London - Investors have a fresh incentive to do proper research before buying shares -- dividends paid by British companies breaking the law may be confiscated, following a legal ruling won by the Serious Fraud Office.
Shareholders who receive the proceeds of crime as a dividend can expect civil action against them to recover the money, and should satisfy themselves with the business practices of firms they invest in, SFO Director Richard Alderman said on Friday.
“This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it,” he said.
The SFO won a civil recovery order, which approves court action, on Thursday against the principal shareholder of a company that had admitted corruption.
Mabey Engineering Holding agreed to repay the £131 201 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 behaviour to the SFO.
It was the first time the SFO recovered the proceeds of crime by targeting dividends paid in Britain.
Alderman said the SFO would pursue its new approach of confiscating dividends vigorously even if, as in the Mabey case, the shareholder was totally unaware of the breach.
Institutional investors and lawyers said the ruling would not open the floodgates for payouts to be returned.
The UK Investment Management Association, whose members manage £3.9 trillion in assets, said it was right that dividends from illegal or criminal activity should be returned.
“A lot of this would have to be looked at on a case by case basis,” an IMA spokeswoman said. The difficulty would be when it comes to deciding what portion of a dividend was derived from illegal activity.
“While there may be some implications from this ruling, it is quite unlikely that the implications would be high enough to be a particular issue,” the IMA said.
Another influential investor official said big investors conduct due diligence based on public information and it was up to the company’s board to act on behalf of shareholders.
Arnondo Chakrabarti, a partner at Allen & Overy law firm, said the case involved a private company parent of a subsidiary and was not a serious legal precedent for the SFO to obtain similar orders against institutional shareholders with small holdings in a listed company.
“The reason Mabey and Johnson cooperated was because the subsidiary pleaded guilty. That is not the same position the average fund manager is going to be in as a truly innocent third party,” Chakrabarti said.
If the SFO pursued institutional investors it would face years of expensive litigation as they are not going to plead guilty, Chakrabarti said.
Peter Lloyd, chief executive of Mabey Holdings, said the group has new management and rigorous anti-bribery and corruption procedures.