April 2020 Issue
An unannounced dawn raid can cause a business major disruption and may potentially trigger protracted proceedings, fines and arrests. Often, officers will arrive at premises early in the morning when the only people there to meet them are secretaries, security staff or cleaners. Officers from regulatory authorities such as the Serious Fraud Office (SFO), Financial Services Authority (FSA), the Competition & Markets Authority (CMA), the European Commission, the Department of Justice (DoJ) or the Federal Bureau of Investigation (FBI) can turn up without warning and gain access to important company documentation. The surprise element can create confusion and disturbance. It is vital that companies are prepared to react appropriately.
Cooperation
The ability of a company to deal with a dawn raid, especially the first hour, is essential. Failure to cooperate with authorities can have significant consequences. “Regulators can impose, and have imposed in the past, heavy fines for procedural irregularities or treated these as aggravating factors, regardless of any antitrust infringement being eventually found,” says Jane Wessel, a partner at Arnold & Porter. “In the UK, obstructing dawn raids is a criminal offence. Failure to have an appropriate process in place also risks jeopardising the relationship with investigators, at the expense of the whole process. Further, inappropriate communications about the raid may result in reputational damage, unnecessary concerns or misunderstanding from stakeholders.”
Agencies can hand down serious sanctions including criminal convictions, fines and imprisonment. Criminal penalties if documentation is concealed or destroyed or if the company provides false or misleading information, and civil fines. Companies must also be wary of the commercial risks – reputational damage, employee dissatisfaction and class action lawsuits can all stem from a raid.
To avoid the worst of these outcomes, companies must react the right way. “In the short term, there are several key immediate actions which must be taken,” says Charlie Critchley, a senior solicitor at Macfarlanes LLP. “The company must engage effectively with the authorities upon arrival and reception must contact key personnel within the business. External counsel must be contacted as soon as possible and it is critical that the IT department is engaged as soon as possible – in today’s world, IT access is key as the majority of a company’s records and documentation will be digital.”
“While dawn raids, by their very nature, are unexpected, companies must take steps to endure them with minimal financial and reputational damage.”
Often, advanced preparation and training is necessary. “Companies must train reception staff as they will likely be the first point of contact between a business and the authority,” says Mr Critchley. “Reception will need to know what to do and who to contact and they must also identify and train key members of staff who will be responsible for managing and coordinating the business’ response to the raid.”
Establishing a task force
While dawn raids, by their very nature, are unexpected, companies must take steps to endure them with minimal financial and reputational damage. One of the most important precautions companies can take is to set up a dawn raid task force. “Establishing an internal ‘task force’, made up of pre-designated senior counsel, IT specialists and possibly a team of ‘shadowers’ who are familiar with the company’s structures and procedures, is invaluable,” says Ms Wessel. “The task force can coordinate the process, ensure cooperation and compliance, and reduce the risk of tension with inspectors. Having best practice guidelines for each of the ‘task force’, reception staff and all employees, which can be consulted on the days of the raid, is also advisable.”
The internal task force should form part of a pre-existing corporate risk management and compliance plan. “Trying to plan in the heat of a raid can be disastrous,” suggests George Addy, senior counsel at Davies Ward Phillips & Vineberg LLP. “There are a lot of critical elements to any plan, from what to do when officials show up at the front door with a warrant, to having a records management protocols in place, to having a communications plan. The benefit of establishing a dawn raid task force is that a lot of the logistical details will be thought of and planned for in advance. Roles and responsibilities will be assigned – people will know who to call, who is in charge of which component of the response plan and which external advisers you will reach out to.”
Ensuring that employees are clear about the structure and response to a dawn raid is critical. “It is prudent to establish a dawn raid task force in advance who can prepare the business,” says Mr Critchley. “The plan must see companies first establish lead individuals and appropriate managers to coordinate for each site, including reserves. The company must also prepare guidance notes and checklists and ensure that they are readily available for those involved, including reception staff. Lead IT support must also be appointed in advance of any raid. Finally, companies should consider training staff in advance so that they are familiar with relevant steps to take and processes to follow.
As Mr Addy suggests, companies should also attempt to obtain a copy of the authorising order or warrant, then review the scope of the warrant carefully. “It must identify the matter in respect of which it is issued, the premises to be searched, and the records or material or the class of records or material, to be searched for,” he says. “The warrant may contain specific conditions which have been imposed by the judge who issued the warrant. Check to ensure that all such conditions have been or are being fulfilled. Also check that the persons conducting the search are properly identified in the warrant.”
Communication is key
Companies also need to consider how to manage communications about the raid, both external and internal. It is possible that companies could receive questions from the press and it is imperative that they carefully consider the impact any communication could have on the investigation or any damage to the firm’s reputation resulting from news of the raid. It may also be appropriate to communicate clearly with shareholders and other interested parties, including employees. “There is no one-size fits all approach to communication strategy,” says Mr Critchley. “Companies should ensure that, to the extent any external comment or communication is necessary, it comes from a single, authorised source, with a pre-agreed and consistent message. Internally, management will be concerned of the risk of document destruction. As a minimum, until the authority or regulator is satisfied that effective preservation measures are in place, existence of the raid should be on a need to know basis only. Thereafter, it is recommended that any internal messaging is agreed with the authority. Any internal message should focus on employee conduct, such as instructions not to obstruct or destroy, and the company’s obligations, such as keeping existence of the raid confidential. The message should not disclose details of the raid, including what is being investigated.”
Irrespective of planning, it is impossible to know exactly what will happen during a dawn raid. For example, companies cannot predict exactly what documents investigators will demand. In-house counsel have a key role to play in managing the crisis and limiting disruption. They must know which documents regulators can take, what happens to privileged material and what to do if inspectors begin to interview staff. They should also coordinate with external counsel, who can help maximise the company’s position and mitigate risk.
“Call external counsel immediately,” suggests Ms Wessel. “External counsel will be able to advise by telephone and mobilise a team to attend the dawn raid. Inspectors should be asked to delay starting the investigation until external counsel have arrived. If they wish to start immediately, the company should be prepared to cooperate and avoid obstructing the process.”
As Mr Addy points out, advisers who have worked in the field will have knowledge of the process. “They can tell you what to expect, how to handle the process and what to watch out for,” he says. “They will likely know and have dealt with the agency and agency staff before and many unnecessary friction points will be avoided. They will also be familiar with relevant laws and precedents which will come in handy both during the raid and afterwards when assessing risks and options.
“External advisers also bring much needed objectivity to the process,” he continues. “They will review materials and share how those records may be interpreted by the agency and courts. It is also useful from a risk management perspective. Unlike internal staff, being outsiders they will not have daily working relationships with people in the firm and the risk of ‘turning a blind eye’ to a problematic issue or person to help a fellow employee should not arise.”
Lessons to be learned
Dawn raids can be daunting. Companies can misstep during the process, often with a significant penalty. “Experience shows how easily eye-wateringly expensive mistakes can be made,” says Ms Wessel. “These mistakes are often the result of a lack of an established procedure, or poor levels of employee awareness or preparedness. Notable examples include fines of several millions of euros for tampering with seals put in place by authorities, refusing access to officials pending arrival of external counsel, diverting emails during a raid, and deleting WhatsApp conversations. It is vital to have in place a clear process to follow on the day of a raid, clear and simple guidance for all employees, as well as an internal team of experts. Regular, tailored training sessions also help to prepare employees for the challenges of a dawn raid.”
According to Mr Addy, how serious the impact will be is greatly influenced by pre-planning. “In our experience, it is often much more costly and damaging from all perspectives to firms that do not have a plan in place,” he says. “Reputational damage, talent exodus, management time diversion, legal and financial consequences will all be negatively impacted by a lack of planning. Imagine as general counsel you are at the front door when officials show up with a warrant investigating an alleged cartel. What do I need to do now? What do I need to do later today? Tomorrow? Next week? In the months ahead? How do I best serve the company and protect its interests? These issues are what companies need to sort out in their plans.”
While good education and a strong compliance programme will reduce the risks posed by a dawn raid, there is no way to eliminate them entirely. However, the most important lesson companies can learn when it comes to dawn raids is the benefit of planning.
© Financier Worldwide
BY
Richard Summerfield