Crime, fraud and investigations in 2017: Guidance on privilege

In brief

• There is the possibility of the most significant decision on privilege for companies in years, should the decision in the RBS Rights Issue Litigation be appealed.

• The Law Society, responding to what it calls “increasing State encroachment upon the sacrosanct nature of Legal Professional Privilege”, is to issue new guidance for solicitors.

• Following two cases resolved by Deferred Prosecution Agreements (DPA) in which the cooperation of the defendant was cited as the main reason for the use of a DPA, in 2017 the Serious Fraud Office (SFO) is likely to persist in encouraging companies to waive privilege over some documents during investigations in order to be considered cooperative.

A Supreme Court decision?

Since 2003, and the Court of Appeal’s decision in Three Rivers (No 5), it has been the position that legal advice privilege will not attach to communications between a company’s lawyers and any employee of the company, but instead only those within the company with authority to instruct lawyers. This means that when lawyers interview employees to ascertain facts for the purpose of giving advice, notes of those interviews will not benefit from legal advice privilege unless the employees were empowered to seek legal advice for the company.

This decision has not been followed in Australia, has been distinguished in Singapore and rejected outright in Hong Kong, but remains the law in England and Wales and has consistently been followed. It makes conducting internal investigations in order to seek legal advice very difficult, unless contemplated litigation is the dominant purpose of any interviews.

In the RBS Rights Issue Litigation, RBS sought to claim privilege over notes of 124 interviews conducted by its US lawyers. Recognising the difficulty of Three Rivers (No 5), RBS argued that the employees were authorised to speak to the lawyers for the purpose of the company seeking legal advice and so constituted “the client” for the purposes of privilege. The bank also argued that US federal law should be applied, under which it claimed the documents would be privileged as attorneys’ working papers. These arguments were unsuccessful, for reasons explored in our article, but the resulting judgment gives rise to the tantalising prospect of Three Rivers (No 5) being considered by the Supreme Court, to which any appeal of the RBS case would probably be leapfrogged. This could see the biggest development in the law of privilege in more than a decade and dramatically change the approach to internal investigations. Inevitably the case may settle, however, in which case the wait for a review of the law in this area will continue.

Privilege under attack

Over the last two years, there has been an increasing focus on the role of privilege in investigations, as to when it is applicable and whether it is appropriate for enforcement agencies to request that it be waived. The Financial Conduct Authority has warned institutions against seeking to disclose internal investigation reports under a limited waiver that maintains privilege and limits the regulator’s use of them. Meanwhile the SFO has made numerous statements casting doubt on claims to privilege over notes of interviews conducted by lawyers during internal investigations.

The SFO has also repeatedly made clear that a decision to waive privilege and provide privileged material to it will be seen as a “significant mark of cooperation”. While that is not the same as demanding that companies do this, in practice this is a fine distinction, because the consequences of being found to have been uncooperative can now be significant. Cooperation with the prosecutor is the most important factor in determining whether an investigation might be closed by way of a DPA rather than a prosecution, and the decision as to whether to offer a DPA lies in the sole discretion of the SFO.

Politicians have also made attacks on privilege, often showing little understanding of its importance to the rule of law. In particular, members of the the House of Commons Business, Innovation and Skills Committee and the Work and Pensions Committee criticised law firms during the inquiry into the sale of BHS for refusing to disclose their legal advice. The fact that this advice was subject to privilege belonging to the client, and that the lawyers therefore had no right to disclose the material, appeared to be lost upon these MPs.

Guidance for solicitors

Navigating this increasingly hostile landscape has become a concern for many lawyers, both in-house and external, particularly when faced with having to advise clients as to whether to waive privilege. The Law Society will seek to assist by publishing new guidance on privilege in early 2017. This is expected to set out clear definitions of privilege and guidance on its application in the light of a wealth of caselaw.

The guidance is likely to address the role of privilege in internal investigations and in particular whether notes of “first account” witness interviews will be privileged. While this will not put an end to pressure by regulators and prosecutors, it will give solicitors something to refer to in discussions with them. It is hoped that the guidance will also contain a clear statement that the application of pressure by the authorities to waive privilege in order to be seen as cooperative is improper.

The Investigatory Powers Act

Another development at the end of 2016 that may see issues arise as to privilege in 2017 is the coming into force of the Investigatory Powers Act (IPA). This replaces the Data Retention and investigatory Powers Act, which ceased to be of effect at the end of 2016 under a sunset clause. The IPA has been controversial, as it grants wide powers to investigatory authorities to access records of individuals’ telephone and internet use.

After much debate in parliament, the IPA in its final form provides that legally privileged information can only be intercepted if, in the view of the head of the new Investigatory Powers Commission, the public interest in obtaining the information outweighs the public interest in its confidentiality. It must also be shown that there is no means of accessing the information without intercepting privileged communications. If privileged communications are obtained as part of a wider body of information and the test is not satisfied, the privileged material must be destroyed.

Despite these protections, this represents a significant inroad into the absolute protection from production that privilege has traditionally provided. The public interest test is a new one and it remains to be seen how it will be applied. In the context of recent attacks on privilege by both politicians and investigatory authorities, however, expect to see more controversy over privilege in 2017.

For regular updates on privilege issues, see Colin Passmore’s Blog.

Update

The RBS appeal was withdrawn on 03 February 2017 - Read our article here

The Law Society’s Practice Note on Legal Professional Privilege was published on 23 February. You can find it here.