Internal investigations are neither rare nor straightforward.
They can be prompted by a whistle blower inside the organisation alerting their superiors to allegations of wrongdoing. Alternatively, they could be a reaction to the corporate being investigated by a regulatory or enforcement agency.
To give an idea of the frequency of investigations by enforcement agencies, it is worth noting that at any given time the Serious Fraud Office (SFO) has about 60 live criminal cases under investigation or before the courts. It is likely that many of these have either prompted or been the result of internal investigations.
In the past two months or so, the SFO has announced that it has:
- Imposed an £850,000 fine on logistics and shipping corporation FH Bertling Ltd for using bribery to secure contracts in Angola.
- Secured a guilty plea from a company owner regrading bribery to secure £12M worth of contracts for her company, ALCA Fasteners Ltd.
- Opened a joint investigation with Dutch authorities over biodiesel trading at road fuel provider Greenergy and various third parties, resulting in property searches in the UK, Netherlands and Belgium and four arrests.
- Charged Anna Machkevitch, director of London-based ALM Services, with failing to supply documents required by the SFO, contrary to Section 2 of the Criminal Justice Act 1987, in connection with an ongoing corruption investigation into Eurasian Natural Resources Corporation (ENRC) and related companies.
- Charged individuals after a five-year investigation into alleged fraud involving the ethical forestry investment scheme, Global Forestry Investments; one of two schemes in which investors lost an estimated £20M.
The Importance of Internal Investigations
This list of new SFO activity is just a brief indicator that investigations into corporates are common. And any company that believes it could become (or already is) the subject of an investigation by any enforcement or regulatory agency needs to conduct its own internal investigation.
Such an investigation can be vital in determining what, if any, wrongdoing has been committed and how it could be prevented in the future.
Information uncovered by a properly planned and conducted internal investigation can be of benefit in dealing with enforcement agencies. Self-reporting wrongdoing uncovered by an internal investigation before the relevant agency knows about it can result in lenient treatment. Similarly, cooperating with an ongoing agency investigation by sharing the findings of an internal investigation can also help avoid either prosecution or the most severe penalties that a prosecution can bring.
But conducting an internal investigation raises a number of legal issues. This is an area of law that in itself is worth a series of articles.
But on this occasion we are going to focus on one area of law that can have a huge impact on an internal investigation – privilege. The issue of privilege in relation to internal investigations can be of vital importance when it comes to corporates being able to cooperate with investigating agencies and / or defend themselves against allegations.
Earlier, we mentioned a recent development in the SFO investigation into ENRC. This case has had a profound effect on privilege and internal investigations.
Privilege and the ENRC Case
In 2010, ENRC became aware via a whistle blower of fraud and corruption allegations at its subsidiary in Kazakhstan. It began its own investigations. The following year, the SFO contacted ENRC about the allegations and referred to its self-reporting guidelines but said it was not, at that stage, carrying out a criminal investigation. Various meetings took place, at which the SFO gave no assurance that it would not prosecute. In 2013, following protracted negotiations, the SFO formally requested documents from ENRC - under Section 2 of the Criminal Justice Act 1987 - but ENRC would not disclose documentation created by its own investigations, arguing that it was privileged.
This resulted in the case of SFO v ENRC (2017), in which ENRC argued that the documentation it refused to disclose was privileged because it was confidential communication prepared for the purpose of adversarial litigation – in this case, an SFO prosecution. But Mrs Justice Andrews held that litigation privilege did not apply as an SFO investigation - as opposed to a prosecution – could not be considered adversarial. She added that, at the relevant time, a prosecution was only a possibility; which she said was insufficient to allow the documentation to be covered by litigation privilege.
While the ruling was widely considered to be controversial and a possible restriction on a company’s ability to conduct an internal investigation, the Court of Appeal overturned Andrews J's ruling in 2018.
The Court of Appeal held that documentation - including interview notes and forensic accountants' paperwork, as in this case – generated by an internal investigation was in fact produced for the purpose of likely adversarial litigation. It was, therefore, privileged.
This ruling acknowledged that even if investigations are at an early stage there is still a risk of prosecution, which means that such documentation is protected by privilege. The Court of Appeal also stated that Andrews J was wrong to conclude that ENRC had created the documentation in question in order to show it to the SFO.
Privilege, the SFO and Co-operation
While the Court of Appeal ruling may have been welcomed by many in both the legal and business sectors for effectively stopping the SFO’s interpretation of privilege in its tracks, the issue of privilege extends beyond the circumstances contained in the ENRC case. Despite the ruling, the issue of privilege in an investigation may still require very careful handling.
If, for example, a company was looking to secure a deferred prosecution agreement (DPA) with the SFO rather than be prosecuted, the nature and the extent of the cooperation it offers the investigating agency will be a factor. If the company offers wholehearted, comprehensive cooperation and is prepared to share the findings of its internal investigation with the SFO it has a greater chance of a DPA than if the SFO believes the company is just trying to appear to be cooperating in order to escape prosecution.
The Director of the SFO Lisa Osofsky placed further emphasis on this issue four months ago when she promised to provide companies with concrete guidance on cooperation with the SFO. But when making this promise she was vocal in her belief that the ultimate objective of any internal investigation should be cooperating with law enforcement. This objective, she argued, would be frustrated by what she called companies throwing “the blanket of legal professional privilege over all the material they have gathered”.
On 6 August, the Serious Fraud Office (SFO) published that guidance, in the form of a five-page document, "Corporate Co-operation Guidance". In it, the SFO defines co-operation as "providing assistance to the SFO that goes above and beyond what the law requires" and details 11 general practices that companies should consider when preserving material and giving it to the SFO.
There is specific guidance given relating to digital evidence and devices, hard copies and physical evidence, financial records and analysis of them, industry information and individuals. There appears to be a view taken by the SFO that a company could assist the agency by alerting it to aspects of an investigation that the company cannot gain access to or by identifying possible witnesses.
The SFO’s guidance refers to its 2014 “Deferred Prosecution Agreements - Code of Practice’’ which states that making witnesses available for interview and providing a report of an internal investigation are evidence of co-operation. But the SFO states that if a company claims privilege then that privilege is expected to be certified by independent counsel: an approach that companies are likely to prefer to the requirement that privilege should be waived in order to show co-operation; which some senior SFO figures have spoken about previously.
While the guidance will be of use to companies – and is arguably less demanding than many would have feared – it does make the point compliance with the compulsory process does not, in itself, indicate co-operation. It even goes as far as to say that even “full, robust cooperation’’ will not guarantee any particular outcome.
Balancing the current law on privilege with the desire to cooperate with the SFO in order to “do a deal’’ and avoid prosecution may, therefore, require quite a balancing act.
Points to Consider`
The ENRC case brought a focus on the relationship between any documentation created in an internal investigation and the likelihood of a criminal or regulatory investigation. The outcome of the Court of Appeal case emphasises the need for clarity regarding the purpose of an investigation and any resulting privilege issues.
When it comes to internal investigations and documentation, corporates need to be aware that:
- If an internal investigation is being conducted because litigation is expected, this should be made clear in communications to staff, third parties and any outside experts brought in to assist.
- Even if litigation is not expected at the start of an investigation, this may change over time. If this happens, the expectation of litigation should be communicated to all involved in the investigation as soon as it arises.
- Ideally, documents should be marked as being confidential and privileged. In the very least, it will remind those receiving them to keep them confidential. It may also be worthwhile segregating privileged and non-privileged material; especially now that the SFO expects privilege to be certified by independent counsel.
- The Court of Appeal ruling in the ENRC case means that any self-reporting or co-operation with enforcement agencies will not necessarily remove the right to privilege. But the nature and extent of any such interaction should be thought about very carefully before committing to it.
- If privilege is asserted, it is important to remember that each case differs and that any court asked to decide on the issue of privilege will look at all the facts and circumstances. This may well mean that specialist legal advice is required.
- It should also be remembered that even if a particular matter looks likely to only be a regulatory issue, it could prompt civil litigation; which may mean non-privileged documents having to be disclosed.
The Court of Appeal case may have been definitive on the scope of privilege but – as the SFO’s latest guidance has made clear - corporates needing to conduct an internal investigation have to tread carefully and seek specialist legal advice when necessary.