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Andrea Puccio
Puccio – Penalisti Associati, Milan
puccio@pucciopenalisti.it

 

It is common knowledge that corporate fraud has greatly increased over the past decade. This has forced not only large corporations, but also small and medium-sized businesses, to make great effort to combat this worrisome trend.

Recent surveys have shown that fully 47 per cent of companies interviewed have experienced fraud over the past two years, resulting in a total financial loss of over USD 42bn.^[1]

To a still significant extent, the various manifestations of the offence (research shows that some of the most common are cybercrime, misappropriation and consumer fraud) are not detected through the system of internal controls, but through external action by the courts or by law enforcement as they perform their investigative and inspection activities. In Italy, for example, almost 30 per cent of reported fraud was revealed only after intervention by the public authorities, with clear damage to the finances and reputations of the companies involved.^[2]

Defensive investigations

As there are still significant deficiencies in internal controls, the defensive instruments that the national legal system gives criminal lawyers allow them to play an essential role in identifying and promptly addressing the offences that continue to dog companies.

More specifically, it is common knowledge that under Article 327 bis of the Italian Code of Criminal Procedure, the lawyer has the ‘power to conduct investigations to seek out and identify evidence on behalf of their client’, which, of course, could impact both the party being investigated for a particular offence and the natural person or legal entity who was the victim of it.

The foundation of this construct, known as ‘defensive investigations’, lies in the right of defence, which Article 24 of the Italian Constitution recognises as inviolable at every stage and level of the proceedings.

Indeed, except for documents that request the court’s authorisation or intervention, the lawyer can conduct defensive investigations even before criminal proceedings are initiated. And it is precisely in these cases – that is, when the courts have not yet been seized – that a criminal lawyer can conduct corporate internal investigations to effectively support private organisations victimised by fraud.

The standard code of procedure allows the lawyer to have conversations, which may also be documented, aimed at obtaining information from persons who have knowledge of the facts, although they are not required to respond. Nevertheless, if the person does decide to make statements, under Article 371 ter of the Italian Criminal Code they must tell the truth or be subject to criminal sanctions.

During the investigations, the lawyer may also request documents in the possession of the public administration, view places or things related to the offence and describe them, and perform technical, graphical, photographic or audio-visual surveys.

In these activities, criminal lawyers may direct and coordinate true multidisciplinary (including cross-border) defence teams, since, under Article 327 bis, paragraph 3, Italian Code of Criminal Procedure, they may be assisted by both private investigators and, when specific expertise is needed, by technical consultants.

What are the advantages of allowing a criminal lawyer to manage and investigate corporate fraud?

First of all, with their technical expertise and experience, the lawyer may often be able to identify the causes and delineate the contours of offences perpetrated against the company even before the company itself can do so. A detailed description of any criminal implications also allows the entity to clearly delimit legitimate investigative activities, which also avoids disastrous boomerang effects that could harm the company.

For example, consider employee data collected by the employer through methods that potentially could be controlled remotely (such as audio-visual equipment), or work tools (such as company computers and email). Even when presented in a courtroom setting to prove the commission of illegal acts, these may only be used if workers have previously received adequate information through a company policy and if there has been compliance with the privacy law. If not, the company not only cannot use the information and data for evidentiary purposes, but it would be exposed to the risk of significant penalties, including of a criminal nature.

More specifically, there may be offences of unauthorised access to the information system under Article 615 ter of the Italian Criminal Code, or offences of unlawful installation or use of systems for remote video surveillance and control of employees under Article 38 of the Italian Workers’ Statute.

In addition, by virtue of the powers granted to them by law, the results of investigative activities carried out by criminal lawyers, unlike those undertaken by company management bodies, are equivalent to those obtained by the Public Prosecutor during preliminary investigations in terms of their effectiveness and usability during the trial.

By performing a documented investigative activity, the lawyer can also offer the courts an account of the facts that is already accompanied by strong supporting evidence, which, on one hand, significantly speeds up preliminary investigations (which are often characterised by the inertia of the inquiring authority) and, on the other, promptly mitigates harm to the company’s finances and reputation.

Moreover, it is well-known that much corporate fraud is committed by company managers or executives, who can operate independently or in concert with parties outside the organisation. In these situations, the company often begins to suspect that its employee is engaging in unlawful or disloyal conduct, but at the same time, it is not actually in a position to obtain concrete evidence to support this suspicion.

Defensive investigations can certainly be a valid solution to this problem. In fact, using the above methods, a criminal lawyer, with the possible cooperation of expert private investigators, is in a position to determine whether the person the company suspects has engaged in criminal behaviour.

A practical case

For example, in a case that involved multiple instances of corporate fraud (misappropriation of enormous sums of money, unfair competition, defamation of top management and fraud by false representation), committed by a manager against the company and its directors, the criminal lawyer was given the assignment of conducting an internal investigation in order to obtain irrefutable evidence of the employee’s extremely harmful conduct.

The lawyer promptly brought in a private investigator, who placed a bug in the company car assigned to the employee in order to record his conversations. Recordings of these conversations made it possible to ascertain that the manager was committing the offences the company suspected and also revealed new criminal acts in complicity with the company’s business partners.

The employee formally contested the evidence collected, but in the absence of any valid evidence in his defence, he decided to voluntarily turn in his resignation (which prevented the continuation of the unlawful conduct and avoided any labour disputes).

In addition, based on this evidence, several civil actions were brought to determine whether the company’s intellectual property rights had been violated as a result of unfair competition by the employee and the other parties involved.

Moreover, in order to prove that the manager misappropriated money, the lawyer used the expert support of a certified public accountant, whose in-depth, expeditious examination of accounting and tax documents effectively documented and crystallised what the company had originally surmised. Based on the facts the lawyer ascertained with the accountant’s assistance, the company filed a complaint of misappropriation against the disloyal employee.

Due to the robust reconstruction of the facts, the Public Prosecutor handling the related case was able to conclude preliminary investigations very quickly (less than one month after filing the complaint).

A ‘remedy’ to protect the company

One final consideration is necessary. As we have seen, corporate internal investigations are not only a valid tool for promptly ascertaining corporate fraud and taking all steps to obtain compensation for damages, but they also identify and remedy any organisational deficiency that made it possible to commit the offence within the entity.

In this regard, investigations also serve as a remedy that can shine a light on the weaknesses of the entity’s organisational structure and, accordingly, set up a possible defence strategy when objections, for example of ‘organisational liability’, are raised regarding the events that occurred, (including but not exclusively under Legislative Decree 231/2001 - Criminal Liability of Legal Entities).