Civil claims against banks arising from bribery and corruption issues

Bribery and corruption allegations have been central to some high-profile regulatory investigations of banks. While most major banks have sophisticated systems and controls to manage corruption and money laundering risks, there is a growing need to include in investigations the risk of civil claims as well as criminal or regulatory action. Civil claims relating to bribery and corruption are well-established in the US, and have become increasingly common in other jurisdictions, particularly the UK. There have been numerous claims arising out of allegations of mis-selling of derivatives and several recent significant claims in the English courts have involved allegations of bribery against banks.

In this article, we address the key civil liability risks for banks that may emerge in the course of an investigation into bribery or corruption. If a transaction was procured by bribery, it may be unwound, leading to remedies that in some circumstances are more prejudicial to a bank than damages for breach of contract. If the transaction is tainted by corruption, this may jeopardise the bank’s investment and lead to liability for claims including unlawful means conspiracy and dishonest assistance.

Under English law, a contract procured by bribery is voidable and may be set aside (i.e. unwound) at the election of the innocent party. Bribery can include the giving of various advantages by bank employees or other agents, including money, gifts, entertainment, or jobs. Importantly, the party seeking to unwind a contract does not have to prove a criminal offence has been committed. The civil concept of bribery is based on the concept of a secret commission or other secret benefit being paid to an agent or employee of the principal by a person aware of the nature of the relationship between the agent/employee and the principal (Petrotrade Inc v Smith [2000] 1 Lloyd’s Rep 486). It is not necessary to show that the paying party paid the secret commission to obtain a benefit or otherwise to induce the agent/ employee to enter into a contract on behalf of the principal. Consequently, if the bank’s agent has bribed an employee or official at the counterparty, it is possible that the entire deal might later be liable to be set aside.

In 2014, the Libyan Investment Authority (LIA) brought a civil bribery claim against a French bank in relation to transactions in the period 2007-9. The LIA sought to unwind those transactions. It alleged that Panamanian-registered company was owned by a Libyan businessman and that a payment of US$58 million to it by the bank was a bribe. The case was settled before trial.

A related claim by the LIA was based, not on bribery, but on undue influence. On October 14, 2016, the English High Court rejected the LIA’s claims that Goldman Sachs had exercised undue influence to procure the LIA to enter into a series of derivatives transactions or that the trades otherwise amounted to an unconscionable bargain (Libyan Investment Authority v Goldman Sachs [2016] EWHC 2530 (Ch)). The LIA did not allege bribery in that case but argued that the offering of an internship within Goldman Sachs to the brother of the Deputy Chairman of the LIA improperly influenced the LIA to enter into the trades of US$1.2 billion.

In December 2016, a Dutch Housing Association, Vestia, issued a claim against a German bank in the English High Court alleging that that the bank bribed one of its officials to enter into swaps between 2005 and 2011 in the form of hospitality and by virtue of payments to a broker who allegedly made payments to the official.

More recently, the Court of Appeal held that a German water company could rescind a credit protection contract in relation to derivatives entered into with a Swiss bank on the basis of bribes paid by the company’s financial adviser, upholding the first instance decision (UBS v KWL [2017] EWCA Civ 1567). The Court of Appeal rejected the first instance finding that the financial adviser was the bank’s agent. The financial adviser had formally been engaged by the company, and the bank had been unaware of the bribes. However, the majority considered that the bank could not enforce the transaction as, even though it was not aware of the bribe, it dishonestly assisted in the financial adviser’s breach of its fiduciary duties, in particular the duty to provide loyal and disinterested advice. The company had been entitled to decide whether to continue with the credit protection contract or rescind it (i.e. cancel the contract with the effect that the parties would be put into their respective precontractual positions). The company had elected to rescind, which required it to return the US$30 million premium, but enabled it to avoid paying out US$137 million under the credit protection contract.

Banks are particularly susceptible to claims to unwind transactions. Rescission is more likely to be available in a financial transaction which simply involves payments of money because there is no obstacle to reversing the transaction to put the parties back in their original positions. And, as the cases above illustrate, rescission is particularly attractive for financial contracts when the breach itself has not caused any damage but, due to market movements, the contract as a whole is unprofitable.

To mitigate bribery risk, banks need to understand the role of third parties and conduct thorough due diligence on them, irrespective of which party has formally engaged them. Banks also need effective controls in relation to entertaining clients, particularly where those clients are government officials or otherwise have government connections.

The risk of civil claims against banks arising out of bribery and corruption is not confined to transactions procured by bribery. Where the sums advanced by the bank are to be used for corrupt purposes, the bank may be exposed to a number of different claims.

We consider this via a hypothetical example. Suppose a bank enters into a finance transaction with a sovereign government. The purpose of the transaction is to finance an infrastructure project, but the bank has reason to suspect that much of the sum advanced is going to be diverted to corrupt government officials. The immediate risk is that the project may not be completed or might be stopped or unwound and that the bank will not be repaid. However, even if repayment is secured other than by performance of the project, perhaps by a sovereign or third party guarantee, the bank is still exposed to a number of potential civil claims, the most obvious being unlawful means conspiracy.

For a claim of unlawful means conspiracy to succeed, it is necessary to establish the use of unlawful means (i.e. fraud) in furtherance of an agreement, and an intention to cause injury to the borrower. It is not necessary to show a binding contractual agreement as between the bank and a fraudster: a tacit agreement or understanding or combination is likely to suffice. From an evidential perspective, linking the bank and the fraudsters in government might be difficult, but it is not a risk that banks should discount, especially given the time and cost of a dispute, the associated regulatory scrutiny and reputational risk.

An intention to cause injury can be established where it can reasonably be foreseen that the conspiracy might cause loss to the borrower. If parties are aware that the funds are going to be diverted to corrupt purposes rather than the putative purpose of the transaction, this is likely to be sufficient. Turning a blind eye will constitute knowledge for these purposes. Where there is actual dishonesty by bank employees, the bank may also be liable for dishonest assistance.

The interplay of civil corruption litigation, regulatory supervision and enforcement, and money laundering reporting obligations presents practical challenges for banks, particularly in relation to privilege issues and tipping off.

Consider the scenario of an allegation of corruption being made in relation to a third party on a derivatives deal. The bank may be required to notify the National Crime Agency of the FCA report and is also likely to want to investigate the allegation itself. In doing so, however, it may create documents which could be used against it in subsequent civil proceedings. Given the recent decision in The Serious Fraud Office v ENRC [2017] EWHC 1017 (QB) (ENRC), documents are unlikely to attract litigation privilege unless civil claims are contemplated. In ENRC, it was held that, in the context of a criminal investigation, litigation privilege would only be triggered once prosecution was reasonably in contemplation: the fact that a criminal investigation was feared or had even commenced was not enough to trigger litigation privilege if, at that stage, the focus of the investigation was to fact find and no prosecution was contemplated by the entity being investigated – see our briefing (When does “litigation” become sufficient to trigger litigation privilege?) and note that the decision is subject to appeal.

Equally, the bank will need to be careful in its investigations and in any dispute to avoid committing tipping off offences under the Proceeds of Crime Act 2002 when corresponding with the third party. Financial institutions will also need to consider how decisions made in responding to, or settling, regulatory investigations will play out in potential litigation.

Recent cases show the increasing willingness of parties who feel they have been wronged by corruption – or who have made a bad bargain in a deal potentially tainted by corruption – to pursue civil claims. English law civil corruption litigation is still at an early stage of development but it is beginning to move into the mainstream.