All you need to know about self reporting, Concerned about possible bribery?, Internal investigations - Written by on Sunday, May 15, 2011 22:27 - 0 Comments

4) Investigating a possible bribe: Preserve evidence & our 3 golden rules on scope

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At the same time as assessing the credibility of the concerns to be investigated, choosing the investigators and understanding the logistics of the investigation and who the investigators will report to (that’s the first 10 minutes accounted for) the Company should take immediate steps to preserve evidence ASAP.

Preserve the evidence

Think of the part of the business to be investigated as a taped off crime scene.

A successful internal investigation requires swift moves to preserve evidence (taping off the suspected crime scene).  In a business context that evidence will typically be documents and data.

Many businesses will have a document retention policy.  This is usually an oxymoron.  Outside of exceptional circumstances most businesses will have a periodic practice of the destruction of documents.   The document retention policy is a document which typically lays this process out.

As a result, any such so-called “document retention policy” will need to be suspended over relevant documents and data.

Failure to get this right can have catastrophic consequences.

Arthur Andersen was famously convicted of obstruction of justice after its in-house counsel reminded employees of the document destruction policy in the wake of the Enron collapse.

The Houston office didn’t need a second reminder. While Andersen succesfully appealed the conviction it was a pyrrhic victory. Andersen as a stand-alone business was already dead after the DOJ indictment and conviction as clients jumped ship.

A sobering example of what can happen.

Scope

We recommend a document which approves the investigation and sets out some broad parameters of scope.

This can be a Board resolution or the audit committee or an engagement letter.  It’s not necessary to spend too long on this but is a useful way to memorialise the intention from the get go.  The instructions should set out the scope of the confidential investigation, outline the document retention position, and that the investigation will be privileged among other basics.

In our view there are three golden rules to the scope of the investigation:

1. Put out the fire

The investigation must have the rooting out of any possibly illegal activity at its core.

Only if you know where it is can you stop it and fix up the problem and as we described in our first post in the series – it is critical that any potential wrongdoing is stopped as soon as possible.

2. Ensure appropriate breadth

The investigation must also be sufficiently broad to ensure that it can have credibility with stakeholders and regulators.  Too narrow a focus will be met with claims (in some cases justifiable…) that the investigation’s parameters were fixed with a view to reaching a pre-determined (favourable) outcome.

3. Speed

Speed will be critical.  On any investigation it is always possible to do more.

Balancing the arguments weighing in favour of a broad scope in 2. it is critical to ensure that the investigation can be conducted as speedily and efficiently as possible.  Extended investigations can cause practical as well as regulatory problems.  Stock prices can drop, loan covenants risk being broken and reporting obligations to public markets (if appropriate) need to be borne in mind.

This means that while an investigation needs to have a sufficiently broad scope it must also be focused.

We recommend setting a clear timetable (including to external counsel) for collation of documents, interviews and interim and final reports.  This helps to keep focus and minimises the risk of getting side-tracked up a blind alley.

Other views

When balancing these sometimes competing drivers it is often appropriate to ensure that interested parties (for example the auditors) are on board.

If regulators are involved they too may have a say in the scope of the investigation.  Against the backdrop of the SFO’s Self Reporting regime the SFO has this to say on internal investigations:

“we will discuss the scope of any further investigation needed.  Wherever possible, this investigation will be carried out by the corporate’s professional advisers. This will be at the expense of the corporate. We undertake to look at this in a proportionate manner and to have regard, where appropriate, to the cost to the corporate and the impact on the corporate’s
business.

12. We appreciate that document recovery and analysis will be a very significant issue in any investigation. Electronic searches will be needed. We are able to discuss the methodology for this with the corporate and its advisers to ensure that the cost is proportionate to the amount and seriousness of the issues reported. We shall also be prepared to discuss the steps taken by the corporate and its advisers to ensure that material (and, in particular, electronic material) is preserved.

13. We will also want to be involved in regular update discussions concerning the progress of any further investigation.”

Now.  In the first phase of an internal investigation it may well be that the matter has not risen to the level where the corporate has concluded to Self Report to the authorities.  It is too early.  However, any investigation undertaken in advance of dealings with the regulator will set the tone.

In other words, echoing our quote from Howard Sklar last week, “The other thing I would add is that investigations often snowball. You get a call about something pretty minor, an employee worried about something. When you start picking at it, the threads start to unravel and pile up, until you’re in over your head. In my opinion, it’s important—vitally important—to begin every investigation with an eye toward what you would do if it’s much bigger than at first appears.”

Or put another way.  Hope for the best.  Plan for the worst, and start as you mean to go on.

If the corporate wishes to try to keep some control over the investigation should the regulator become involved an ability to demonstrate a sensible, and defensible approach to the initial investigation will add credibility and increase the likelihood that the regulator will allow the continuance of the investigation.

Be careful out there.

 

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