Legal Briefing

International investigations: understanding the risks

The In-House Lawyer Logo

Crime, fraud and licensing | 01 December 2011

It seems that every day brings a news report of corporate wrongdoing or control failures somewhere in the world – rogue traders, corruption, fraud, tax evasion, price fixing, environmental disasters and export control issues.


Not that long ago, internal, regulatory and criminal investigations would be confined to the country where the problem arose. But times have changed for several reasons:

  • large multinational companies have operations spanning different continents – and so a problem that comes to light in the UK may have implications in other countries;
  • the nature of commerce has changed – transactions and personnel now pass between multiple international jurisdictions with relative ease; and
  • co-operation between enforcement authorities around the world has increased significantly, especially in respect of corporate and financial crimes.

Not only has regulatory co-operation increased, but the sanctions being levelled at companies are becoming more punitive. European companies have paid eight of the top ten US fines for bribery under the Foreign Corrupt Practices Act (FCPA) 1977. In 2008 Siemens finally concluded the biggest corporate corruption investigation in history by paying $800m to settle with the US authorities and €395m ($531.9m) to resolve a similar investigation in Germany. Three years on, Siemens is still experiencing the fallout from a scandal that stretched around the world – to Argentina, Bangladesh, China, Iraq, Israel, Mexico, Russia, Venezuela and Vietnam.

In recent years, the US has led the way with major corruption investigations and enforcement actions across borders, and other countries are now taking note of their successes. Whistleblowers are being encouraged to come forward and report on their own company or its competitors. Legislators are relying on laws with expansive extraterritorial effect, such as the FCPA 1977 and, more recently, the UK’s Bribery Act 2010. As a result, regulatory and criminal investigations are being conducted more frequently and the risks associated with overlooking or mismanaging internal issues have increased.

WHAT TRIGGERS AN 
INTERNAL INVESTIGATION?

An internal investigation is usually triggered by a specific event such as the discovery of an accounting irregularity, an unexpected communication from a regulator, a press report or a disclosure from a whistleblower, all of which can have devastating consequences if the company’s senior management fails to react or decides to turn a blind eye.

Whenever there are suspicions or allegations of foul play, an internal investigation must be considered in association with the internal legal department. A robust and thorough internal investigation can facilitate a preventative rather than reactive stance to the problem by identifying risks and avoiding control failures, while also displaying good corporate governance.

Conducting an effective internal investigation requires more than a boilerplate procedure. The objectives should be to control the situation, establish facts, identify potential liabilities and minimise damage. A bespoke approach, taking into account the strengths and vulnerabilities of the company and its available resources, is vital to ensure that the specific needs of the situation are met. In addition, a multinational company will need to recognise that the investigation may have to cross borders and that there could be different implications – in terms of laws, regulations and enforcement powers – depending on the jurisdictions involved.

INTERNATIONAL DIMENSION

An ineffective internal investigation that fails to take account of the international pitfalls may make a bad situation worse, so it is important to prepare by taking account of these key considerations.

Privilege

It is vital that legal professional privilege (or client-attorney privilege in some jurisdictions) is established and maintained from the outset of an internal investigation. Issues of privilege can be complex and if the correct procedures are not followed early on, sensitive communications such as working papers and reports on the investigation might not be protected from disclosure to third parties.

In cross-border investigations it is important to note that the laws on privilege and confidentiality can differ across jurisdictions. A company may opt to waive privilege and disclose its findings to the authorities in due course but this should be a choice forming part of a company’s strategy to ensure the optimum outcome from the investigation. It should not be the result of a failure to successfully establish privilege in the first place or failing to consider the implications of waiving privilege in one jurisdiction. As privilege and confidentiality are complex areas and may not apply to in-house legal advisers, it is important to get expert advice at the earliest opportunity.

Evidence

Data and evidence relevant to the investigation must be preserved, handled and logged properly. At some stage in the investigation it may be necessary to demonstrate where documents originated from and when. Failing to properly preserve documents can have severe repercussions, including regulatory sanctions or even criminal charges for obstructing justice. It may therefore be necessary to take immediate steps to protect and preserve evidence – even before the decision to launch an investigation is made.

Where large volumes of paper and e-mail communications are required, it is important to identify the different custodians of electronic and hardcopy materials across the global business so that no relevant documents go unchecked.

Evidence gathering may prove to be particularly problematic in multi-jurisdictional investigations as there are different data protection and confidentiality laws around the world. Indeed, gathering information and documents or sending them across borders without the appropriate permissions may be a criminal offence.

Planning and personnel

A plan and timetable should be established at the very earliest opportunity and kept under review to ensure that the investigation is completed efficiently and quickly to safeguard against it becoming unwieldy and unduly expensive. Consideration of any international ramifications should be part of the process.

However, a degree of flexibility in approach is essential. The scope and reach of an investigation may change once documents are analysed and staff have been interviewed, resulting in a change of strategy, direction or international reach.

The logistics of an internal investigation can be daunting. A range of specialist skills may be required and a company must ensure that suitable resources are made available. Consideration must be given to who will be responsible for the conduct of the investigation, the structure for reporting lines and accountability, and whether there is any conflict of interest between the internal investigators and those being investigated.

To preserve the independence of the investigation, the investigators must be 
free to decide who from the company they wish to interview. Interviews should be conducted in the interviewee’s first language wherever possible.

Close attention must be paid to the timing of the interviews. Generally, junior employees should be interviewed first as they are likely to have greater availability than senior staff members, whose time is more expensive and who should only be interviewed once a thorough knowledge of the facts has been gained. However, if there are pressing time constraints and the investigation must be promptly concluded, it may be necessary to interview senior staff from the outset. Anyone who is the subject of the investigation or is in any way implicated in the breach or offence may be approached at a later stage.

Employee rights will vary from jurisdiction 
to jurisdiction – workers’ councils may have 
to be notified and the employee may be entitled to have their own legal adviser, 
union representative or friend present 
during an interview.

Internal investigators may find it difficult to impose their authority unless there is demonstrable support for the investigation from board level. Disagreements and conflicts may arise during the investigation – for example, between different business and operational units of a company, where senior management have to be interviewed about sensitive issues or where an investigation spans across multiple jurisdictions. In such circumstances, the senior management team must ensure that all those called upon to engage with the investigation recognise the significance of the investigation and the consequences of failing to co-operate.

Self-reporting

Self-reporting potential regulatory breaches or criminal offences to a regulator or prosecutor may be mandatory or voluntary but will usually trigger the possibility of some sort of leniency in terms of the eventual outcome. Approaching the authorities with an investigation plan or the results of an initial investigation may bring positive results. In some instances, the regulator may wish to help define the scope of the investigation and then receive findings on an interim basis. However, the procedures will vary from authority to authority and from jurisdiction to jurisdiction. It is therefore imperative that the full implications are understood before such an approach is made and that a controlled, single point of contact is established to prevent inadvertent and potentially damaging disclosures.

Evaluation

Once the investigation has been completed, the board of directors and senior legal personnel should decide on a course of action regarding the final report and whether further external disclosures need to be made about the outcome. Part of the evaluation should be a ‘lessons learned’ session where practices and procedures are reviewed to determine whether additions or improvements are required (locally and/or internationally) to prevent a repeat of the trigger event.

CONCLUSION

An internal investigation should always be considered at the first indication of wrongdoing by the company or individuals. Understanding the extent and complexity of the potential problem from the outset and implementing a well-planned investigation is crucial to prevent the situation from spiralling out of control. This is even more pertinent for multinational companies due to the added risks and complexities that cross-border investigations always bring. In-house lawyers can play a crucial role in determining whether it is appropriate to handle the investigation within the company or whether to instruct local or international specialist external advisers.