ENRC – A corruption investigation and an avalanche of litigation

3 March, 2023 | 15 minute read

Court documents

Dispute over the disclosure of documents from ENRC’s internal investigation:

ENRC’s claims for damages from Dechert, Neil Gerrard and the SFO:

ENRC’s claim for damages from the SFO in respect of alleged leaks to journalists: 

  • Skeletons from pre-trial review in November 2022

ENRC’s libel claim related to Kleptopia:

The SFO’s prosecution of Anna Machkevitch for failing to comply with request for documents:  

  • R v Anna Machkevitch

ENRC’s claim for damages against Mark Hollingsworth (settled) 

  • ENRC Ltd v Mark Hollingsworth 

Summary

In April 2013, the Serious Fraud Office (SFO) announced it was conducting a criminal investigation into allegations of bribery, corruption and fraud by Eurasian Natural Resources Corporation Ltd (ENRC), a multibillion-dollar mining business founded by three ex-Soviet oligarchs in 1994. The SFO said that its investigation would focus on “fraud, bribery and corruption relating to the activities” of the former FTSE 100 mining conglomerate or its subsidiaries in Kazakhstan and Africa.

Ever since its listing on the London Stock Exchange in 2007, ENRC has been dogged by controversy with boardroom rifts, troubled investment deals, and mounting corruption allegations. In 2011, ENRC hired Dechert LLP to conduct an internal fact-finding investigation into whistleblower allegations of bribery and financial wrongdoing at its Kazakh subsidiary. Kept on retainer with an expanding scope of work, Dechert made several presentations to the SFO on its findings until ENRC fired the US law firm in March 2013.

The communications between Dechert, acting primarily through its then partner Neil Gerrard, and the SFO have been the subject of long-running litigation that appeared to stall the criminal investigation into the Kazakh mining company. ENRC has not only denied all allegations of corruption, but gone on the offensive – including by suing its former lawyers for breach of contract and the SFO for misfeasance in public office.

In May 2022, the High Court delivered its damning verdict on the conduct of Dechert, and Gerrard in particular. The judge found that Gerrard recklessly breached his professional duties by making unauthorised disclosures to the SFO, leaking confidential information to the press, and acting plainly against the interests of ENRC. While Gerrard played the “leading role” as “instigator” of the misconduct, the judge found the SFO showed “bad faith opportunism” in accepting these unauthorised disclosures. A further trial in March 2023 was held to determine what losses, if any, were caused by the SFO’s conduct, and judgment is expected in late 2023. Most significantly, the court cleared the SFO of misfeasance in public office and declined to grant key demands sought by ENRC relating to the agency’s handling of its investigation.

In August 2023, the SFO announced that following the latest review of its investigation, the agency concluded that it had “insufficient admissible evidence to prosecute” and closed the case. Yet a decade since the SFO launched its investigation into ENRC, the civil litigation which has long diverted scarce public resources from the fight against economic crime remains ongoing.

Why does this case matter?

  • The case concerned long-standing and serious allegations of corruption by a former FTSE 100 company that remained unresolved for 10 years while the SFO undertook its official investigation. The allegations which prompted the investigation were not limited to isolated deals or single sources, but reflected concerns about ENRC’s operations in both Kazakhstan and Africa which have been raised by a wide range of people – from whistleblowers and campaigners, to parliamentarians and investors. Yet the SFO’s blockbuster investigation appears to have stalled during the proliferation of litigation and ultimately the case was closed, with the result that the corruption allegations against the company have not been answered by a court.
  • ENRC’s controversial listing and poor performance on the London Stock Exchange expose weaknesses in the regulatory and supervisory framework for public listed companies. It is highly problematic that, at the time of listing, the company’s founders were still under investigation for money laundering in Belgium. ENRC’s use of opaque shell companies and middlemen to strike business deals was at odds with the transparency that should be demanded from a public listed company. Despite widespread concern about these business practices and ongoing boardroom turmoil, the financial services regulator lacked power or otherwise failed to investigate corporate governance standards at the company.
  • The proliferation of lawsuits initiated by ENRC has prompted concerns that the multibillion-dollar company is adopting aggressive legal tactics to close down scrutiny of its allegedly corrupt practices. This has forced the SFO to invest scarce public resources in defending its handling of the investigation into ENRC, diverting resources and staff time away from the work of fighting economic crime. This has a chilling effect on law enforcement agencies tasked with going toe-to-toe with multinational companies, and provides a playbook that can be followed by others who may wish to close down scrutiny and stall enforcement actions.

The global context

ENRC was set up in 1994 by a “trio” of ex-Soviet business partners – Alexander Machkevitch, Patokh Chodiev and Alijan Ibragimov (d. 2021). In addition to its major operations in Kazakhstan, the company built up extensive interests in the Democratic Republic of Congo (DRC), Zambia, Zimbabwe, South Africa, Mozambique and Mali.

In 2007, the Kazakh-based mining conglomerate was allowed to sell some of its shares on the London Stock Exchange despite pending charges of money laundering in Belgium against the three billionaire shareholders, who jointly owned almost 45% of the company. In June 2011, the trio paid an undisclosed fine to settle these Belgian charges without an admission of guilt.

The resolution of these charges coincided with a crisis in corporate governance as the oligarchs exerted increasing influence over decisions without having formal roles on the board. This culminated in a boardroom coup that saw the trio, backed by the Kazakh government, oust two independent directors – the first time in a decade that a FTSE 100 director has been voted off the board at an annual meeting. One departing director described the outsized influence of the oligarch shareholders as “more Soviet than City”. 

ENRC’s share prices slumped further as corruption concerns grew. Its controversial 2010 bid to buy a disputed copper project in the DRC caused disquiet among investors, with ENRC subsequently paying $1.25 billion to settle its claim to assets that the Congolese government had stripped from the London-listed First Quantum. The company’s rapid acquisition of substantial mining assets in the DRC prompted scrutiny from both anti-corruption campaigners and British MPs about the FTSE 100 miner’s reliance on offshore shell companies in deals that appear to have delivered vastly inflated profits to middlemen at the expense of the local population. In June 2012, Global Witness wrote to ENRC shareholders expressing serious concerns about the corruption risks in five deals struck by ENRC with the assistance of Dan Gertler, an Israeli businessman and close friend of the then Congolese President Joseph Kabila.

At the same time, the company was faced with whistleblower allegations about suspicious payments totalling $100 million at its Kazakh subsidiary, SSGPO. ENRC instructed Dechert to get to the bottom of these allegations, but this internal investigation soon expanded from alleged Kazakh kickbacks to its African operations — principally its acquisition of Camec, Camrose and Chambishi. 

Major cracks opened up within the company as this investigation progressed. Mehmet Dalman, the chairman of ENRC tasked with leading the investigation, quit after reportedly reaching a “pressure point” over “issues of principle” with senior executives at the company. News of his resignation came only a day before the SFO announced its official investigation in April 2013, and followed a string of high-profile departures from the company.

In November 2013, ENRC went private again after three years of declining share prices, including being the worst performer in the FTSE 100 in 2012. It finished public trading with share prices having fallen 85% from their peak worth. The oligarch founders reportedly felt they had been “mugged by the City”, having spent millions on lawyers and bankers to meet London compliance standards only to see their shares plummet. Yet the trio retained strong ties to the UK through significant business interests and high-end property in London. 

UK court proceedings

Before the SFO officially announced its own investigation into ENRC, Dechert provided regular updates to the agency on its internal inquiry. This included handing over a detailed report with its Kazakh findings, although the law firm’s Africa investigation was still ongoing when its retainer was terminated by ENRC in March 2013. By this point, Dechert’s total legal bill stood at £13 million excluding VAT.

ENRC was unable to keep a lid on its ongoing investigations. Shortly after initiating the internal inquiry in 2011, confidential information was leaked to the press revealing that ENRC had hired outside investigators and that the corruption allegations had attracted the SFO’s attention. Days before Dechert was fired in March 2013, the suspicions raised in the firm’s presentation to the SFO made headlines. In June 2013, a brown envelope containing confidential and privileged material was sent anonymously to the SFO’s senior prosecutor.

A proliferation of lawsuits

ENRC has consistently denied all allegations of corruption. The company has also gone on the offensive by launching a substantial number of lawsuits challenging not just the allegations themselves but also the conduct of those who have investigated the company. Since the SFO began its criminal investigation, ENRC has initiated at least 16 legal proceedings in the US and UK against journalists, lawyers, investigators, contractors, a former SFO official and the SFO itself. ENRC has reportedly spent $397 million on litigation and related expenses since 2014, and more than $86 million in the 2020/21 financial year alone – more than the SFO’s entire operational budget.

Together with 20 other human rights, freedom of expression and anti-corruption organisations, Spotlight has voiced concern that these aggressive legal tactics appear to be aimed at discouraging scrutiny of ENRC and undermining investigations into alleged wrongdoing by the company. This wave of well-resourced litigation has had a chilling effect on reporting about the company and has consumed significant staff time and funding of the SFO. 

ENRC claims legal privilege over internal investigation documents

In March 2013, the SFO gave Neil Gerrard notice that it was determining whether to start an investigation into corruption offences by ENRC and called for the company to produce documents relevant to that determination. In response, ENRC claimed legal professional privilege over certain documents generated by its solicitors and forensic accountants during their internal investigations. The SFO approached the court for a declaration that these materials were not protected by privilege and should be released.

Although the SFO was initially successful in the High Court, the Court of Appeal ruled in 2018 that ENRC did not have to disclose these internal documents to the SFO. Commenting on the dynamic between the parties, the court said that “the whole sub-text of the relationship between ENRC and the SFO was the possibility, if not the likelihood, of prosecution if the self-reporting process did not result in a civil settlement”. This meant that the core materials from ENRC’s internal investigations were legally privileged because they were produced “for the dominant purpose of resisting or avoiding contemplated criminal proceedings against ENRC or its subsidiaries or their employees”.

ENRC sues the SFO for misfeasance in public office

In addition to claiming privilege over these documents, ENRC has taken action against both its own lawyers and the SFO for communications that took place while internal investigations at the company were underway. Between October 2011 and March 2013, there were 8 formal meetings between the agency and ENRC representatives (at which Neil Gerrard was always present), and 30 so-called “disputed contacts” between Neil Gerrard and SFO officials. These disputed contacts formed the core of ENRC’s claims for damages against Dechert, Gerrard and the SFO which were consolidated and heard together in an explosive trial in the summer of 2021.  

The High Court’s ruling, delivered in May 2022, was an unequivocal loss for Dechert and a “devastating” blow to Gerrard. The near 400-page judgment found that Gerrard had not only acted negligently but also in reckless disregard of his duties as ENRC’s lawyer. He was identified as the “instigator” of the “highly damaging” leaks to the press as well as of the disputed contacts with the SFO, which were held to be unauthorised and a “gross betrayal of his own client”. Described by the court as “obsessed with making money”, Gerrard was found to have been motivated primarily by the financial rewards of an increased scope of work that would likely follow from the SFO’s involvement. The court subsequently sent its judgment to the Solicitors’ Regulation Authority, who have received a number of further complaints relating to Gerrard’s conduct of other cases.

The outcome was more mixed for the SFO. On the one hand, the judgment is highly critical of the institutional culture that prevailed under the leadership of Richard Alderman, finding it was conducive to the kind of line-crossing that occurred in its engagements with Gerrard. The court found that in 15 out of the 30 disputed contacts, SFO officials acted in breach of their own duties by being a “willing audience” to “bank” information that was clearly unauthorised and against ENRC’s interests. In doing so, the SFO may have induced Gerrard to breach his professional duties although the court’s decision pending a further trial that was held in March 2023 will determine whether this caused ENRC to suffer any financial loss. ENRC seeks up to £41 million in damages from Dechert and the SFO.

On the other hand, the court rejected all the other allegations advanced by ENRC against the SFO, including the claim the agency had committed “misfeasance in public office”. The result was that the court declined to grant any of the key demands sought by ENRC at this stage. Seen in this light, the outcome was a welcome breakthrough for the SFO although the future of the agency’s investigation into ENRC remained uncertain.

ENRC sues the SFO – again

The SFO faces further litigation brought by ENRC for alleged “covert briefings” given by agency officials to journalists. In a trial scheduled to take place in 2024, ENRC will again argue that the SFO is guilty of misfeasance in public office and that SFO officials conspired to harm ENRC. The mining giant is also suing two SFO officials in relation to the “leaks”: John Gibson, the former case controller in charge of the ENRC investigation, and Tony Puddick, a senior investigator who was suspended by the SFO for two years pending an internal inquiry which cleared him to return to duty.

Challenging Kleptopia

Tom Burgis is one of the journalists who allegedly received leaked information about the SFO’s investigation into ENRC, including through a secret meeting with John Gibson in an underground car park. As a Financial Times reporter, Burgis has written extensively about ENRC, including raising questions about the suspicious deaths of potential witnesses in the SFO’s ongoing investigation. 

Released in 2020, Burgis’ international bestseller Kleptopia subjected the mining giant to further scrutiny as part of his extensive investigations into global networks of corruption and the rise of kleptocracy. This prompted ENRC to bring a libel suit against Burgis and the publishing house HarperCollins, arguing that Kleptopia would lead readers to understand that ENRC ordered the murder of three men to protect its corrupt business interests. In March 2022, the High Court threw out the libel claim and ENRC subsequently dropped related libel suits based on Burgis’ Financial Times articles.

Daughter of ENRC co-founder prosecuted for failing to comply with the SFO

Only one minor enforcement action was taken in relation to the SFO’s investigation of ENRC. In January 2020, a court held that Anna Machkevitch, the daughter of one of ENRC’s founders, had unlawfully refused to supply the SFO with all the documents requested by the agency. Although Machkevitch, who was not a suspect in the investigation, argued she was being “singled out” for an “ulterior purpose”, the court dismissed her attempt to halt the prosecution and instead upheld the SFO’s claim that she had wilfully obstructed the agency’s investigation by failing to comply with its demand to reveal the documents.

Giving voice to the victims of corruption

One of the biggest challenges presented by any company with truly global reach is how to begin identifying, cataloguing, and pursuing justice for the people who suffer harm at their hands. Kleptopia focuses on the population of a Kazakh mining town called Zhanaozen, many of whom were beaten, imprisoned and even killed for having taken part in protests against working conditions in their town. In 2020, RAID identified around 32,000 Congolese residents and 700 former workers of an ENRC-owned copper mine as possible victims of corrupt practices which allegedly left their communities rife with pollution and illness, and deprived them of educational opportunities and clean drinking water.

These are two clearly documented examples. The victims of corruption globally can seem uncountable, but it is vital when picking apart allegedly corrupt practices that we do not lose sight of the individual lives which are left routinely devastated. Recognition of the immense harm which has been caused to them must be the first step, as without that we cannot ensure that they are compensated.

The closure of the SFO’s investigation

In August 2023, the SFO announced that it had decided to close its investigation into ENRC. In reaching its decision based on the Code for Crown Prosecutors, the agency did not comment on whether a prosecution would be in the public interest but instead concluded that it had “insufficient admissible evidence” to prosecute.

The SFO’s decision to drop a decade-long investigation has raised concerns about the impact that the parallel civil litigation may have had on the agency’s assessment of the evidence that would be admissible in any potential prosecution as well as the effect that the likely defence case would have on the prospects of conviction.

While there has been no shortage of litigation related to SFO’s investigation, none of these cases has yielded an answer to the underlying allegations of corruption that were levelled against ENRC. With the SFO’s investigation now closed, the merits of these allegations will remain untested in a court.

The Serious Fraud Office (SFO) closed its 10-year investigation into ENRC in August 2023.

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