In the second of a series of regulatory columns in Compliance Matters by experts in Guernsey’s legal sector, Mourant Ozannes Partner Christopher Edwards and Counsel Tim Richards discuss the management of internal investigations, including the trouble that financial firms may have when maintaining claims to privilege over documents they produce.
One of the first steps which a company may take when faced with a regulatory issue is to embark on an internal investigation in order to understand what issues it is facing and how best to deal with them. Although that process is often ultimately very helpful, the manner in which that investigation is conducted is very often given far less thought than it deserves.
The investigative process, if undertaken in the frank and honest manner which it requires, can produce material that the company would rather not become available to a regulator, much less to members of the public. It is sometimes possible to avoid that outcome by claiming legal professional privilege over those documents. The underlying purpose of legal professional privilege is to allow unfettered access to a lawyer's professional skill and judgment and it most commonly arises in the context of the giving of legal advice (legal advice privilege) or litigation (litigation privilege). However, unless that issue is properly considered at the outset (rather than merely at the conclusion) then a belated attempt to cast a cloak of privilege over documents generated during an investigation can lead to unhappy results. Recent court decisions in England and Jersey have highlighted the difficulties that companies face when maintaining legal professional privilege over documents produced by internal investigations.
Legal advice privilege – who is the 'client'?
Where legal advice privilege applies, it is important for the firm in question to keep asking itself who the 'client' is. The Court of Appeal in Three Rivers District Council and others v Governor and Company of the Bank of England (no 5)  QB1556 held that the 'client' for the purposes of legal advice privilege was a small team set up to deal with certain legal issues. Any information gathering undertaken by employees from outside this unit was no different, for the purpose of assessing whether legal advice privilege applied, to information obtained from outside third parties. In other words, legal advice privilege would only apply to communications between a lawyer and the small group of employees actually charged with instructing the lawyers (which the court defined as the 'client'). This meant that the information that the employees outside the unit had obtained was not privileged and the authorities could require the company to disclose it - a most unhappy outcome.
The same issue reached the English courts again in the context of proceedings known as the RBS Rights Issue Litigation  EWHC 3161. As part of some continuing litigation, the claimants sought the disclosure of Royal Bank of Scotland interview notes in relation to two internal investigations. Those interviews involved in-house American and British lawyers as well as the RBS Group Secretariat which contained no lawyers. Although the English High Court acknowledged that Three Rivers was a "controversial decision," it nevertheless felt bound by it. Although the interview notes recorded direct communications with RBS' lawyers, they contained information gathered from employees or former employees for the purposes of enabling RBS to seek and receive legal advice. Legal advice privilege did not extend to information provided by employees and ex-employees to or for the purpose of being placed before a lawyer. It is worth noting that although a verbatim note of non-privileged interviews would not be privileged, the court held that an interview note that included a lawyer's thoughts or comments on what he was recording with a view to advising the client would be. However, the court said that on the facts of the case, it was not enough for RBS to say that the interview notes were not verbatim and therefore must "contain legal input or selection justifying a claim to privilege." Again, this meant that the authorities would be able to require RBS to disclose interview notes which it might have thought would remain confidential to persons who were suing RBS.
In the light of Three Rivers and the RBS Rights Issue cases, legal advice privilege probably does not cover internal documents generated by a firm's employees, even if they are required to provide information to lawyers to obtain legal advice. This issue, however, has yet to come before the Guernsey courts and other common-law jurisdictions have specifically declined to follow English law on this point (see, for example, the Hong Kong Court of Appeal decision in CITIC Pacific Limited v Secretary of Justice and Commissioner for the Police  HKEC 1263). It does, however, show us that it is necessary for financial firms to structure any interviews (and the gathering of information in general) carefully. It is important to consider at the outset who should undertake them and how they should be recorded (and by whom) in order to ensure that the interview notes and documents that the investigation generates are subject to privilege and there is no requirement to disclose them. That can be hard to do in the real world as firms often want to progress matters swiftly, but the consequences of failing to take the time to do so can be dire.
Litigation privilege – what is litigation?
A company that tries to involve litigation privilege may also have problems. In the Jersey case of Smith v SWM Ltd  JRC026, a Jersey master held that a report which the Jersey Financial Services Commission (JFSC) had told SWM Ltd to obtain about the way it had been conducting its investment business was not subject to legal professional privilege. That meant that the report was disclosable in an action by one of SWM's clients in relation to that business. The Master held that the exercise of powers by a regulator, such as the JFSC, was not adversarial. The dominant purpose of any report obtained by the JFSC was to allow it to discharge its regulatory responsibilities. The Master accepted that his conclusions implied that a regulated entity might receive a complaint about the services it had performed, and that the complaint might also have been lodged with the JFSC, and that such a complaint could lead to the JFSC exercising regulatory powers. In doing so, he said that the regulator might demand the production of a report which the regulated entity would then have to hand over if the complainant were to persue it in the courts later. Such a report is likely to be a fact-finding exercise and an assessment of whether or not the firm has met regulatory standards. As such, it would not of itself be subject to legal professional privilege. This applies even if the regulated entity can establish that legal proceedings by a former client or clients are "reasonably in contemplation." The key point is that the dominant purpose of the exercise by the JFSC of its regulatory powers was not the production of documents for use in anticipated litigation but rather a response to the exercise of those powers.
The recent English case of Serious Fraud Office v Eurasian Natural Resources Corporation  EWHC 1017(QB) also highlights the extent to which documents produced by internal investigations may not be subject to privilege. In 2011 a tipster at the Eurasian Natural Resources Corporation made various allegations of fraud and bribery in relation to its businesses in Kazakhstan and Africa. ENRC then embarked on an internal investigation and at the same time reported the occurrence to the SFO. There were various follow-up meetings between the ENRC and the SFO, after which the SFO began its own criminal investigation of the ENRC in 2013. Later, the SFO asked the ENRC to hand over internal documents that it had created during its internal investigations. The ENRC refused, claiming legal advice privilege in relation to a small subset of documents and litigation privilege in relation to most of the remainder. A judgment handed down in early May 2017 refused the claims for litigation privilege and made a number of findings, including the following.
- A raid by the SFO and the processes set in train by such a raid (such as an SFO investigation) does not constitute adversarial litigation.
- The reasonable anticipation of a criminal investigation does not amount to a reasonable anticipation of litigation.
- Litigation privilege applies only to documents prepared for the sole or dominant purpose of conducting litigation (and not to documents produced with the purpose of enabling advice to be taken in connection with anticipated litigation).
- Litigation privilege does not apply to documents created with the purpose of obtaining advice about how to avoid contemplated litigation.
It must be emphasised that the ENRC decision was in the context of a criminal investigation that the SFO had begun. The judge's findings, however, are both surprising and controversial, not least because their effect is to ensure that litigation privilege in England may arise only in limited circumstances in the criminal context, and far more rarely than in a civil context. The Guernsey Royal Court is not bound by the ENRC decision and the ENRC itself has sought leave to appeal against the English Court of Appeal's decision.
In conclusion, all four cases serve to highlight the difficulties a financial firm may face in maintaining claims to privilege over documentation produced by internal investigations. It can avoid many of these pitfalls by instructing external lawyers at an early stage so that, where possible, it can take effective steps to preserve privilege. It should take the following practical steps to preserve privilege.
- Set up a protocol, at an early stage, for the undertaking of any investigation, establishing a working group with clearly defined responsibilities to undertake that investigation.
- Limit the dissemination of legal advice as far as possible. This should, for example, help to keep things confidential.
- Ask clients, if possible, not to add comments on any legal advice received (because such comments may not be privileged).
- Mark any privileged communications "privileged" and be clear about it. The presence or absence of such a label is not determinative, but it makes it clear to the recipient that the communication is supposed to be privileged and may add weight to an argument that in fact it is.
A failure to take these steps, or at least to consider them, can have unfortunate consequences.
An original version of this article was first published in Compliance Matters, July 2017.