Corruption investigations in Kuwait and increasing actions against D&Os

Introduction

The last two years have seen an increase in regulatory and state-backed investigations into domestic Kuwaiti and international businesses operating in Kuwait.

This article examines the regulatory developments taking place in Kuwait and their relevance to D&O Insurers writing risks in the jurisdiction. 

Notable Regulatory and Legal Developments

The Kuwaiti Anti-Corruption Authority (Nazaha) was established pursuant to Law No 2 of 2016.  Nazaha is an independent body and has been active since its inception in reviewing hundreds of cases and referring matters to the Public Prosecution.

In 2020, Nazaha announced that it had reviewed over 300 cases and referred over 40 matters to the Public Prosecution to pursue criminal action.

Nazaha has also issued several public statements about the referrals that it has made. For example, in February 2021, Nazaha referred 57 executive officials in the Kuwait Municipality to the Public Prosecution. In June 2021, Nazaha announced the referral of the chairman of the board of directors of a sports club and others to the Public Prosecution on charges of committing the crime of facilitating the theft of public money and began investigating a corruption case which involved 37 government agencies. Nazaha has made clear that its efforts form part of a broader national strategy to crack down on corruption and criminal wrongdoing in Kuwait

The establishment of a dedicated anti-corruption agency in Kuwait was motivated by several factors.  There was concern, as expressed by Transparency International’s corruption perception index in 2020 and 2021, about the extent to which corruption was perceived as a concern within the  public sector. In 2021, Kuwait ranked 73 out of 180 countries in the index (an average rating but one which represents an improvement from the 2020 index). More generally, the Kuwaiti government is focused on improving domestic market conditions to attract foreign investment.  Reducing corruption is seen as a key driver in the government’s aim to  diversify Kuwait’s economy, reduce dependency on oil, and lessen exposure to global volatility.

The government has taken other steps to open up the economy and to remove protectionist barriers that previously existed. An example of this is the implementation of the Commercial Agencies Law No. 13 of 2016, which liberalised the import of products. A distributor or agent cannot now claim exclusivity which could see it subject to an investigation by  the Competition Protection Agency (an active regulator in Kuwait). 

These reforms have been broadly hailed as a means to make Kuwait an attractive place to do business for Kuwaitis and foreign investors alike. 

The impact of these developments on the D&O market

As government agencies and regulators become more active in investigating wrongdoing, there is likely to be an increase in exposure for D&Os in Kuwait, both within state-owned entities and the private sector.

This in turn may lead to increased risk for D&O Insurers who cover entities with operations in Kuwait.

There is already evidence of an increase in investigations relating to a range of allegations, including unauthorised transactions with connected parties; the failure by D&Os to follow a company’s set procedures in order to achieve a benefit for him/herself; and inappropriate activities connected with procurement and vendor processes. Investigators require the attendance of senior management individuals at convened hearings to discuss their knowledge of events, even if no allegations are made against that individual.

In these scenarios, D&O insurers may be impacted where their policies are triggered and they have agreed in the insurance wording to advance defence costs pending a judgment or adjudication which establishes dishonest or criminal conduct. Once such a judgment or adjudication has been passed, this should allow Insurers to apply an exclusion (commonly known as a “conduct exclusion”) for future loss.  

Furthermore, D&O Insurers may find that they have to cover defence costs of individuals called by investigators for questioning who have no involvement in alleged wrongdoing and who are called as mere witnesses of fact.

Finally, some D&O insurance wordings require a “final” or “non-appealable” judgment or adjudication, as opposed to “any” judgment or adjudication to allow Insurers to apply the conduct exclusion. The effect of this may be that D&O Insurers are obliged to pay defence costs for a number of years before the conduct exclusion can be triggered. 

Whenever a D&O notification relates to an investigation of dishonest or criminal activity, D&O insurers need to look carefully at the declarations that were made during the underwriting and proposal process, as well as the knowledge of the entity and the relevant D&O in the run up to and at the time the policy was bound.