Allegations against Chelsea: Legal Considerations

A contribution article from a Trainee Lawyer

This is a contribution article by a Trainee Lawyer and member of this community, Lewis.

Whether it’s a transfer ban, an FFP scare, Government sanctions, or being frozen, it is fair to say that no club attracts chaos quite like Chelsea. Given the madness of recent times, it was of little surprise to see yet more drama emerge in recent news. This time it was courtesy of The Guardian who, together with the Bureau of Investigative Journalism, have cast fresh doubt over Chelsea’s financial operations. Fuelled by a body of leaked documents known as the “Cyprus Confidential files”, it is alleged that a series of payments were made by offshore entities connected to Roman Abramovich for Chelsea’s benefit in the commission of various high-profile acquisitions including those for Eden Hazard, Antonio Conte, and Willian. These payments, it is suggested, may not have been declared to the relevant footballing authorities, raising the prospect of deliberate breaches of various financial regulations.

The news emerged against the backdrop of major shockwaves further north, as Everton were slapped with a points deduction for breaches of their own, indicating the beginning of a crackdown by the Premier League (“PL”) amidst talk of an independent regulator. When one factors in the litany of charges levelled against Manchester City earlier this year, it’s hard to escape the feeling that the PL might be ushering in a regulatory crisis of its own making, having spent the past two decades permitting all manner of ownerships and turning a blind eye to the consequences. Now that Everton have been hunted down and hung out to dry, the onus is on the PL to apply the same vigour to policing its other 19 members. It is going to be very interesting, if not rather concerning, to see what other scandalous revelations crawl out of the woodwork in the coming months.

The difficulty of all of this for ordinary fans is that the scope of their allegiance can no longer be limited to watching football. To keep up developments, fans are now expected to be chartered accountants, qualified lawyers, and the rest. This is of course unfeasible, and the inevitable result is a culture of misinformation and scaremongering. The impetus of this article is to cut through some of the noise and, drawing on my training in commercial litigation, provide you with a broad-brush legal analysis of the allegations against Chelsea, and how any charges, if brought by the PL, might pan out. Before we get started though, and at risk of sounding too officious, I must state that this article is not to be interpreted as formal legal advice, and the views expressed are entirely my own personal opinions, and not those of my employer.

Relevant Rules

The allegations could, if proven, constitute a breach of the Premier League’s Profit and Sustainability Rules (“PSR”), contained at rules E.47-52 of its handbook (“Handbook”). The basic premise of the PSR is that clubs must spend within their means. It operates on a cyclical basis; clubs are assessed according to their financial accounts in a rolling three-year period (being the estimate for the current year, and the actual figures for the two years before that). If those accounts show that the club has operated at a loss in that period, it is required to submit its “PSR calculation”. There are certain costs that are excluded from this calculation, such as women’s and youth development football expenditure, but the bottom line is that clubs must not exceed a loss of £105m in the relevant three-year period. Where that threshold is breached, the PL shall refer the matter to a Commission. Accordingly, if Chelsea have made undeclared payments that, if properly disclosed, would have caused the club to breach the £105m threshold, that could result in the matter being referred to a Commission.

Clubs are also under a general duty to act in the utmost good faith, which prohibits acts of dishonesty towards the PL, as well as conduct intended to circumvent the rules. There are also requirements around the submission of accurate financial accounts, and payments made to agents. Given the nature of the allegations, these rules might be applicable.

Certain FA rules may also be relevant, but those rules and any investigation being conducted by the FA are beyond the scope of this article.

Preliminary Considerations

Time-bar

Those who followed the City v UEFA case will recall that City were, to some extent, saved by UEFA’s 5 year statute of limitations i.e. time-bar. This prevented UEFA from considering the legitimacy of transactions that occurred more than 5 years before charges were brought. The PL, however, are bound by no such restrictions and can scan back as far as they like. The current allegations against Chelsea – dated from around 2012 onwards – are therefore within the PL’s remit.

UEFA Settlement

There have been some suggestions that the latest allegations are linked to the £8.6m settlement that Chelsea reached with UEFA over the summer. That settlement was in relation to “incomplete financial reporting”, with the present owners having reportedly held back £100m from the purchase price to cover such liabilities when buying the club. It is not clear the extent to which the financial irregularities discovered and reported to UEFA overlap with those that have been released recently in the press, but a recent statement from a club spokesman did clarify that the latest allegations “are based on documents which the club has not been shown” suggesting there may be no direct connection between the present leaks and those inconsistencies that were previously self-reported to UEFA. We must also bear in mind that, given the time-bar that UEFA are constrained by, and the date range of the present allegations, any sanction imposed by UEFA has inherently limited application to the latest developments. Separately, one cannot rule out the ominous prospect of UEFA reopening its case against Chelsea, should it become aware of any evidence of wrongdoing that falls within its statute of limitations.

The Parties

An interesting quirk is that any proceedings would be brought against Chelsea as an entity, yet the underlying allegations relate entirely to the club’s previous regime. This much was clarified in the statement referred to above, which confirmed that the present allegations “pre-date the club’s current ownership”. This leaves Chelsea’s management in the unenviable position of answering to allegations to which they have no knowledge, nor documentation, raising the question of what, if any, positive defence the club can advance. In the circumstances it seems possible that the current regime intends to admit any charges at the outset and rely on mitigating factors (see below), rather than embark down a path of defending matters to which they have no knowledge. But that strategy might need a rethink in the wake of the Everton decision and, on the assumption that it does, it’s worth considering some of the issues around evidence, should charges crystallise.

Evidence

Admissibility

In any case where evidence is obtained via “leaks”, the admissibility of that evidence in proceedings can be called into question. As some may recall, the evidence levelled by UEFA against City was famously procured by Portuguese hacker, Rui Pinto. This led City to argue that it was illegally obtained and thus not admissible at CAS – an argument that failed due to there being an overriding interest in finding the truth, despite UEFA having stringent rules regarding the origins and admissibility of evidence. The PL’s Handbook, on the other hand, makes clear that all documentary evidence is admissible provided it is relevant and submitted in sufficient time ahead of any hearing. To the extent that the evidence being cited against Chelsea is illegally obtained, the relevant rules would not, therefore, prevent the PL from relying on that evidence in any proceedings against the club. However, that would not necessarily prevent Chelsea from running it as a preliminary argument, particularly if there is a lack of credibility to the evidence.

Expert Evidence

Financial cases of this ilk are often ripe for the use of expert evidence, and the Commission’s powers to call such evidence is contained at W.38.4 of the Handbook. The PL would bear the burden of proving, on the balance of probabilities, that these transactions represent breaches of the PSR. That might require proof that the transactions were in effect made by the club, as part of the club’s footballing operations, for the club’s sporting benefit, and should have been formally declared as part of its PSR calculation. That is no simple task when one is untangling a web of international bank transfers between offshore entities hidden in opaque and multi-jurisdictional corporate structures through a body of leaked evidence, not least when that evidence relates primarily to an extremely private, careful, and shrewd oligarch. It might necessitate the use of expert, forensic evidence to establish a solid paper trail; but any holes that can be poked in that trail could be fatal to the PL’s case.

Witness Evidence

The club would most likely be at liberty to rely on witness evidence from persons involved in, or connected to, the transactions in question. The Commission can direct the parties to lodge and exchange witness statements, and for witnesses to appear at a hearing. However, there are several variables to consider. The prospect of extracting testimony from Roman Abramovich or his associates is uncertain, and fear of retribution may ultimately deter implicated parties from volunteering information – but that’s only assuming there has been any wrongdoing. However, whether the club would even seek to rely on any such evidence is itself unknown, given early indications might suggest the strategy is geared towards distancing itself from the previous regime and cooperating with the authorities.

Yet, if there are plausible explanations to these allegations, one would ordinarily expect those to be forthcoming. Implicated persons might also be wary of Chelsea pursuing compensational proceedings against them in the event of sanctions being imposed, and might therefore consider it in their interests to assist the club in obtaining a favourable outcome in the first instance. One must also bear in mind that the scope of these allegations is broad, and their nature damning. Several high-profile individuals have been publicly implicated in accusations of deceit and dishonesty. Those individuals – if innocent of any wrongdoing – might be concerned to clear their names and protect their reputations in the game (and perhaps even consider defamation claims against the press). It must also be said that declining to call any witnesses might impair any defence, both from an optical and legal perspective.

The aim of any witness evidence would be to offer legitimate explanations to allegedly illicit dealings. Where documentary evidence is open to interpretation, witness testimony can be vital in helping a Court (or Commission) to fill in the gaps, or understand the context and motives behind a transaction, in a way that a set of financial documents taken in isolation cannot. One must remember that the alleged payments are not automatically illegal. Where, for instance, they have been properly declared, that might be perfectly legitimate – and witness evidence is the vehicle through which that legitimacy might be conveyed. Some might recall, for example, that where UEFA’s evidence against City was inconclusive, City were able to rely to some extent on witness testimony to explain and, ultimately, quash the allegations. UEFA’s case in those proceedings - much like the allegations levelled at Chelsea - hinged on a piecemeal body of leaked documents that, in the end, only City could tell the story of. Only time, and the true motivations behind the allegations, will tell if there is a story to be told for Chelsea.

Disclosure

The legal process known as “disclosure” could have an important bearing on any proceedings. In a nutshell, it is where the parties are ordered to exchange the relevant documents in their possession. Its overarching purpose is to ensure a just outcome between the parties by ensuring that “all cards are on the table”. It’s a vital stage to any proceedings and the Commission would no doubt exercise its power to direct “either or both parties to produce and exchange documents”. But if the club has been blindsided by the allegations, and any payments were indeed made outside of the club’s operations, then Chelsea is unlikely to be in possession of many documents relevant to the allegations. Rather, the PL might be far more interested in the documents that Chelsea do not have. This could result in the Commission ordering third parties, namely those persons and entities implicated in the allegations, to disclose their documents. Such a process could have varied success to the extent that it is dependent on eliciting information from Roman Abramovich and associated persons/entities, although that is not to say that other persons would fail to provide their documents. Nonetheless, if the PL were to need further information to meet the burden of proof, any difficulties in obtaining it through disclosure could be significant.

Sanctions

Legal Framework

Amidst doomsday headlines predicting Championship football for Chelsea next season, let’s look at how sanctions could work. It must be stressed that every case is different and will turn on its own set of facts; just because Everton were deducted 10 points (subject to any appeal) does not mean Chelsea will receive the same sanction, or worse. It’s not even remotely clear, for instance, whether Chelsea might be in breach of the PSR, or other rules, and the comparative factual circumstances are hugely disparate. However, the Commission’s approach to sanctioning Everton will, to some extent, act as a precedent for future cases. This is how case law works; precedent is considered to ensure consistent and fair outcomes. It is therefore worth exploring the principles established in the Everton case, and how they might apply to Chelsea’s circumstances.

Unlike the EFL, the PL has no sanctioning guidelines in its Handbook. The PL did, however, recently adopt a sanctions policy, whereby the starting point for any penalty is a deduction of six points, increasing thereafter by one point for every £5m over the £105m threshold. However, the Commission determined this policy to (for now) be inconsistent with the PL’s rules on sanctioning, which are contained at W.50 and W.51 of its Handbook. These two rules permit the Commission to consider mitigating factors, and grant it a broad range of sanctioning powers, ranging from reprimands and fines to points deductions and, crucially, any “other order as it thinks fit”.

As it transpired in the Everton case, the Commission considered both aggravating factors and mitigating factors, before determining the sanction. It made clear, among other things, that:

1. All relevant information will be considered.

2. Each case is fact dependent.

3. Culpability will be increased or decreased according to the facts of each case.

4. The extent to which the £105m threshold is breached is important (if breached at all).

5. The purpose of sanctions is to punish, vindicate, deter, and uphold the integrity of the game.

6. There is no fixed formula for determining the sanction itself (although added that a financial penalty was, in Everton’s case, not sufficient for a club with a wealthy owner).

In respect of the last two points, it’s worth noting that the Commission is independent of the PL. Whether or not the PL would contemplate taking drastic measures against one of its members is, therefore, not strictly relevant, as the PL would not be responsible for determining any sanctions.

Against this framework, let’s consider the present allegations against Chelsea.

Aggravating Factors

Although strictly not considered an aggravating factor, the Commission would place great importance on the extent to which the £105m threshold is breached (assuming it has been breached at all). Everton were found to have exceeded the limit by £19.5m, which represented a less than 20% breach of the threshold. The Commission made it clear that any breach of the PSR “involves a significant overspend” and deemed Everton’s case to be “serious”. The allegations against Chelsea involve greater sums, indicating a more severe breach of the threshold. However, regardless of the value of the payments, what matters is how far, if properly disclosed in the accounts, the transactions would have led the club to breach the £105m limit. It’s possible that even if the transactions were disclosed and incorporated into the PSR calculation, that the threshold would still not have been exceeded (although that would not relieve Chelsea of breaching other rules, such as the submission of accurate financial accounts).

The real elephant in the room is dishonesty which, if proven, might significantly increase Chelsea’s culpability. It’s noteworthy that the sanctions against Everton were aggravated by the club being “less than frank”, despite the Commission making no finding of deceit. It seems, therefore, that if Chelsea are found to have deliberately circumvented the rules for the club’s gain, that might weigh heavily on the sanctions imposed. It is hard to speculate further on the limited facts to hand, but it’s likely that the number and frequency of any breaches – if damning - would also be held to aggravate the charges.

Mitigating Factors

Chelsea would, however, seek to rely on certain factors to mitigate the severity of any sanctions. Notwithstanding any findings of dishonesty in relation to the transactions themselves, the way in which the club have responded to discovering those transactions might work to mitigate any sanctions. As it transpires, Chelsea has “self-reported” any known irregularities to not just one, but all of the relevant footballing authorities, displaying a high degree of honesty, integrity, accountability, and co-operation.

There have been suggestions that this will count in the club’s favour. This will depend to some degree on what exactly the current ownership discovered and reported, and the extent to which that overlaps with the latest allegations, but the club can only report what it is aware of, and its actions to date might carry some weight in mitigation. Everton sought to rely on their apparent cooperation with the PL, but the Commission found that those dealings were not of a sufficiently “exceptional nature” to warrant mitigation of Everton’s culpability, largely because the club were found to have “misled” the PL. It remains to be seen whether Chelsea’s conduct could amount to that of an “exceptional nature”, but for the current ownership to act with honesty and integrity, to its own detriment, and despite bearing no responsibility for the events in question, could soften the force of any sanctions. These actions could, furthermore, demonstrate exceptional regard for the duty of utmost good faith.

Many are wondering whether Chelsea’s current ownership will avoid punishment for the actions of its predecessor. Although this might seem fair, one must remember that any charges would be brought against the club, not its owners. The fact that the club has changed hands does not constitute any grounds for mitigation. The club might, however, use it to frame a narrative, as follows:

1. The transactions are historic.

2. Key personnel connected to the previous regime were swiftly moved on by the new ownership in a bid to achieve a clean break.

3. The club has since opened a constructive dialogue with its regulators and has already reached a settlement with UEFA.

4. A culture of good practice, compliance and integrity has been implemented under the new ownership.

5. There is a positive and growing trend towards PSR compliance and good governance.

6. The new ownership has self-reported all known irregularities to its own detriment despite having no involvement in the commission of the offences.

It’s worth noting that Everton sought to rely on the impact of Covid-19 and the Russian invasion of Ukraine as mitigating factors, on the grounds that the former resulted in a depressed player-sales market, and the latter resulted in a commercial deal being abandoned, both of which it claimed caused loss to the club. However, the Commission dismissed these events as the sort of everyday turbulence that businesses are required to navigate. The inference here is that Chelsea would be unable to rely on any unexpected external factors to mitigate to force of any sanctions.

Compensation Claims

Some may have seen the news that Leeds, Nottingham Forest, Southampton, Leicester, and Burnley may now be queuing up to claim compensation from Everton for losses suffered by consequence of Everton’s breach. The relevant power is contained at Rule W.51.5 of the PL Handbook, which allows the Commission to order “the Respondent to pay compensation unlimited in amount to any Person or to any Club”. Any club claiming this compensation, however, faces the uphill battle of proving that it suffered loss because of the breach i.e. that it was relegated because Everton breached the PSR threshold (rather than any other reasons). This causal link, in any compensation claim, would be extremely difficult to establish. Given we are yet to even see charges, it is premature to be considering the possibility of such claims against Chelsea, but it is something to bear in mind given the allegations relate to transfers of players such as Eden Hazard and Willian, who were central to the club’s recent success. If compensation claims were to arise, this hypothetical merry-go-round of litigation might then be completed by Chelsea seeking to recoup its losses from the proximate cause of the loss, Roman Abramovich. Let’s hope it doesn’t come to that.

Timeframe

Fans wonder why these cases can take so long to be resolved. An answer (of sorts) can be found at paragraph 39 of the Everton judgement, which reveals that over 40,000 documents were produced in the proceedings, of which approximately 28,000 were included in the papers before the Commission. This is despite Everton’s case being, in relative terms, rather straightforward; yet it still commanded this vast volume of documents and took the best part of a year to resolve. The charges against Manchester City (which will now be the PL’s priority), are on a different scale entirely and have now been scheduled for trial next Autumn, with a verdict likely to be handed down at the end of next season and a possible appeal to follow. It remains to be seen how protracted any proceedings involving Chelsea could be, but it would be remiss to expect a swift conclusion.

Conclusion

Given the number of variables at play, and the limited amount of information in the public domain, I do not propose to predict the outcome of these allegations. The fact remains that no charges have been brought and until there has, there remains every chance that none will be. Even assuming that there is substance to the allegations, much will hinge on the advice the club receives and the strategy it chooses to adopt. Early indications would suggest that Chelsea might look to front up, cooperate, admit any breaches, and rely on its conduct to mitigate the severity of any sanctions. However, the viability of that strategy is now uncertain in the wake of the Everton judgement, and the prospect of contesting the allegations may suddenly seem more practical. Should that be the case, the many variables surrounding expert evidence, witness evidence and disclosure could determine the outcome of any proceedings. Either way, this is not a problem for today, and for now we must wait and see - if anything - emerges from these allegations.

This is a contribution article by a Trainee Lawyer and member of this community, Lewis.