Internal investigations: recent developments

Keynote interviewee

Claudio Visco

Macchi di Cellere Gangemi, Italy; IBA Secretary General

Interviewer

Riccardo Lucev

Studio Legale Cagnola & Associati, Italy; Publications and Newsletter Editor, IBA Criminal Law Committee

rl@cagnolaeassociati.it

1. Internal investigations are becoming more and more important in ensuring corporate compliance and the prompt reporting of corporate offences. Does this also reflect your experience as attorney in handling corporate matters, even in the international context?

An increasingly complex global business environment, combined with changing expectations and enhanced scrutiny both in Asia and overseas, means that more companies are finding themselves subject to regulatory investigations and proceedings. In 2014, 64 per cent of large companies in the United States with revenues of $1bn or more, and 44 per cent of companies with revenues of $100m to $1bn, retained outside counsel to assist with investigations. In recent years, in the US, approximately two thirds of companies in the insurance, energy, financial services and healthcare industries faced some type of regulatory or government investigation.

This increasing regulatory scrutiny, along with a renewed focus on ethical behaviour and protecting (and, in some cases, incentivising) whistleblowing activity, has created an environment where regulatory lawyers are increasingly called upon to conduct or supervise internal investigations into suspected wrongdoing.

An effective corporate investigation may provide management or the board with the information it needs to make an informed decision on how to proceed in the face of alleged misconduct.

Unlike many forms of traditional litigation, however, there is often no roadmap to follow. Internal investigations may cover various topics including suspected accounting fraud, violations of the anticorruption and anti-bribery legislation.

There are usually no mandatory procedural rules or court-imposed deadlines; there are no local rules or forms to follow. More importantly, how an investigation is conducted, and the scope of that investigation, are necessarily informed by the context and the potential impact on a particular company.

2. Which are the main issues you have come across while managing corporate investigation cases and how have you successfully tackled them?

The first and not obvious issue to be addressed when considering corporate investigations is indeed whether the allegations received deserve an investigation and, if so, who must conduct such an investigation?

In some jurisdictions, particularly the common law ones, the decision to commence an internal investigation is prescribed by applicable laws and regulations or requested by external parties (eg, the company's auditors), but in most of the cases the decision is entirely at the discretion of the company, which will often consult with their lawyers before taking any decision.

The second most common issue is whether the people who should be interviewed as part of the investigation are still with the company and, more importantly, whether the relevant documents are still available or accessible. It is very common, before the formal decision to start an internal investigation, to order a legal hold preventing documents from being destroyed.

Legal privilege is also another sensitive area. Normally, documents exchanged with, or produced by, the in-house or outside counsels of the company are not accessible in the framework of an internal investigation. Waiver of the legal privilege implies a fairly complex procedure.

The original position in Anglo-Saxon jurisdiction was that legal advice privilege only applies to communications between a limited group of employees within a company entrusted with the handling of a particular investigation (for example the legal department) and the company’s external legal advisers. It was held that any communications between employees outside that limited group (and hence, a non-client) and the external legal advisers were not privileged notwithstanding that they were created for the sole or dominant purpose of obtaining legal advice.

More recently, it was argued that in identifying the ‘client’ for the purpose of considering whether legal advice privilege applies to a particular document, one should apply the dominant purpose test, for instance, whether the document was created with the sole or dominant purpose of obtaining legal advice, rather than focusing too much on whether or not the particular employee of the company creating/sending the document should be considered as a ‘client’.

Potential waivers of the attorney/client privilege may arise from sharing information with the individuals whose conduct is being investigated; sharing information with auditors; or sharing information with the government. Credit for cooperation with the government, however, does not require waiver of the privilege.

3. Is the widespread nature of internal investigations somehow changing the rule of law, and the role of the lawyer from a pure defence counsel to an investigator?

Corporate investigations are a powerful tool in the hands of companies willing to enhance their profile with respect to corporate and social responsibilities. Investigations in the field of business and human rights, bribery and corruption and money laundering will certainly contribute to reveal situations in which the rule of law is at risk. Nonetheless, the legal privilege characterising the relationships between an attorney and his client must always be preserved and exceptions admitted only for very specific circumstances.

It is clear that counsels conducting an internal investigation must embark upon their task with one overriding objective: to minimise the consequences of any wrongdoing for the company. However, while it is apparent that the entity’s interests must remain first and foremost, the standards for dealing with employees and other corporate constituents interviewed in the course of the investigation are far less clear.

Counsel must inform employees of the client’s identity only ‘when it is apparent that the organisation’s interests are adverse to those of the employee’. This is a specific determination dependent on counsel’s analysis of potential adversity of interest between the corporation and the employee. Particularly for counsel who are strangers to the matter and the people involved, it is likely to be very difficult to determine in advance whether such adversity exists. Adversity may become apparent only after the employee has made an incriminating statement. Even if immediately thereafter the investigating lawyer warns the employee that the attorney-client privilege affords no individual protection (at least in common law jurisdictions) and explains that the employee may want to obtain personal counsel, irreparable damage may already have been done.

Regardless of whether a particular jurisdiction requires a pre-interview statement, many practitioners recommend that counsel routinely provide such warnings to avoid any possibility that a court will subsequently permit the individual employee to invoke the protections of the attorney-client privilege on grounds that an attorney-client relationship existed between investigating counsel and the interviewee.

There are, of course, a number of downsides to requiring pre-interview statements. The most significant is that any kind of warning that distances counsel from a corporate constituent is likely to chill the willingness of the employee to talk with the investigating attorney.

Most experts agree that the strategic advantages of providing some type of pre-interview warning outweigh the disadvantages. Nevertheless, if the rules of professional responsibility do not require pre-interview warnings, some lawyers will decide not to provide them or to offer only an abbreviated form.

The content of counsel’s statements is equally critical, particularly with respect to the effects of the attorney-client privilege and the employee’s need for his or her own counsel.

A warning shall clearly identify the role of the attorney and indicate that it is the company’s decision whether it will ultimately reveal the information the employee offers in the course of the interview.

4. As a representative of the so-called civil law juridical tradition, have you experienced some weaknesses in the discipline on this topic, or seen any lessons that could be learned from the common law tradition?

In civil law jurisdictions the use of internal investigations is not very common. They normally follow the commencement of criminal, antitrust or other regulatory proceedings. More recently, the adoption of anti-corruption and anti-bribery codes has contributed to expand the use of internal investigations also following receipt of allegations.

As in common law jurisdictions, there are no statutory provisions governing the conduct of investigations and the latter often follow Anglo-Saxon models. The issues of legal privilege and confidentiality arise not only with respect of the need of preserving the privileged status of attorney-client communications (as in common law jurisdictions), but also with respect to the involvement of lawyers in the investigation activities.

5. Which are the most relevant challenges for internal investigations today, and how will such activities develop in the near future?

Investigations can be disruptive and expensive, and resources are limited. While the need to investigate in some situations is obvious, in some situations determining whether to conduct an investigation, and how that investigation should be conducted, are judgement calls. Some factors to consider in making these determinations include:

• the seriousness of the allegations, including whether the alleged misconduct violates criminal law or company policy;
• whether the alleged misconduct involves senior management or board members;
• the company’s potential exposure if the allegations are true;
• the possibility for additional, future violations, or the possibility that the violations are continuing;
• whether the alleged misconduct implicates a potential health and safety risk to employees or others;
• whether the alleged misconduct calls into question any prior internal control or financial certifications provided by executive officers and whether the alleged misconduct prevents such officers from truthfully executing future certifications;
• the likely response of the company’s auditors to the alleged misconduct;
• whether there is a parallel government investigation or whether such an investigation is likely to occur;
• the extent to which the company may receive credit from enforcement officials for conducting its own investigation;
• the possible impact on any pending or potential civil litigation.