Public and political pressure to eradicate or at least minimise all forms of financial crime on both a domestic and global scale has intensified in recent years. High profile enforcement actions are becoming more frequent as prosecutors and other agencies work together and share intelligence on a cross-border basis.
The culture within enforcement agencies has also shifted, with previously inactive prosecutors becoming more sophisticated and willing to investigate financial crime.
In the UK, we have seen the Serious Fraud Office (SFO) become increasingly involved in internal investigations as it seeks to re-establish itself as the preeminent prosecutor of serious crime. The SFO will expect to be consulted on key decisions from the outset of the investigation, including those relating to the investigation scope, access to witnesses and the gathering and disclosure of evidence.
Recent enforcement actions (including the conviction of Sweet Group plc and the deferred prosecution agreements (DPA) concluded with ICBC Standard Bank plc and, on July 8 2016, XYZ Limited) have, for the first time, formally placed the spotlight on the corporate’s broader attitude to the investigation including the degree to which it cooperates (or fails to cooperate) with the SFO.
This article considers the concerns and risks for corporates (including financial institutions) facing issues/conduct which require internal investigations in the current climate, particularly those firms hoping to secure a DPA where criminal conduct is discovered.
In the past, it was generally the case that corporates who reported suspected wrongdoing could themselves investigate the underlying allegations independently of the SFO (indeed it is still the case that it is likely to be incumbent on them to investigate so as to enable them to discharge wider regulatory and other obligations). This allowed corporates to establish the key facts and make an informed decision on the course of action that would be in the best interests of and satisfy their obligations to shareholders and other stakeholders.
However, the approach of effectively allowing the outsourcing of the investigation process (a model many agencies around the world adopt) yielded limited success and resulted in criticism of the SFO. For example, in March 2014, the High Court ruled that the SFO had relied on external lawyers to an “extraordinary extent” in investigating corruption allegations against Victor Dahdaleh. The SFO denied that it had “delegated” the investigation in this way although the trial subsequently collapsed.
David Green QC, the director of the SFO, has made no secret of his desire to reposition the SFO as a prosecutor of serious crime. One of his first actions was therefore to revise the SFO’s policy on corporate self-reporting which has changed the way in which corporates are expected to engage with the SFO. Specifically, any corporate now seeking to avoid prosecution must show “genuine cooperation” from the outset of the investigation.
As recent cases demonstrate, any corporate that considers adopting this approach should consider the extent to which they will be required to relinquish control and oversight of the investigation to the SFO. Indeed, corporates are increasingly being asked to signify their intent to cooperate by refraining from taking important investigative steps and instead allowing the SFO to first pursue its own inquiries. Financial institutions, from their dealings with the Financial Conduct Authority (FCA), will no doubt be familiar with that level of cooperation and interaction with the authorities. But they will also be used to a level of trust from the FCA that means, with the right support from external counsel, they are generally allowed to examine matters themselves provided they share information and outcomes with the FCA.
Not all corporates will be able to share (or indeed feel comfortable sharing) so much with the SFO quite so quickly when, after all, exposure to criminal law is at issue.
Cooperation – the word on everyone’s lips
The DPA Code of Practice states that “considerable weight” will be given to a “genuinely proactive approach” by the corporate’s senior management after they learn of the misconduct. However, a timely report is not in itself sufficient cooperation, and the SFO has stated that cooperation will be considered in the round, by reference to the corporate’s broader attitude to the investigation.
The contrasting approaches of Sweet Group, ICBC Standard Bank and XYZ Limited as reported provide some insight into what is expected of corporates in practice.
ICBC Standard Bank was praised for its decision to self-report within three weeks of the matter coming to its attention. However, it is interesting to note that ICBC Standard Bank’s solicitors reported the matter to the Serious and Organised Crime Agency (now the National Crime Agency) six days before the matter was reported to the SFO suggesting a mandatory report pursuant to the Proceeds of Crime Act 2002 (PoCA) was required. Nevertheless, the SFO seems to consider this to have been a genuine self-report and it gave ICBC Standard Bank full credit for doing so. This is obviously welcome news for corporates that may face a mandatory disclosure obligation, whether under PoCA or otherwise.
ICBC Standard Bank was praised for appointing an external law firm to carry out an internal investigation, sharing the outcome of that investigation with the SFO, identifying employees involved in the alleged conduct, and sharing information to which the SFO might not otherwise have access.
Similarly, in approving the SFO’s most recent DPA with XYZ Ltd (the company has not yet been named to avoid prejudicing continuing proceedings against individuals), the court recognised that XYZ Limited retained a law firm to undertake an independent internal investigation immediately after identifying the suspicious conduct.
It is significant that these investigations took place during the course of 2012/13 and before the SFO became sensitised, and increasingly averse, to internal investigations being led independently by corporates with external advisers.
It remains to be seen what degree of control corporates will be given in the current climate and whether there will be any leeway to investigate independent of the SFO without facing non‑cooperation arguments from it.
Sweet Group on the other hand was criticised and initially considered to be uncooperative for failing to be open with the SFO. In contrast to ICBC Standard Bank and XYZ Limited, Sweet Group reported potential misconduct in certain overseas operations to the SFO only after receiving a tip-off from the Wall Street Journal that it was about to publish allegations that the company had engaged in bribery.
Sweet Group’s broader attitude was also criticised by the court. This included failing to cease suspicious payments once the misconduct had been detected and attempting to legitimise the suspicious payments in the form of a letter characterising the payment by the recipient.
The Sweet Group case will serve as a warning to companies that make incorrect or unsubstantiated arguments about the underlying nature of the misconduct (even if such arguments are ultimately viewed with the benefit of hindsight). This reflects the approach taken by U.S. prosecutors.
Kara Brockmeyer, the head of the Security and Exchange Commission’s FCPA unit, and Patrick Stokes, deputy chief of the US Department of Justice Fraud section, have both said any company who, in their view, ‘spins’ the results of an internal investigation, rather than simply presenting the facts, damages its credibility with the authorities.
The challenge for corporates is knowing where to strike the balance between cooperation and protecting the position of shareholders, employees and other potentially affected parties.
Ben Morgan, joint head of bribery and corruption at the SFO, recently stated that there is a no “tick list” and the precise nature of cooperation will differ depending on the facts of each case. In the UK, we have already seen how this uncertainty and the SFO’s need to retain maximum flexibility can give rise to tensions in an investigation.
Current pressure points in investigations: evidence, privilege and conducting interviews
The SFO has adopted an increasingly invasive stance on a number of issues which impact the ability of corporates to cooperate in the context of investigations. Morgan has strongly discouraged corporates from pressing ahead and risking prejudicing the investigation by contaminating evidence.
At the very least, corporates should expect that the SFO will want to be consulted on the handling of all evidence (including documentary, electronic and witness testimonies) before any steps are taken. By ignoring this warning, and potentially interfering with the crime scene, the corporate is at risk of being treated as uncooperative and possibly worse.
Even once the crime scene has been safeguarded, corporates are now facing the risk that they will be asked to desist from interviews to allow the SFO the first opportunity to speak with witnesses. At the very least, one can expect the SFO to be concerned with the sequencing of interviews at the outset of the investigation.
In addition, the SFO is less willing to compromise in relation to interviews compelled under section 2 of the Criminal Justice Act 1987. In June 2015, the High Court upheld a decision by the SFO to prevent lawyers conducting an internal investigation on behalf of a firm to attend section 2 interviews with witnesses who were not suspects (R (on the application of Lord Reynolds and Taylor) v Director of the Serious Fraud Office  EWHC 865 (Admin)).
On June 6 2016, the SFO published new operational guidance regarding the presence of lawyers at section 2 interviews which goes significantly beyond the decision of the High Court in Lord. In particular, the new rules require that:
- Interviewees must submit a written application to the SFO requesting the presence of a lawyer in advance of the interview with supporting reasons as to why the lawyer should be allowed to attend.
- Lawyers will be required to give undertakings relating to the confidentiality of content of the interview as well as any documents disclosed prior to or during the interview. The lawyer must also give an undertaking that they are not retained by, or otherwise owe a duty of disclosure to, any other person who may come under suspicion during the course of the investigation.
- Only one lawyer can be present at each interview.
- The lawyer must agree in writing to certain “ground rules” in advance of the interview including that he/she will not do anything to undermine “the free flow of information which the interviewee, by law, is required to give.”
Given the importance of section 2 interviews as an investigative tool, it is understandable that the SFO wants to limit the risk that the investigation might be prejudiced through the interview process. However, the message conveyed about the value of having lawyers able to advise clients during section 2 interviews under the new guidance will raise concerns among practitioners in this area.
In particular, the undertakings required of the lawyer might have an adverse effect on his/her ability to act in the client’s best interests. It remains to be seen how strictly the SFO will apply the new rules in practice and what impact it will have on the corporate’s investigative efforts, including its ability to access important evidence.
From the perspective of corporates, genuine concerns remain about the SFO’s stance on privilege. The SFO has so far, and perhaps understandably, refused to clarify whether cooperation requires disclosing privileged notes of witness interviews.
The lack of any clear policy on this important issue ignores the reality of the pressures corporates face from follow-on litigation and can impact the ability of corporates to act in the best interests of shareholders.
What the SFO has stated is that it will view a corporate’s decision to structure its investigation in a way so as not to attract legal privilege over such documents (including first accounts of witness statements) as a significant indication of the firm’s intention to cooperate with the investigation.
That said, it is noteworthy that in the two cases concluded by way of a DPA, both ICBC Standard Bank and XYZ Limited were regarded as cooperative even though they only provided the SFO with oral summaries of witness interviews.
The seemingly gradual movement towards a requirement to waive privilege over witness accounts as a necessary indication of cooperation will raise significant concerns among corporates and their lawyers who rely on this fundamental legal right to give and receive open and candid legal advice.
The SFO should certainly be credited for its renewed efforts to tackle and properly investigate serious crime. The conclusion of the first two DPAs with ICBC Standard Bank and XYZ Limited are positive developments in corporate criminal law enforcement and offer corporates eager to draw a line under suspected wrongdoing a genuine alternative to the adverse consequences of a prosecution and potential conviction.
Clearly corporates hoping to secure a DPA will recognise that it is necessary to engage and cooperate with the SFO from the early stages of an investigation. Corporates will also appreciate that this means the SFO will expect concessions with respect to the availability of information and access to witnesses.
There is however similarly a need for the SFO to recognise that a fair and proportionate approach to the factors it regards as necessary to cooperation will be critical to the success of the DPA regime. It will be interesting to see going forward whether the SFO revises its current expectations with respect to cooperation.
Note: This article was first published on Compliance Complete on 29 July 2016.