Legal professional privilege and internal investigations- using the tools in your arsenal

2018 has seen significant developments in relation to the rules underpinning legal professional privilege (legal privilege). These rules impact on financial service sector firms and their relationships with regulators.

Let's go back to basics to review what legal privilege is, how it has been challenged and, most importantly, to offer some practical tips on how firms and other corporate entities can maximise the benefits from exercising their right to legal privilege in internal investigations.

What is legal privilege?

Legal privilege is a fundamental right which enables a person to seek legal advice or conduct litigation, secure in the knowledge that advice, or information prepared for the litigation, will not be made available to others, whether regulators, competitors or anyone else. Once established, the protection can only be waived by the client, not by the lawyer or any other party. There are two sub-categories of legal privilege:

  • Legal advice privilege; and
  • Litigation privilege.

Legal advice privilege applies to communications between a client and a lawyer which have come into existence for the purpose of providing or receiving any legal advice (this need not be advice relating to litigation).

Litigation privilege applies to communications made and documents produced for the dominant purpose of adversarial litigation that is either ongoing or "in contemplation", meaning a real likelihood. Once established, litigation privilege can apply to many forms of documentation, even documentation produced by a third party (for example: internal investigation reports, expert reports, some forms of witness statements). A lawyer does not necessarily have to be involved for litigation privilege to apply.

Why is legal privilege significant in the context of internal investigations?

Regulated firms have a duty to maintain appropriate systems and controls. When events suggest there may have been misconduct, or a possible failure of internal controls, firms will often want to conduct internal investigations to get to the bottom of this.

However, if there has been a serious issue, the relevant regulator may want to impose sanctions. There may be scope for criminal prosecutions, and if the situation becomes public knowledge a firm's customers may also seek remedies in the courts.

"Litigation privilege can apply to many forms of documentation, even documentation produced by a third party."

Accordingly, a firm could find itself facing criminal or civil actions later down the line from the initial internal review. If there is a risk that materials produced for internal investigations might find themselves discoverable in such proceedings the firm might well feel torn between encouraging those involved to speak freely and exchange views, and protecting itself against potentially unhelpful evidence in future litigation. Legal privilege provides a "safe space" for an honest investigation and analysis of the facts.

Recent challenges to legal privilege and some practical tips

The ENRC Case

This case highlights the difficulties that corporate entities face in effectively applying legal privilege. ENRC began an internal investigation after a whistle-blower made it aware of potential corrupt behaviour. As part of its internal investigation, ENRC engaged forensic accountants and external lawyers to establish what had occurred and to advise ENRC. In the course of the subsequent Serious Fraud Office (SFO) investigation, the SFO requested copies of documentation which ENRC considered to be legally privileged, including external lawyers' notes of witness interviews and materials generated by a firm of forensic accountants in relation to the potentially corrupt behaviour. ENRC refused to provide the SFO with these documents on the basis that they were legally privileged. The SFO took the dispute to the High Court for a judicial determination on whether legal privilege applied to the documents in question.

The first instance judge made a number of rulings which, if upheld, would have significantly reduced a firm's ability to benefit from legal privilege, particularly in relation to conducting internal investigations where criminal prosecution was contemplated but had not yet been confirmed by the regulator/prosecutor, and the firm was itself not yet sure whether the facts would support a prosecution. In the Court of Appeal the first instance judgment was largely overturned but the case serves as an important reminder of the rules which govern how legal privilege applies; it takes much more than badging a document with "legally privileged" to benefit from the protection on offer. Our tips on conducting legally privileged internal investigations in the aftermath of this case are as follows:

  • The internal investigation should be based on written advice from the firm's lawyer to senior management that the investigation is required for the purpose of advising on reasonably contemplated litigation.
  • The investigation team should be named and investigation documentation should not be disclosed to anyone outside of that team (even to employees within the firm) without first obtaining legal advice.
  • The fact-finding exercise in an internal investigation can benefit from the protection of legal privilege, as long as its dominant purpose is in relation to the conduct of reasonably contemplated litigation. As such, ideally all activities (interviewing witnesses, instructing third party reports, drafting internal reports etc.) should be conducted under the written instruction of the lawyer leading the investigation.
  • All investigation documentation (internal emails between the investigation team, relevant correspondence with third parties, internal reports, external reports, witness statements etc.) should be marked as "confidential and subject to legal professional privilege" and electronically saved in folders marked as "legally privileged".
  • Witness statements taken by lawyers, or on the instruction of a lawyer, in a legally privileged investigation can be protected by litigation privilege. Ideally they should be taken by a lawyer, failing which the firm's lawyer should instruct (in writing) the interviewer to conduct the interview for the purposes of the legally privileged investigation. The interviewees should be instructed to keep the terms of the discussion confidential.
  • Third party expert reports (such as a books and records review) can be legally privileged. We recommend that they are instructed by the firm's lawyer for the purposes of the legally privileged investigation. The expert report's terms of reference should be marked as "confidential and subject to legal professional privilege" and should flag that the report is prepared in contemplation of litigation.

It is easier for a corporate entity than it is for an individual to fail to establish legal privilege, or to inadvertently waive or lose it, because dealing with corporate bodies (particularly large ones) often means dealing with many more people. The tips we have outlined above are intended to address these difficulties but each case will turn on its own facts and there is no guarantee our tips will ensure that legal privilege applies.

Challenges regulated firms experience in using legal privilege

Establishing litigation privilege at the commencement of an internal investigation, and extending it to cover all relevant documentation generated during an internal investigation, can be challenging. The number of people involved in an internal investigation, the different teams who play a part and the heightened emotions which often accompany a serious allegation, can create a difficult environment in which to maintain the discipline required to preserve litigation privilege.

The situation is made more difficult when you add into that mix the expectation, and pressure, applied by the regulator. The FCA's Director of Enforcement has said, "Whether and how a firm investigates internally must now be looked at from the point of view of whether doing so will assist or inhibit the Financial Conduct Authority's investigation." As such each firm must decide how they walk the narrow line of not obstructing a regulatory investigation while simultaneously maintaining legal privilege, where appropriate, to enable a full and frank investigation of the facts.

The involvement of a regulator also adds other complications, in that if an investigation would be carried out even in the absence of a litigation risk, for example to comply with free-standing regulatory obligations, it will be harder to establish that it had the dominant purpose of preparing for any litigation. A regulatory investigation (as opposed to a prosecution) may also not have the "adversarial" character required for litigation privilege to apply.

Interestingly, the FCA has previously expressed a similar view to that of the first instance judge in the ENRC case on the application of legal privilege to interview notes taken by lawyers. The FCA has stated that restricting access to the evidence established in an internal investigation on the basis of privilege is not an approach which the FCA welcomes.

The FCA is clear that it expects firms to be open and cooperative and to inform them of anything about which the FCA would expect notice (see the FCA Handbook for more details). As such, communications with regulators need to strike a difficult balance between compliance with notification obligations and valid protection of the right to legal privilege.

The balancing act it's your privilege, you decide

Ultimately where legal privilege can be established, it is for the firm to decide on how closely to guard the privileged information. This involves maintaining openness where appropriate while also considering whether enforcing the firm's right to privilege will damage its prospects (i.e. in the negotiation of a civil settlement with a regulator through a self-reporting process, or "failure to cooperate" being threatened as an aggravating feature in sentencing). The regulator cannot unilaterally set aside the firm's legal privilege but it can decide that the firm's reliance on legal privilege is unhelpful and does not amount to the openness and cooperation expected of a regulated firm. However, far from being a tool to avoid openness and cooperation, legal privilege provides you with the safe space within which to uncover all facts and then disclose what is required of you in a form of your choosing.