UPDATE 2-Dividend risk for corrupt UK companies-SFO

* Serious Fraud Office recovers payout made by law-breaking firm

* Sees case opening door to confiscating dividends

* Investor group sees no major implications from ruling

* Lawyer says SFO case hard to apply to big investors (Adds SFO, legal reaction)

By Huw Jones

LONDON, Jan 13 (Reuters) - Investors were warned on Friday they could forfeit dividends paid by British companies breaking the law.

Shareholders who receive payouts from the proceeds of crime could face civil action to recover the money and should have confidence in the business practices of firms they invest in, the head of Britain's Serious Fraud Office said.

"This is very important and we cannot emphasise it enough. It is particularly so for institutional investors who have the knowledge and expertise to do it," Richard Alderman said.

The SFO on Thursday won a civil recovery order, which approves court action, against the principal shareholder of a company that admitted corruption.

Mabey Engineering Holding agreed to repay the 131,201 pounds ($201,000) dividend it received from Mabey & Johnson, which built bridges in Iraq and admitted corruption and breaches of UN sanctions in 2009.

Two former Mabey & Johnson executives went to prison after the company reported their behaviour to the SFO.

It was the first time the SFO recovered the proceeds of crime by targeting dividends paid in Britain. It declined to comment on whether it has similar cases in the pipeline.

Alderman said the SFO would pursue its new approach of confiscating dividends vigorously even if, as in the Mabey case, the shareholder was unaware of the breach.

Institutional investors and lawyers said the ruling would not open the floodgates for payouts to be returned.

The UK Investment Management Association, whose members manage 3.9 trillion pounds in assets, said it was right that dividends from illegal or criminal activity should be returned.

"A lot of this would have to be looked at on a case by case basis," an IMA spokeswoman said.

The difficulty would be when it comes to deciding what portion of a dividend was derived from illegal activity.

"While there may be some implications from this ruling, it is quite unlikely that the implications would be high enough to be a particular issue," the IMA said.

Another influential investor official said big investors conduct due diligence based on public information and it was up to the company's board to act on behalf of shareholders.

Arnondo Chakrabarti, a partner at Allen & Overy law firm, said the case involved a private company parent of a subsidiary and was not a serious legal precedent for the SFO to obtain similar orders against institutional shareholders with small holdings in a listed company.

"The reason Mabey and Johnson cooperated was because the subsidiary pleaded guilty," Chakrabarti said, adding that if the SFO pursued institutional investors it would face years of expensive litigation.

Dan Hyde of lawfirm Cubism Law said the ruling potentially sets a precedent though the SFO would likely apply common sense and proportionality.

"That said it appears harsh in the extreme that innocent third party investors are seemingly at risk if they invest in a company they believed, on the information available, to be sound but which transpired to be conducting illegal practices," Hyde said.

Peter Lloyd, chief executive of Mabey Holdings, said the group has new management and rigorous anti-bribery and corruption procedures. ($1 = 0.6528 pound) (Additional reporting by Stephen Mangan; Editing by Dan Lalor and David Cowell)