The pitfalls of internal corporate investigations


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This article was published in FT Alphaville on 27 May 2015

Anil Rajani, Partner at law firm Fladgate, reckons the SFO should take a leaf out of the FCA’s book when it comes to the “self reporting” of wrong-doing within companies.

Business leaders are increasingly finding themselves between a rock and a hard place in the tricky terrain that is the economic crime landscape. “The rock” in the UK is the 2010 Bribery Act and the duty this brings for directors and officers of a company to prevent fraud. It has pushed good corporate governance and fraud prevention to the top of boardroom agendas and created a complex new layer of management responsibility for C-Suite office holders.

The corporate world jumped at the chance of Deferred Prosecution Agreements (DPAs), when they were brought in by the Crime and Courts Act 2013, and their promise of more lenient penalties for businesses taking positive action to flush out bad practice amongst staff and self­report. And this ushered in a new era of internal investigations.

However the “hard place” is the criticism levelled at the business community recently by Serious Fraud Office director general David Green, that the new penchant for commissioning internal investigations before self-reporting can be dangerous, often “churning up the ground” for any subsequent investigation by a regulator. Important evidence in a white collar crime scene can be contaminated, he says, and rendered useless. Conversely a company’s position can be scuppered if evidence it might want to rely on in its defence is made inadmissible in court.

But if corporates are to hold back on internal investigations, how does this square with their duty to prevent fraud? That spot between the rock and the hard place is looking ever more uncomfortable by the day.

Under a DPA a prosecuting agency charges the offending company with a criminal offence but proceedings are automatically suspended. The company may agree to a number of conditions (such as payment of a fine). However, if it does not honour the conditions, the prosecution may resume. Acceptance of a DPA requires the corporate to have ultimately co-operated fully with the authorities, which it could be argued would include self-reporting. And it is this that has sparked the rise in external advisers being engaged to assist with internal investigations.

However, recent statements from both the joint head of the Bribery and Corruption Unit at the SFO and David Green, the Director General, have directly questioned the desirability of corporations commissioning internal investigations before deciding whether to self-report. In fact, Mr Green was quoted as saying that he was “against businesses commissioning their own reports into allegations of serious misbehaviour that often ‘cleared’ the subject of illicit activity”. He said that the SFO was “often handed privately paid-for investigations by external advisers that contained an inherent conflict” implying concern that external advisers could minimise the corporate’s culpability.

Mr Green highlighted the recent fine handed down to PwC in New York, where authorities accused the consultancy of watering down its report into alleged money laundering by one of its clients. He also cited a report prepared by external lawyers for a bank who had investigated its activities following claims of misleading customers over a government loan funding scheme. The report produced by those lawyers, Mr Green said, either was not entirely candid in its conclusions or adopted too narrow a remit at the outset.

But how are companies to respond to this withering criticism from the SFO? Surely they are damned if they don’t investigate their own practices and damned if they do? How on earth are they to respond?

Any hint of wrongdoing by a corporate or its senior officers requires investigation, particularly in the prevailing climate for self-reporting. In fact the SFO in its public-facing website encourages corporate self-reporting and refers to the Guidance on Corporate Prosecution and the Joint Prosecution Guidance of the Director of the SFO and the Director of Public Prosecutions on the Bribery Act. These state clearly that the SFO will take into consideration whether a corporate body has reported itself as a public interest factor against prosecution. They go on to state that a genuinely proactive approach adopted by the corporate management team when the wrongdoing is brought to its notice may mean (although it is not guaranteed) that a prosecution will not follow.

One of the answers is to be sure that an external investigator has suitable experience; indeed it is most often lack of expertise and experience that can result in the “contamination” of crime scenes that Mr Green talks of. It should also be borne in mind that the SFO’s budget is not unlimited. Notwithstanding the blockbuster funding it may have received for specific matters from the Treasury, for instance for the LIBOR and the Forex investigations, its resources are finite. A properly conducted internal investigation carried out by external advisers who really do know what they are doing, followed by a “self-report” not only has the advantage of flushing out corporate culprits but is also a saving to the public purse.

Perhaps the SFO could take a leaf from the FCA’s book, which focusses on the use of experienced independent external investigators, or “Skilled Persons” – a role which is tightly defined. Following a report from a corporate concerning wrongdoing, the FCA may require a Skilled Person’s Report under s166 Financial Services and Markets Act 2000. The Skilled Person will be someone approved by the FCA who will conduct their own internal investigation. Upon production of the Skilled Person’s Report, the FCA will then decide whether to take any further action, but it will generally follow the Skilled Person’s recommendation. However, even the fact that the Skilled Person’s Report has been prepared will, of itself, assist the corporate in being able to demonstrate that it has co-operated with the prosecutor. We would advocate a similar approach for the SFO. This will deal with the pitfalls and, one hopes, lead corporates away from the rocks, to a place more habitable than a hard place too.

For further information, please contact Sophia Purkis, Partner, Fladgate LLP (spurkis@fladgate.com)

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