Privilege in regulatory investigations

Part of Guernsey’s excellent reputation as an offshore financial centre is the strength of its regulatory regime.  Effective regulation can give investors confidence about the integrity and credibility of the organisations operating in that sector. 

However, such businesses should also be prepared for the possibility, however remote, of a regulatory investigation. One important issue that can arise in such a context is the extent to which communications regarding the investigation may need to be disclosed to the regulator. Reliance on what is commonly called privilege can enable a party to legitimately resist compulsory disclosure of documents and information.

The UK’s Serious Fraud Office (SFO) recently released guidance on corporate co-operation in regulatory investigations. 

Although not strictly binding on businesses operating in Guernsey, nevertheless, the SFO guidance reinforces the need for organisations to ensure that any claim for the existence of privilege needs to be properly established if it intends to rely on that privilege.  Privilege is something that should be considered at the outset of any investigation. 

Internal Investigations

A regulatory investigation is not always prompted by the regulator itself.  It is important that a business carries out its own detailed investigation regarding any regulatory concerns as soon as it is aware of such concerns, whether or not the regulator is aware of those concerns.  It is common for investigations to commence long before any regulatory bodies are involved, and the result of the internal investigation can often be the catalyst for a notification to the relevant regulatory body.

Litigation Privilege

Litigation privilege will only apply in circumstances where legal proceedings are already in existence or are imminently contemplated.  It is unlikely to apply where the investigation is internal or in contemplation of a regulatory investigation.  This note therefore focuses primarily on legal advice privilege.  For more guidance on the different types of privilege please click here. 

Legal Advice Privilege

It is prudent to involve legal representatives in this investigation from the outset to ensure that the investigation is conducted effectively and appropriate lines of enquiry are considered. 

Care should be taken at the very beginning of an internal investigation to ensure that communications between the parties and their legal advisors are covered by legal advice privilege.  The purpose of legal advice privilege is to enable parties to freely discuss matters openly with their lawyers when seeking legal advice, and successfully establishing legal advice privilege provides an organisation with the right to withhold disclosure of those documents from third parties.  Ideally, legal advice should only be provided to and shared between a select group of people within that organisation in order to preserve privilege.

Guidance from case law

The application of legal advice privilege is often assumed whenever legal advisors are involved, but it is a complex area of law and there have been a number of significant recent cases in the English Courts which have provided guidance on this issue.  It is likely that the Guernsey Courts will have regard to this advice when considering any relevant matters arising in this jurisdiction. 

Director of the SFO v Eurasian Natural Resources Corporation [2018] EWCA Civ 2006

This case concerned an investigation by the SFO into the activities of the Eurasian Natural Resources Corporation (ENRC) as a result of what the SFO alleged was a self-reporting process initiated by the ENRC (something which the ENRC later denied).  The ENRC asserted both litigation and legal advice privilege applied to some of the documents generated as a result of the internal investigations undertaken by ENRC. 

The judge at first instance ruled that the documents that had been generated in the internal investigations were not subject to legal advice or litigation privilege (with the exception of some slides prepared by the solicitors for the specific purpose of giving legal advice).  The documents included notes taken by the ENRC’s solicitors of evidence from individuals, notes from the accountant’s books and records reviews and documents containing factual evidence, all of which had been generated by the solicitors and forensic accountants conducting the internal investigations for ENRC.  The Court ordered disclosure of these documents to the SFO. 

The decision at first instance was controversial and the ENRC appealed.  The Court of Appeal reversed much of the decision and held that both litigation and legal advice privilege attached.  The majority of the decision concerned litigation privilege and the Court of Appeal held that litigation privilege could apply in circumstances where criminal proceedings were in reasonable contemplation.  This is fact specific and the Court noted the situation would arise where the SFO had made clear that there was a prospect of criminal prosecution.  Unlike the SFO, Guernsey Financial Services Commission is not a prosecuting authority and does not have the power to bring criminal proceedings, and therefore this aspect of the decision has limited application in Guernsey.

As regards legal advice privilege, the Court of Appeal held that this also applied, although as litigation privilege was held to apply it made limited determinations on this issue.  In circumstances which do not give rise to the prospect of litigation it is importance to consider whether the investigation will be covered by legal advice privilege. 

Legal advice privilege can apply both to an organisation where there is the possibility of it being subject to a regulatory investigation itself, or where it is seeking legal advice in relation to a third party which may be subject to a regulatory investigation, for example officers or employees of that organisation.   

The Court of Appeal decision assists organisations which conduct internal investigations into potential regulatory matters by recognising that, ultimately, it is in the public interest for such organisations to investigate these issues thoroughly at an early stage.  It allows organisations to properly engage lawyers to assist with and advise on internal investigations without fear that those investigations will cause difficulties in the future. 

Takeaway Points

• Legal advice privilege will only apply to protect legal advice given by lawyers 

• Therefore, in circumstances where an organisation wants its investigation to be protected by legal advice privilege it is sensible to ensure that the investigation is conducted by lawyers rather than other professionals 

• It is important for an organisation to consider whether to use its own internal legal counsel or external legal counsel

• Care should be taken when only using in-house counsel as their role often encompasses both legal work and business and administrative aspects. Legal advice privilege will only attach to the former

• We recommend that all communications involved in the investigation, including those sent internally are marked “confidential and subject to privilege” and privileged documents should be kept separately and shared only when necessary 

• Privileged information should not be included or referred to in correspondence with a regulator as this may involve a waiver of privilege

• Organisations should remember that legal advice privilege only applies to communications between lawyers that their clients and therefore will not necessarily cover communications with third parties

If you would like to discuss the use of privilege in regulatory investigations, please do not hesitate to contact a member of the Dispute Resolution team.