When suspicions of wrongdoing or illegal activity have arisen in your organization, an internal investigation should be considered to minimize damage to the organization’s reputation and to limit the organization’s exposure to criminal, civil and regulatory enforcement, and related action.

An internal investigation should be considered when there is a credible indication that a law or an important organizational policy has been violated within the global organization. The alleged misconduct may be at the parent or subsidiary level. Regardless of whether the allegation is at the parent or the subsidiary level, the organization has an obligation to investigate the allegation and remedy the situation promptly. What steps should the organization take to investigate the conduct? It is prudent that internal investigations regarding serious allegations should be conducted by external counsel that is not engaged as counsel for the parent or the subsidiary for other representation. Independence is the key.

It presents a significant challenge when the parent is a foreign company, and the conduct is alleged to have occurred at a United States subsidiary. What criteria should the foreign parent organization use to select counsel in the United States to conduct the independent internal investigation? These issues will be discussed in this paper.

Reasons to Conduct an Internal Investigation

Information of alleged wrongdoing may come from an internal audit, a compliance hotline report or from an employee or agent of the organization. It may also come from a disgruntled former employee. The goal of an internal investigation is to obtain accurate and reliable information about an allegation and examine closely the information and the source of the allegation.

An internal investigation is important to assist the organization in evaluating whether to self-report any illegal activities to the government, take corrective action and consider disciplinary action against those in the organization who engaged in wrongdoing and breached their fiduciary duty with fraudulent intent. If a self-report is not made, the corporation risks an investigation being commenced by a state or federal law enforcement agency. Further, if the alleged misconduct involves company personnel who engaged in the wrongdoing against the organization, the organization risks the continued loss of assets and resources. If any of these things occur and an internal investigation is not commenced, the corporation loses control of the situation and has far less opportunity to identify the wrongdoing and mitigate the damage and harm to the organization.

Selecting Counsel to Conduct an Internal Investigation

As discussed above, the organization should consider engaging experienced and independent outside counsel to conduct a full and unbiased investigation of the alleged misconduct. The scope of the internal investigation should be reasonably calculated to address the alleged misconduct. The organization and its counsel should discuss and agree upon the scope of the investigation and steps to be taken prior to initiating the internal investigation.

Selection of counsel is an important step in this process. This decision will be made after the organization assesses the allegations of misconduct however received. Maybe the information received can be adequately addressed by the corporate compliance officer in coordination with the office of general counsel. If so, there is no need to engage outside counsel. The normal protocols and procedures of the organization should be followed to arrive at an appropriate resolution. That, of course, is the objective of an effective corporate compliance program. However, the allegation being presented may involve the conduct of a high-level executive or board member of the organization or it may involve the Foreign Corrupt Practices Act. Under those circumstances, it is wise for the organization to engage outside counsel to conduct the internal investigation.

When deciding on counsel to be engaged to conduct the internal investigation, consideration should be given to attorneys who have competently conducted such investigations in the past and have the resources to undertake this task. Conducting an internal investigation is complicated and an involved undertaking since fraud and corruption are difficult to uncover and establish. When interviewing counsel for this task, questions should be asked regarding how counsel will undertake this assignment. Is counsel competent to create and employ an investigative plan, bring in the necessary resources to conduct the investigation and provide a legal analysis with recommendations for corrective action? Is counsel competent to refer and coordinate with the Justice Department should a referral be directed? Is counsel competent to recognize the issues presented by international law and to coordinate with lawyers in foreign jurisdictions to make the right recommendation? Since internal investigations are very involved and, therefore, may take a long period of time to complete, engagement of the right lawyer is essential.

Other Considerations When Conducting an Internal Investigation

Once counsel is selected, an investigative plan will be prepared and then updated and revised as the investigation goes forward. One of the first steps in conducting an internal investigation is to secure and preserve all potentially relevant documents. The best practice is to promptly and immediately advise in writing all appropriate management and employees to preserve all potentially relevant hard and electronic documents, which is commonly known as a “hold.” Any organizational document retention policy (better described as an automatic document deletion policy—a systematic plan for the destruction of paper and electronic files) should be halted or suspended immediately.

The next step is to interview relevant witnesses pursuant to an established protocol. In conducting witness interviews, it is advisable to have an attorney and one other person, who may also be an attorney, paralegal or investigator, present for the interview. Notes should be taken by the investigator and a memorandum of the interview should be prepared following each interview. Also, Upjohn warnings must be given to all witnesses who are employed by the company to make it clear to that employee that counsel conducting the internal investigation only represents the company, not any employee of the company. The attorney client privilege owed by counsel conducting the internal investigation is solely with the company. However, the company has the right as the client to waive the privilege and direct the disclosure of the information.

The combination of witness interviews and document review, coupled with an analysis of any prior regulatory history, will assist counsel in determining whether a violation of policy or law took place and what steps should be implemented to prevent and detect further non-compliance.

It is important to note that not all internal investigations are alike and that a cookie-cutter approach should be avoided. Experienced in-house and outside counsel should work together in providing advice to the organization regarding how to tailor an internal investigation that is best suited for the specific allegation at issue.

Although the initial audience for an internal investigation is the corporation’s general counsel and board of directors, if a voluntary disclosure is made, the government will also receive the information gathered in the internal investigation. As a result, it is important that a private investigator be engaged by counsel conducting the internal investigation to protect work product. The private investigator will be responsible for conducting the interviews of personnel, gathering evidence, preserving chain of custody, and working with forensic accountants in the financial analysis of the wrongful conduct.

In addition, counsel conducting the internal investigation will likely want to engage a forensic accounting firm, in addition to the private investigator, to perform a financial analysis and extract and ingest data from the organization. Although the work of the forensic accountant is important for the factual determinations, the forensic accountant may also make recommendations for improvement of the accounting procedures. Those recommendation may be segregated from the factual findings contained in the final investigative report and considered to be part of the attorney’s work product. A thorough analysis of foreign and domestical laws must be conducted by counsel in those jurisdictions.

However, even if a voluntary disclosure is being considered, the work of an attorney in conducting an internal investigation should be done in such a way to preserve the attorney-client privilege and work product doctrine. This presents an issue for counsel to consider when dealing with a foreign parent organization of a U.S. subsidiary. The attorney client privilege and the work product doctrine are governed by state law. However, the parent organization may be seated in a country that does not have similar privileges and protections. Counsel for the parent organization must be part of the analysis of how to protect the work product of the internal investigation since the final investigative report will be presented to the Board of the parent. The parent organization may have disclosure obligations in the country in which it is located. This is especially true when the parent organization is a public company.

Counsel conducting the internal investigation and counsel for the parent organization must also deal with the issues presented by an annual audit of the parent and subsidiaries. How much information should be shared? Will that information be protected from further disclosure? It is essential to establish a good rapport with the external auditors to collaborate in such a way that maximizes the confidentiality of the internal investigation as much possible.

Depending upon the organization’s objectives in conducting the internal investigation, it is often wise for an organization’s audit committee or board of directors to receive an oral report regarding the results of the internal investigation from counsel prior to deciding whether a written report is desirable. Many factors may influence an organization’s decision in requesting whether a written report should be prepared and submitted. As discussed above, it is essential to fully understand the law of the locations of the parent and subsidiary.

The final investigative report needs to be presented to the Board of the parent organization. The board should consider whether the report should be written or oral. The board will direct counsel how to proceed, which may include corrective action, revision of policies and procedures and whether to report the misconduct to law enforcement. If the board directs a report be made to law enforcement, counsel will facilitate that referral and cooperate with the government in its criminal investigation.

If a written report is requested and prepared, it should address all critical facts related to the investigation. The written report should identify the scope of the inquiry, summarize the steps taken to gather the evidence, summarize the facts discovered during the investigation, provide a legal analysis, and suggest recommendations. Depending on the circumstances, this compartmentalization of the final investigative report can be segregated. For example, the factual findings of the internal investigation will likely be disclosed to government agencies as part of reporting requirements or in making a referral to law enforcement. However, the legal recommendations contained in the final investigative report constitute attorney advice and should be kept confidential so long as the governing laws permit such confidentiality.

Actions to Take in Response to the Findings of an Internal Investigation

If the internal investigation concludes that the allegation is credible and supportable, then the organization must take prompt and effective action to address the violation and prevent a recurrence of the conduct. This may include placing personnel in the organization who are suspected of wrongdoing on administrative paid leave pending the results of the internal investigation. This step protects the integrity of the internal investigation and allows for relevant evidence to be gathered from computers, phones, iPads and physical documents without interference.

If the final result of the internal investigation confirms that personnel of the organization were involved in wrongdoing and that misappropriation of company assets occurred, then those individuals must be terminated, and demand letters should be sent to those individuals for repayment of the loss that the company sustained. It is important to consult with an employment and benefits attorney in making employment decisions and in providing notice of termination. For example, depending on the state law, compensation provided to an employee during the period of time when the employee breached his or her fiduciary duty with fraudulent intent may be clawed back. In addition, deferred compensation may be withheld. A litigation attorney should also be consulted to advise on whether civil affirmative litigation should be sought against those engaged in wrongdoing for recovery of damages and seeking equitable relief when appropriate to divest the wrongdoer of an interest in property improperly obtained.

In any corrective action taken, it is important to show the government that the organization is taking the misconduct seriously, rectifying it, and trying to prevent such misconduct from happening again in the future. Corrective action should always include the enhancement, or implementation of, an effective corporate compliance program. A corporate compliance program should be focused on the significant areas of risk to the organization and include policies, standards, and procedures designed to prevent and detect violations of law by employees and agents of the organization. The compliance program should be designed to meet the criteria set forth in Chapter 8 of the U.S. Sentencing Guidelines.

When the company is not the victim of the misconduct, the results of an internal investigation will allow an organization to consider whether to self-report criminal wrongdoing to the government. This is an important decision when dealing with the Foreign Corrupt Practices Act. Voluntary disclosure can help the organization minimize the risk of prosecution or, if the organization is prosecuted, can help in minimizing the severity of penalties imposed on the organization, including the size of the fine and the imposition of organizational probation. An organization without an effective corporate compliance program will likely be placed on probation with a condition to implement an effective compliance program designed to prevent and detect violations of law. This condition will remain under the oversight of the court for the duration of probation and a monitor may be appointed by the court to oversee the implementation of the compliance plan. This is costly since all of the expenses must be borne by the company.

Conclusion

Each internal investigation presents unique issues. Those issues become increasingly complex when the internal investigation involves an organization whose presence extends across multiple countries. Experienced counsel can help an organization address these issues from both strategic and ethical perspectives.