Conducting internal investigations

August 2013 | SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

Running an internal corporate investigation is fraught with risk. Even a single-site, small to medium sized company will face a number of difficulties in carrying out an internal investigation. The risks multiply many times when the company concerned operates in a number of different countries. There are differing financial, political, regulatory and commercial pressures to balance.

Investigations incur costs and management time and, worst of all, the best outcome is usually to minimise harm. Financial losses might be minimised, fines might be reduced and criminal charges might be avoided but no-one makes a profit out of an investigation (other than the external firm instructed to conduct it). They are necessary because something has gone amiss: the company, or certain individuals within it, have done something wrong; the company has been a victim of fraud; there has been some regulatory failure. But it is not all bad news. A well-executed internal investigation can soften the blow considerably.

There are countless issues which need to be considered before launching an internal investigation, and much will be dependent on the underlying situation. There are, however, three critical topics which should be addressed at the very beginning of any internal investigation.

What is the objective of the investigation?

This is all too easily overlooked or false assumptions made. When a potential problem has been spotted, senior management instinctively just want to find out what happened. However, identifying a clear objective at the very outset is likely to shape how the investigation should be carried out. Failing to plan for the potential outcomes might leave the company exposed.

For example, take Company A, a manufacturing company. It discovers that certain of its senior management have been fixing the price of its goods with its competitors. If Company A’s objective is simply to identify the wrongdoers and put a stop to the conduct, the whole investigation will be dealt with in a very different way than if it intended to report the price-fixing to the relevant authorities.

Be conscious that the objective of the investigation may change, or may have to change. It may only be part way through the investigation that Company A discovers that the conduct is more extensive than it had originally thought and it is only at that point that it decides to make a report to the authorities.

It is unrealistic to expect the objective set on day one to remain constant throughout a lengthy investigation, but ensure that it is a conscious decision rather than as a result of ‘mission-creep’. Importantly, those conducting the investigation will have to constantly assess whether their methods are appropriate in light of the current objectives.

For example, Company A may need to adopt a more formal approach to the investigation after its decision to make a report. It is likely to be in the company’s interests to ensure that all relevantmaterial is preserved and analysed rather than relying on its own feeling of whether the investigation has uncovered what went on.

Who is going to conduct the investigation?

The key decision here is whether to keep the investigation in-house, or to instruct a third party to conduct it.

An in-house investigation team will (in all but the largest companies) know how the organisation works, how transactions are carried out and accounted for, how documents are stored, etc. They will need to spend much less time understanding what the company does and how it does it. They are also likely to cost less than an external team and may be more trusted by employees and others connected with the company who may have to be approached as part of the investigation.

On the other side of the equation, does the company have the internal resource (both in terms of time and expertise) to carry out an investigation? Will the investigating team be, and appear to be, objective? The latter is particularly important if the results of the investigation are going to be used in order to try and persuade an outsider (perhaps a regulator or prosecutor) that the company has responded appropriately to the problem giving rise to the investigation. Will employees and others be more open with a third party than with an internal team they may see as being driven by a particular agenda or office politics?

If the decision is made to instruct an external party to conduct the investigation, who should that external party be? Obvious candidates include the company’s existing lawyers or accountants but they will not always be the right choice. If the investigation has been prompted by suspected financial irregularities, the company may not want its auditors conducting the investigation, for example. The company may have a civil claim against the auditors if it failed to identify the problem and an earlier stage, or the company might just want to keep the investigation separate from the day to day running of the business.

One crucial issue to bear in mind is that of privilege. Communications passing between a lawyer (in England this includes in-house lawyers, but in much of Europe the position is different) and his or her client are generally privileged if the purpose of the communication is to give or receive legal advice. In many countries around the world, those communications are entirely confidential and the company cannot be compelled to disclose their contents except in very few situations. If the company wishes to ensure that the investigation is covered by privilege, it will need to ensure that this issue is considered in each jurisdiction covered by the investigation.

How is the investigation going to be conducted?

There are two sources of information available to investigating teams: documents and people.

In this sense, ‘documents’ has a very wide meaning. It includes the traditional lever arch file sitting in someone’s office, their emails and electronic documents stored on their computer, but also texts and instant messages, posts on social networking sites, telephone records, etc.

The investigating team will have to determine what documents may contain potentially relevant material. Once that has been done, it is a question of determining how it can be obtained. If the documents belong to the company, then one might imagine that the process is straightforward. Investigating teams should beware of local laws which prevent electronic data being accessed without, for example, the consent of the individual employee in question or the employee representative on the management board. Even in jurisdictions such as England, where there are relatively few restrictions where the data belongs to the company, problems may arise if the data is held on servers based abroad or if documents are sent from one country to another for the purposes of the investigation.

If the company cannot obtain the documents it needs for the investigation, it may need to enlist the assistance of the Courts to order production of documents by third parties. Consider carefully where and for what purpose those documents might have to be used – there are often restrictions on the use to which they can be put.

Investigating teams will also need to consider practical issues, such as the number of documents which will need to be reviewed. Is this going to be done manually, or with the assistance of forensic IT programs? Will documents need to be translated? Even if written in the investigating team’s native language, some documents will require particular expertise to interpret: a trader’s Bloomberg chat is unlikely to make much sense to anyone unfamiliar with that world.

The process is similar with people who may know relevant information and it is likely that the investigating team will wish to interview them at some stage. Where the individual is employed by the company, he or she will normally be under a duty to assist the company by answering questions and it is therefore usual not to dismiss an employee until after an interview has taken place. Again, the rights of companies to interview their employees will depend on the local laws in the place where they are employed.

If the individual is not employed by the company, will they assist the investigation voluntarily? If so, consider issues of confidentiality and whether the risk of information about the investigation (or even its existence) leaking justifies the information which the witness may be able to provide.

If an individual will not assist voluntarily, the investigating team will need to consider whether it is possible to obtain an order from the Court compelling the individual to do so. In many jurisdictions it is not possible to obtain such an order in advance of formal court proceedings and so it may not be possible as part of the investigation.

There will be much more to think about if you are unfortunate enough to become involved in an internal corporate investigation, but keeping these three issues in mind will keep you on track.

Jason Woodland is an associate solicitor at Peters & Peters Solicitors LLP. He can be contacted on +44(0)20 7822 7777 or by email: jwoodland@petersandpeters.com.

Jason Woodland

Peters & Peters Solicitors LLP