This article is focused on extraterritorial risk: risks to UK-based professionals as a result of events in foreign jurisdictions. It is not about extraterrestrial risks, as assumed by my spellchecker. However, it is impossible to discuss this topic without contemplating the idea of remorseless beings dragging people to an indeterminate fate. Even the language is sometimes the same – specifically the way the US refers to citizens of other countries as ‘aliens’.
The internet gambling saga has prompted the need for this debate. For several years politicians and authorities in the US have been zealously pursuing internet gambling companies and their officers for alleged breaches of US law.
Alarmingly for professionals, it was reported recently that US authorities were no longer content to pursue the companies operating internet gambling companies and their directors, but that a number of UK professional firms, which had advised those companies, had also received requests for ‘assistance’ and for production of documents.
Obviously, those professional firms could have a range of responses to these requests depending upon the form of request, their obligations of confidentiality to their client, claims to privilege, the view of their particular professional body and whether they actually have a physical presence in the US and are therefore more susceptible to sanction for non-compliance.
Nevertheless, it does not take a huge leap of logic to infer from such a request that the US authorities might see the professional as a party of interest if they have advised on transactions that lead to an allegedly illegal activity.
This raises a significant business risk because, as history records, whenever it is asserted in the US that a corporate crime has been committed, the claimant bar is quick to emerge and seek civil redress, which is a heightened possibility following recent announcements by US class action firms that Europe and the UK are a growth area.
When considering that possibility it is important to note that we are not discussing advisers to companies listed in the US, based in the US or even directly doing business in the US. We are not talking about advisers who have necessarily given advice in the US. Instead we are talking about UK advisers advising non-US companies whose product, in the case of internet gambling, can be accessed by US customers by the magic of the worldwide web.
Beyond the topic of internet gambling, the same concerns arise in relation to advisers to companies that are alleged to have engaged in anticompetitive behaviour.
Rules against cartels in the US are far broader in application to that of those in the EU. US courts have jailed more than 30 non-US directors since 1999 and there is a pending House of Lords appeal against the extradition of the former chief executive of Morgan Crucible. So, could he have a claim against his professional advisers? And if a similar situation arises after 1 October this year, when minority shareholders can bring derivative actions against directors, is it possible a professional could become a third party to a shareholder’s derivative action?
Property damage and personal injury
The press has given broad coverage to the ongoing investigation into the explosion at BP’s Texas City Refinery, which killed 15 people and injured 500 others. Press reports say investigators are suggesting there has been an institutional disregard for safety in favour of cost cutting and that management, including main board members, have ignored a number of warnings.
If a UK professional firm provided internal audit services to BP, or to other companies in a similar situation, it could be drawn into the aftermath of substantial foreign litigation.
Consider this hypothetical situation. A multinational oil producer enters a joint venture with a Russian company to extract oil and natural gas from the former Soviet Union. The joint venture is majority owned by the multinational company. Just as the project is about to come online, the Russian authority suspends licences on the basis of alleged tax deficiencies. The problem is only resolved after the multinational cedes effective control of the joint venture to a Russian state-owned oil company.
To the extent that there is a share offering or revenue raising for the joint venture from public markets, claims might be made against the advisers – the stockbrokers, the accountants or the lawyers – depending upon what they advised the directors to say in the offering documentation about this ‘political’ risk.
The insurance position
Most professional indemnity policies have an insuring clause that indemnifies against civil liability.
In the case of internet gambling, an allegation by the US authorities that a professional firm conspired to conduct internet gambling in the US is clearly not a civil liability; however, a claim by Gamblers Anonymous that the professionals had promoted and facilitated gambling to ddicted gamblers would be just that.
Any claim by an investor that they were misled by statements in a circular or prospectus for a share offering or bond issue could also easily give rise to a civil liability.
In the refinery case, liability for death, personal injury or property damage is usually excluded under a professional indemnity policy. But the professional’s liability to the owner would not be for any of those things. It would be for failing to warn of what might happen.
Even if claims would not fall into the civil liability category, most professional indemnity policies include extensions to the insuring clauses, including in respect of defence costs in relation to investigations or inquiries. If a professional firm racks up tens of thousands or even hundreds of thousands of pounds in fending off an investigation, one can foresee that fairly strenuous efforts would be made to recover them from insurers.
It is by no means certain that a claim for investigation costs is covered. But equally there is wriggle room.
All things considered, professionals have more to fear from unexpected happenings of the type mentioned than from their professional indemnity insurers. Given the rise of e-commerce and the continued existence of governments with protectionist agendas, the prospect of unusual claims increases.
•Matt Andrews is a partner at Kennedys