20200419 All that glisters is not silver - Rihan v Ernst and Young

20200419 All that glisters is not silver - Rihan v Ernst and Young

Nigel Morris-Cotterill

In one of the worst kept secrets of recent times, the case of Rihan v EY Global and others has reached its first major milestone - a formal hearing before the English High Court. It's all about money laundering, skulduggery and all that sexy stuff. But that's just froth. The real meat of the Order comes in the far less seductive part of the case - the choice of venue and corporate responsibility for downstream malfeasance.

The full judgment (https://www.judiciary.uk/wp-content/uploads/2020/04/Rihan-v.-EY-Global-L...) is a very long, mostly well written romp through some complex evidence. It's got money laundering (including gold dressed up as silver to evade export controls), allegations of connivance between a Big Four branded outfit (Ernst and Young or EY, terms which seem to be used interchangeably even though they may represent different corporate identities) and a regulator, the possible (it's not clear) cover-up of suspected money laundering, damage to the reputation of an entire jurisdiction, bullying and, even, threats. It wouldn't take much editing to turn it into one of those stories that fill the pages of popular books about money laundering, so good a job has Kerr, J done.

Not that his will be the last words: a judgment in the High Court has a long way to run before a final decision and although there is general glee in the media about the award, it's not even certain that the headline figure being quoted is what Kerr, J will in fact order.

"I propose to give judgment for the claimant on the negligence claim in the sum of $10,843,941in US dollars and £117,950in pounds sterling. The judgment sums are subject to adjustment (upwards or downwards) to take account of the likely incidence of tax, on which, unless the figure is agreed,I will invite further submissions when dealing with consequential matters."

The facts are long and I do not need to go into them here. The judgment is clear and readers can follow it as easily as if I were to recite it here. It's not even a particularly interesting money laundering case: it is alleged that a company coated gold bars with silver and transported them across a border, the purpose of the scheme being to export in breach of restrictions placed by a government. It's the story of an auditor who spotted that a company was importing silver but selling gold and reported it. Again, there is nothing particularly interesting about that. He wasn't a whistle-blower, he was simply an auditor doing an auditor's job.

Where it does get interesting is that far from thanking him for a job well done, his employer, one or more of the the Dubai "affiliates" of the Big Four accounting and consulting group known variously as EY and/or Ernst and Young decided that they did not want this to come to light and so they pressured him to keep it quiet. He didn't. He and his family flew to London and lived there or nearby in fear for their safety. EY Dubai, as we will call them collectively, later insisted that he return to Dubai which he was unwilling to do. He resigned, made his story public and claimed damages.

There were at least half-a-dozen potential targets for his litigation but Rihan chose to go after the companies at the head of the Group. This brings us to the one core point that must not be missed: how this case came to be heard in an English Court when none of the action took place within the jurisdiction of the Courts.

So, the first thing to realise is that this case is not about money laundering, smuggling gold or connivance per se. At its heart, it's an employment dispute framed in tort not contract.

The central question is this: who is liable in respect of actions taken under a contract of employment? And how does a contract between a company and an individual in Dubai come to be heard in London? Equally, importantly, how does EY Group find itself in litigation in relation to a contract to which it was not a party?

The jurisdictional point was argued on several bases but the Court found that liability falls where command and control resides and that, because of the various interlocking agreements between the UK companies that head the EY network and the local companies made (in effect) the UK companies vicariously liable for the actions of its affiliates despite there being no common ownership.

Rihan has adopted a high-risk strategy. He wanted the case heard in London not in the UAE. All of those things that the case is not about would inevitably be raised in evidence and, as at least part of that involved allegations of impropriety on behalf of a regulator and some well connected people. His case had no relevance to the financial freezone, the Dubai International Finance Centre which has its own legal system which is a near clone of that in England and Wales, including its judges. If his case were brought in the UAE, it would be conducted under the legal system in the Emirates. That he did not want.

I direct your attention to the paragraphs in the judgment starting at 30.

The following extracts go to the nub of the argument:

30. The four defendants are all LLPs or limited companies forming part of the EY network. All four are based in the UK.

31. There was much debate over whether the acts of which the claimant complains were done by, or on behalf of, any of the defendants. They say it was not they but other entities, principally EY MENA and EY Dubai, that did the relevant acts.

32. The legal structures governing the relationship between entities in the EY organisation are derived from a series of inter-locking written agreements. Local country based EY entities often, as in the Middle East, have to be locally owned and not in foreign ownership.They are, however, members of EY Global and their geographical area through joining agreements.Under the joining agreements, they agree to submit to the disciplines of the EY organisation.

33. They agree to abide by the regulations of EY Global, as amended, and to incorporate them into their constitutional documents.There are duties of cooperation, including provision of information and access to information, duties to transfer intellectual property rights as far as possible to EY Global, share knowledge and comply with global objectives. Under the regulations, breaches of discipline by member firms can be visited with sanctions following investigation by the Global Executive, the highest executive body in the EY organisation.Termination of membership is possible and may require a payment by the departing firm to cover losses.

34. Local firms do their own client invoicing locally for their work but there are requirements to pay for services provided to the member firm for services provided from elsewhere within the EY organisation.Services to member firms are provided under separate agreements.

35. Under the regulations binding member firms,EY Global is the coordinating body. Member firms must promote global objectives, namely the promotion by member firms of seamless consistent high quality client service worldwide; promotion of the EY brand and promotion of effectiveness at area and global level within the EY network. The objectives of that network are defined in similar fashion and include the implementation of and consistent performance and execution pursuant to global strategies and plans.

36. Member firms are obliged to do all they reasonably can to implement decisions or determinations of the Global Executive or any Global Executive member acting within the scope of his or her authority.In the present case, the relevant Global Executive member directly responsible for dealing with the issues raised by the claimant in relation to the Kaloti audit was Mr Mark Otty, the managing partner of EY EMEIA, who gave evidence at the trial.

There are more paragraphs which serve to emphasise that the command and control structure, regardless of legal ownership of local entities carrying the brand, was centred - albeit not always directly - in London.

It is relevant to note that at paragraph 61, there is evidence of what appears to be a fraud on the UAE immigration authorities, a matter which the English court has not made much of. Here, however, it is argued that, on that single point, there is room to question the integrity of EY.

Moving on: In the judgment, starting at para 111, the extent of the integration of the entire EY group above that of Dubai is laid bare. The circumstances are that Rihan's report had, not to put too fine a point on it, caused a stink. Its implications were significant in both economic and political terms - money and reputations were at stake and the players made even the most powerful at EY look small in comparison. The matter was sufficiently serious for a stream of senior EY executives to become involved with much flying about done, at least part of which was due to the report. Efforts were made to change it, to delay it, to revise its scope. The regulator first indicated that it intended to cancel audits but then, apparently concerned that this might have reputational issues, decided to redefine the applicable standards. Rahid was under immense pressure from above to accede to modifications that undermined his report. To his immense credit, he resisted all such pressure, even when his wife became afraid for the family's safety, a fear which the Judge found to be entirely reasonable and not fabricated as EY had alleged.

There are many paragraphs containing much information but the following sentence stands out "174: Mr Ali pressed Mr Climent to address the conflict minerals issue swiftly: it was “both delicate and critical” for EY’s Dubai business. This echoed Mr Murphy’s fear that EY could lose its licence to trade in Dubai.Mr Ali urged Mr Climent to see the claimant sooner than 16 July and to involve“Risk Management”. He stressed that “we need the Global firm to be fully aware of the facts and issues”."

As one reads on, another concern crops up over and over again, that of missing or lost or incomplete data: one of the largest professional firms in the world which advises on, amongst other things, data integrity and systems, declares, time and time again, that it is unable to locate, or is aware of the loss or destruction of data all relating to a relatively short period and relating to a highly contentious and potentially very damaging matter. See, for example, paragraph 197 where it says "A backup of data from Mr Mouillon’s laptop was examined for disclosure purposes but, as the defendants explained, “only a small subset of his data exists”."

And then there is this, extracted from several paragraphs starting at 222: "Mr Otty travelled to Dubai to take personal charge of the issue. He is an accountant but, as he said, he has not done an audit in 30 years. His very senior role was now one of leadership, as managing partner of EY EMEIA and the Global Executive member representing the whole of Europe, the Middle East, India and Africa.He said he was “not a note taker”. He accepted that he was bound by the IFAC Code but he had never read it. He struck me as uninterested in questions of professional ethics. Although he is still part of the EY organisation, and although he expressed confidence soon after the claimant’s later resignation that EY would sue the claimant, the laptop he was using at the time was not preserved (although an image of it was taken in relation to another matter).

There is one more matter which seems central: during the efforts to make Rihan modify or otherwise mitigate his report, which lasted several months, Otty held out the prospect that Rihan's request for a transfer from Dubai would be considered in London as a result of his own intervention, so providing an undeniable link between Rihan and the London group.

The entire story is fascinating and reads better than much fiction. One day, it will make a fine film in the style of those that sought to convey the circumstances in some banks, etc. around the time of the global financial crisis but here no story needs to be made up - it's all set out in the judgment.

The Judge made a very detailed analysis of the law and concluded that EY's group operations owed a duty of care to Rihad whether he was an employee "or quasi-employee." That's a positive finding in tort, not in contract.

At paragraph 622 it says "Aside from the statutory regime of employment law and the jurisdiction of employment tribunals, to which I shall return in a moment, I think the law of tort would protect an employee or quasi-employee from having their career ruined by becoming “tainted with unemployability” after being embroiled by the employer or quasi-employer in unethical conduct and forced to dissociate themselves from the wrongful activity." That approach would have been welcomed by those who found themselves in a similar position after the collapse of BCCI and, to a lesser extent, Barings.

And so the actual importance of the case is that EY Group were not able to distance themselves from the conduct of their associate in Dubai because of the command and control structure that exists on paper and, demonstrably, in real human terms within the organisation with direct day to day, sometimes hour by hour, involvement of senior members of the group in various countries all trying to bring pressure to bear on an auditor who wanted to report something shady.

In short - and bearing in mind that this is a civil case, not a criminal prosecution - what this case shows is that corporate responsibility flows in the opposite direction to command and control. To put it somewhat more basically, if you act like the boss, you get treated like the boss - even if you think you've insulated yourself with circuit breakers in the form of lack of common ownership.

There is little doubt that EY will appeal both as to the decision and as to quantum. Rahid is unlikely to see any of the money for some time.

EY tried many lines of defence which this author considers downright despicable but none more than to try to allege that there was an absolute breach of confidentiality and that Rihan's claims should be nullified on that basis if no other.

I leave you with this paragraph from Kerr, J

"683. I do not thereby understate the importance of confidentiality. An audit client not involved in money laundering or other criminal activity must be able to trust the auditor with its commercial and other secrets, just as in the legal sphere a client must be able to trust his or her solicitor. But the solicitor’s obligation of confidence is not absolute; it may have to yield to more weighty obligations to disclose possible criminal activity such as terrorist financing or money laundering."