2009 continued the escalation of civil and criminal enforcement actions undertaken by the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”). Just looking at cases under the Foreign Corrupt Practices Act (“FCPA”), the DOJ is currently pursuing more than 100 investigations. All indications are that the government’s increased focus on foreign bribery, among other activities, will continue into the next decade. Government officials have made statements in recent months reinforcing the government’s commitment to continued aggressive enforcement of the anti-corruption laws.
Because the stakes are high, when a company learns that it is the focus of any government investigation, or facts are discovered that require the company to start its own internal investigation, the general counsel and/or chief compliance officer must be ready to respond quickly and navigate a series of complex issues that will arise very early in the investigation. Based on years of conducting corporate investigations, the following are five of the most important issues a company must consider when faced with a government or internal investigation.
1. Who Should Conduct the Investigation
The first issue counsel will face is determining who should oversee the investigation. Counsel should immediately alert the Board of Directors and/or the Audit Committee of a pending government investigation, along with a recommendation on who should oversee and conduct the investigation. The nature of the allegations, as well as the type and history of the company, should help determine who is best suited for this role. Management (including the general counsel), the Board or its committees, or outside counsel may be in the best position to direct a particular investigation. Determining who should oversee the investigation may elicit the following considerations:
A. In-house Counsel: In-house counsel can conduct a prompt, effective investigation and is in a strong position to quickly obtain facts and findings because of familiarity with personnel, systems and issues. Accordingly, in-house counsel may be best suited to manage employment law violations, internal personnel policies and self-dealing by corporate individuals.
B. Outside Counsel: When the government initiates an investigation or an investigation is made public, it is essential to retain outside counsel. It is appropriate to engage outside counsel when the investigation reaches senior management, and/or directors want to keep their distance from company management.
When selecting outside counsel, the company must consider whether it should retain its usual outside counsel or whether independent counsel is necessary. In an appropriate case, the company may decide to retain independent counsel with no prior ties to the company to increase credibility during the investigation.
C. Scope of Representation: Lawyers conducting internal investigations are under close government scrutiny. Therefore, it is vital that counsel should only represent the interests of the corporation and not those of the individual employee, officer or director. Representing other interests reduces credibility and harms the corporation. One or more independent lawyers should be contacted and kept on standby to represent individual employees, officers and/or directors as the need for individual representation arises.
2. Determine Whether to Self-Report
In matters where the company initiates the investigation, the company will have to decide whether to self-report the investigation to the government. This will depend upon a variety of factors including whether the problem is systemic, whether illegal conduct is involved, whether there is a chance that the government will discover the conduct absent disclosure, or if there is a possibility that the government will initiate an industry-wide investigation.
Early self-reporting will earn the company substantial credit with the government, which should result in a lesser penalty at the resolution stage.
3. Scope the Investigation
The investigation should be thorough and probing to satisfy the government as well as discharge the board’s and management’s duty of care. The SEC and DOJ assess how well the company investigated the following: (1) the nature of the misconduct: how it arose, where it arose, and the duration; (2) the harm the misconduct caused; and (3) how and by whom the misconduct was detected.
The SEC will determine if the company conducted a thorough review when deciding whether to bring an enforcement action. The DOJ will assess whether the company intentionally impeded the investigation while purporting to cooperate.
4. Gathering Information and Preserving Documents
Losing or destroying information can have dire consequences because the government may become suspicious of the company. To avoid civil or criminal liability, the company should gather documents and interview witnesses quickly to gather and preserve information critical to the investigation.
A. Data Retention: One of the first steps counsel must take is to suspend automatic destruction of paper and electronic documents and issue a written directive to those who may possess relevant documents to preserve them. Counsel should be given unlimited access to collect and preserve electronic data and hard copy documents as quickly as possible. Counsel should also take the following steps to ensure preservation of relevant data:
- Retain an expert fluent in all types of media and operating systems and work with the IT department to discuss preserving electronic documents;
- Collect data quickly and carefully monitor and document the process;
- Preserve back-up tapes;
- Preserve data of departing employees;
- Consider making forensic copies of the hard drives of those employees at the core of the investigation; and
- Designate a point person as decision-maker to be notified when relevant documents are to be destroyed or to answer employees’ questions.
B. Interviews of Employees: Counsel should be given unlimited access to quickly identify and interview witnesses with knowledge of facts that may be relevant to the investigation. It is essential that employees receive appropriate warnings at the outset of the interview process.
i. General Warnings: If the company remains neutral in a government investigation and does not require employees to submit to a government interview as a condition of continued employment, employees have discretion whether to talk to the government. The company may inform employees that it expects them to cooperate. Then, employees have a duty to comply with the government’s or company’s own investigation and may be compelled to be interviewed or face termination. Counsel may instruct the employees that they can hire their own counsel, and the company may or may not pay for it.
ii. Upjohn Warning: To preserve the company’s privilege, attorneys should give Upjohn warnings at the outset of an interview. The warning must state:
- The attorney represents the company (or the board, audit committee, etc.), not the employee;
- Anything the employee reports will be shared with the company;
- The interview is privileged but the privilege belongs to the company and can be waived by the company, including by disclosure to the government;
- Interviewers are seeking information from the employee necessary to enable counsel to provide legal advice to the company; and
- The substance of the interview should be kept confidential.
iii. Zar Warning: Because employees sometimes intentionally give false information during the internal interview, counsel should consider giving Zar warnings to the employees. Zar warnings state that information provided during the interview may be turned over to the government, and that the employees may be subject to obstruction of justice charges if they provide untruthful information.
C. Privilege Issues: Counsel should be mindful that privileges belong to the company. In most cases, a privilege will not be waived when information (such as investigative reports) is shared with management, unless the Audit Committee is conducting the investigation, in which case the privilege may belong solely to the Audit Committee as opposed to the company. Courts afford varying degrees of privilege based on the circumstances of each case. The following privileges commonly arise during investigations:
- Attorney-Client Privilege (protects communications between counsel and the client);
- Work Product Doctrine (protects mental impressions of the attorneys created while working in anticipation of litigation, unless those seeking the work product show a substantial need);
- Self-Critical Privilege (protects self-evaluating documents or documents created during the internal investigation if these criteria are met: 1} the information results from self-critical analysis performed by the party seeking protection; 2} the public has a strong interest in preserving the free flow of the type of information sought; and 3} the information is of the type whose flow would be curtailed if discovery were allowed); and
- Audit Committee Issue (Communications between counsel and the board or audit committees are probably privileged, but the law is not settled on this question. Therefore, counsel must satisfy privilege requirements by segregating and labeling any portions of board or committee notes that summarize privileged communications as “Privileged and Confidential.”).
Counsel’s communication with lower-level employees may not be protected by the attorney-client privilege. Depending on state law, this privilege may be limited to senior management and employees that advise senior management on final decisions and may exclude employees who only supply information.
- Documents shared with witnesses during an interview might become discoverable;
- Request employee confidentiality during or after the interview; and
- Have at least two persons present at the interview in case the interviewee later claims the attorney misunderstood facts.
D. Use of Experts: When selecting an expert, counsel should consider the type of expert to employ, including accounting, forensic, private investigation or business-specific experts. Any expert engaged should be independent of the company to increase credibility to the government.
5. Remediation Measures Count
The government will consider the company’s past commitment to compliance; specifically, what controls were in place at the time of the investigation. The SEC and DOJ will also examine the company’s remediation measures undertaken during the investigation to correct problems detected. In assessing both past and current practices, the government will pay particular attention to what management has done and said with respect to compliance. The tone at the top counts. Remediation steps to consider include stopping a potential violation if it has not already occurred; recommending and implementing enhanced controls or other remedial measures to ensure that ongoing or systemic problems cease; retraining or training employees company-wide or in at-risk groups to prevent future violations; disciplining employees involved in the incident; and reminding all employees of the company’s code of conduct and code of ethics, including the company’s anti-bribery policies.
The government has a full array of sanctions from which to choose, including injunctions, disgorgement, penalties, receivers, appointment of monitors, cease and desist orders, non-prosecution agreements, deferred prosecution agreements, criminal indictments and trials. Ultimately, the government’s determination will depend on how it views the company’s response to a potential violation of the law by its employees or agents. Early self-reporting combined with an extensive investigation, as well as immediate and appropriate remediation, can help convince the government that a lesser sanction is appropriate, or no sanction at all.
All general counsels and chief compliance officers should have a written checklist of action items conforming to what the government currently considers to be best practices that should be immediately undertaken when a potential violation is uncovered.