded as being in another State. This can influence whether the presumption against extraterritoriality is applied strictly. The 2018 decision of the British Columbia Court of Appeal in British Columbia (Attorney General) v. Brecknell, 2018 BCCA 5 is illustrative. The Court held that a Criminal Code production order (a judicially authorized order requiring a non-target to produce records to police) could be issued as against Craigslist Inc (“Craigslist”). The Court found there was a real and substantial connection between Craigslist and British Columbia based on Craigslist’s virtual presence in British Columbia to conduct business. Craiglist did not have a physical presence in British Columbia. The Court held that in the era of the Internet it was formalistic and artificial to draw a distinction between physical and virtual presence. The effect of this reasoning was to bless a form of extraterritorial effect - the compulsion of records outside of Canada, on the ground that the custodian has a virtual presence in Canada.

The Court’s reasoning in Brecknell does not fit with the kind of strict application of the presumption against extraterritoriality that occurred in KBR. In fact, in Brecknell, the Court could have held that Parliament had signalled that its intention is aligned with the usual presumption, because a provision dealing with conditions that may be included in a production order includes the condition that “[t]he order has effect throughout Canada…”. In other words, extra-territorial effect of production orders was not contemplated by Parliament, or so the argument would go. The BC Court of Appeal took a different view, emphasizing that drawing a distinction between “physical presence” and “virtual presence” for the purposes of the Criminal Code “would defeat the purpose of the legislation and ignore the realities of modern day commerce”.

Problems of enforcing extraterritorial orders

The extraterritorial scope of a Canadian production order was described in December 2020 by the Ontario Superior Court as “an unsettled and complex area of law” (R. v. Strong, 2020 ONSC 7528 at para. 112(g)). The Court in Strong highlighted the problems of enforcing such orders by reference to Google Inc v. Equustek Solution Inc., [2017] 1 S.CR. 824 in which the Supreme Court of Canada issued a worldwide injunction ordering Google to de-index certain websites from its search engine, only for Google to subsequently obtain an order from a California court making the worldwide injunction issued by the Supreme Court of Canada unenforceable in the US.

While Brecknell has been applied in Ontario (Re Application for a Production Order, 2019 ONCJ 775 at paras. 5-6) on the basis that the “GoDaddy” website conducted business online in Canada and maintained a virtual presence in Canada, it has not been followed elsewhere in Canada. The Provincial Court in Newfoundland (In the Matter of an application to obtain a Production Order, 2018 CanLII 2369 (NL PC) at paras. 26-29) refused to compel the production of documents by a company located in the US on the basis that Section 487.014 of the Criminal Code did not have extra-territorial effect and that the BC Court of Appeal had ignored Parliament’s decision not to provide the provision with extraterritorial effect. The Provincial Court acknowledged that international crime caused difficulties for investigators but observed that “Brecknell creates a situation in which a Canadian court can issue an order, but without any authority to enforce it” and, as a result, such an order becomes “meaningless”. By contrast, MLA regimes have the benefit of nations committing to fair and consistent enforcement. A theme that was not lost on the UK Supreme Court in KBR

Brecknell is therefore by no means the last word on the extraterritorial scope of Canadian production orders. It remains to be seen whether the Federal Government will seek to legislate in the future to conclusively extend the reach of this provision of the Criminal Code beyond Canadian borders. In addition, the reasoning of Brecknell arises within a particular factual and legislative context – i.e. production orders under the Criminal Code – that cannot be simply imported into different contexts. 

Practical implications of KBR

It was clearly a determinative factor for the Supreme Court that KBR Inc was not incorporated in the UK, had no fixed placed of business in the UK, and was not carrying on business in the UK. Therefore, UK registered companies and foreign companies with a business presence in the UK may still be caught by a Section 2(3) Notice.

Companies incorporated outside the UK, which do not have a fixed place of business in the UK or carry on business in the UK, may be compelled to produce documentation depending on whether there is in place an international mutual legal assistance (“MLA”) regime between the company’s home country and the UK. Indeed the Supreme Court indicated that the SFO should have relied on the system of MLA in KBR.

Canada has MLAs with the UK, the US, and many other States[2]. Reliance on MLAs can be a slow, painstaking process for agencies such as the SFO and US Department of Justice due to the existence of safeguards and protections within MLA regimes . However, according to the logic of the UK Supreme Court’s decision in KBR, MLAs should be, in most cases, the default route for such prosecutorial agencies due to what the Supreme Court referred to as the “critical importance” of “mutual respect and comity” between nations.

As many of its investigations involve evidence gathering exercises in overseas countries, the SFO will increasingly have to look to MLA regimes to secure evidence, particularly in light of the fact that, following Brexit, the agency can no longer avail itself of certain cross-border investigatory powers available to Member States of the European Union. For example, the SFO will no longer have recourse to European Investigation Orders that simplified the securing of evidence located within the EU as an alternative to MLA.

In light of the streamlining of its powers post-Brexit, whether or not the SFO seeks to make more use of Overseas Production Orders (“OPO”) (enacted by the Crime (Overseas Production Orders) Act 2019 which came into force in October 2019) to obtain electronic data held in foreign jurisdictions remains to be seen. One such OPO already exists between the US and the UK. However, at first sight, the OPO regime is more cumbersome than the Section 2(3) Notice procedure in that the SFO is required to make an application to a court and require the UK Central Authority (the body which manages MLA requests) to approve and serve the OPO.

KBR will have similar implications for other UK law enforcement agencies seeking to compel the production of evidence from companies without any UK presence. Foreign companies can take comfort that the UK Supreme Court has underscored previously settled international legal principles. However, it can be expected that the UK government will seek to legislate in this space and fill the current void, as the 1987 Act has been exposed in KBR as being inadequate to support investigations into modern cross-jurisdictional white collar crime.

[1] The Supreme Court referred to the General Counsel of KBR, Inc being “induced” to attend the meeting in the UK.

[2] Including: Argentina, China, Czech Republic, Germany, Greece, Israel, Japan, Kazakhstan, Norway, Peru, Portugal, Romania, Russia, South African, Sweden, Trinidad & Tobago, and the Ukraine.

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