Companies’ internal investigations are rising in importance along with calls for increased transparency, says IBA GEI in new report

Pascale Lagesse, IBA Assistant Treasurer and Chair of the Working Group, said, ‘Although internal investigations are not new, the accompanying hype generated in the last few years around such investigations is new. That said, the reasons companies prefer this route remain the same: to improve the company’s internal processes; avoid liability caused by fraud or misconduct; prepare for future investigations that may be carried out by public authorities; and to promptly address any reports of whistleblowing or harassment in the workplace’.

Ms Lagesse added: ‘Rooting out wrongdoing is always in a company’s best interest. Not only is it right and proper that employees should be afforded a working environment that is free from harassment or intimidation, but companies can infinitely improve their productivity and economic efficiency when misconduct and corruption are eliminated. Increasingly, internal investigations have become unavoidable, and their progressively broad scope raises new questions, particularly regarding cross-border issues’.

Recognising that cross-border internal investigations are a major challenge facing international companies, with instances of corruption, tax fraud, and embezzlement all being transnational in scope, the new 67-page guide provides companies with a framework that addresses the difficulties of juggling different rules and regulations from various jurisdictions. A set of global best practices for cross-border investigations are included, alongside information on when and where an investigation should be conducted, by whom and how, and what happens post-investigation.

Whatever the causes, when internal investigations have a transnational character they raise similar concerns, including managing cross-border privilege, ensuring the attorney–client relationship is established with each legal entity (potentially) under investigation in each relevant jurisdiction, and checking whether it is necessary to hire local attorneys for maximum protection. These issues are likely to arise with increasing frequency.

A stark example of the importance of establishing attorney–client privilege is the 27 June 2018 ruling of a German court in the infamous Volkswagen AG ‘diesel scandal’.  In this case, it was ruled that an attorney-client relationship had to be established between the attorney and the company in question for privilege to apply. Any protection against seizure granted regarding the parent company of a group of companies does not automatically apply to the subsidiaries.

Audi AG, a subsidiary of Volkswagen AG, had hired a law firm in September 2015 to conduct an internal investigation to clarify the facts regarding irregularities that were discovered around Volkswagen diesel engines. However, without Volkswagen AG having appointed the law firm itself and established an attorney-client relationship, the materials pertaining to the internal investigation were not protected against seizure in the corresponding criminal proceedings conducted by the public prosecutor in Munich against Audi AG. ‘Importantly, one should never assume privilege will apply’, stated Ms Lagesse.

The Guidelines identify three main areas warranting internal investigations. All are presently topical. These are:

• cases of misconduct against individuals: sexual and moral harassment, bullying, sexism and workplace violence;
• following corruption or failure to comply with financial, antitrust or banking regulations; and
• following environmental alerts.

The Guidelines suggest companies make the process of reporting internal wrongdoing as comprehensive as possible for employees and references corporate compliance programmes that frequently make multiple channels through which improper behaviour can be disclosed available. The Guidelines state: ‘Providing a healthy working environment also means preventing bribery, unfair competition and fraud, since employees are more likely to comply with their duty of loyalty when they respect the system of which they are part.’

Included in the Guidelines is the suggestion that all companies invest in a compliance system. Research revealed that internal fraud – embezzlement, fictious expenses, improper use of a company car, faked sales figures and more – cost companies an average of five per cent of their annual turnover and have the potential to be immeasurably higher due to the risks relating to the company’s liability and reputation.

One of the main reasons for the increase in internal investigations is whistleblowing. Research found this to be the most effective way of bringing internal fraud to the attention of the employer, with 43 per cent of accusations brought in this way. Internal and external auditing were found to be much less effective with a hierarchical review detecting 12 per cent of cases, internal audits detecting 15 per cent and external auditing detecting four per cent of cases of fraud.

The necessity for transparency and whistleblower protection is acknowledged worldwide. In the words of a consulted compliance officer: ‘Companies are increasingly entrusted with roles which are traditionally carried out by the state.’ Though some jurisdictions, United States’ courts, for example, have underscored the importance of enforcement authorities conducting their own investigations.

The shift in roles raises questions: How much power will countries devolve to companies? Will they tolerate, for instance, companies exercising sovereign rights such as issuing currency? These questions were raised when Facebook announced it would be launching its own cryptocurrency.

Els de Wind, Co-Chair of the IBA GEI, commented: ‘Discussions about such powers being exercised by companies may shape one of the most significant challenges of the 21st century, of which internal investigations will be one of the key responses. Compliance and integrity are an essential foundation for all companies and organisations. This new report deals with a wide range of aspects of internal investigations and will be an important tool for audit, legal and HR officers who are responsible for reporting and taking decisions daily, as well as outside parties, such as government agencies, lawyers, judges, external auditors and regulatory bodies’.

Ms de Wind added: ‘Internal investigations have become of crucial importance. These guidelines are an invaluable tool for all businesses, offering comprehensive assistance to global issues’.

As Chair of the Working Group, Ms Lagesse expressed her sincere gratitude to all the IBA committees and law firms for their contribution. She said: ‘The international scope of this project has been possible due to the involvement of many outstanding colleagues across the world. This has brought a multi-jurisdictional dimension to the findings. The project represents unprecedented collaboration between several International Bar Association Committees and many dedicated individuals who are keen to improve best practice standards for companies.’

ENDS