Internal Investigations: Doing One Can Be A Compliance Best Practice

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US NavyThe US Navy contract scandal took an interesting twist recently when one of its contractors, Inchcape Shipping Services, which had been suspended from doing business with the Navy for “conduct indicating questionable business integrity”, was reinstated as reported in an article in the New York Times (NYT), entitled “Audit Planned in Fraud Case as Navy Reinstates Shipperby Christopher Drew and Danielle Ivory. They reported, “The move came after a federal judge questioned whether the service had presented enough evidence to justify the suspension.”

The suspension seems to have been based upon a 2008 internal investigation by the company itself which it turned over to the Navy in late 2012, when a federal judge ordered the company to give Navy investigators a copy of an internal company audit from 2008 into some of the questionable billings. However, “after Inchcape challenged its suspension in December, the main evidence that the Navy presented was that 2008 audit. James F. Merow, a judge on the Court of Federal Claims, said that it did not appear that the Navy’s suspension office had “conducted any meaningful investigation” of other documents “despite having had time to do so.””

The article said that “Faced with the possibility that the judge might dismiss the suspension, records show, the Navy agreed to lift it in exchange for promises from the company to follow federal rules, refund overcharges, and hire independent monitors and auditors.” Further, in addition and in exchange for lifting of the suspension, “the company has agreed to pay for an independent audit that could help the Justice Department determine how much it may have overcharged the government.”

The rather curious fact about this agreed upon audit is that the Navy has known the allegations of over-charging since 2010. Further, the Navy had subpoenaed the company’s records back in 2011. However, the Navy had not gotten around to auditing those subpoenaed records. Drew and Ivory reported that “Former federal contracting officials said that the need to hire an outside auditor also showed how little the Navy had done to get to the bottom of the accusations against Inchcape since they first surfaced in 2010. They quoted Charles Tiefer, a professor at the University of Baltimore School of Law and a former member of the federal Commission on Wartime Contracting in Iraq and Afghanistan for the following, “To wait for the Navy to do a serious audit is like waiting for Godot. Considering that the Navy has sat on its hands for years, getting an accounting from a private firm is a sign of desperation.” Rather curiously when “Asked why they had not conducted their own audit, Navy officials said they had not had “full access” to the documents subpoenaed from Inchcape.”

I thought about how devastating it would be if a corporation, which had access to its own records, waited two years to begin an investigation of allegations of “conduct indicating questionable business integrity” or violations of the Foreign Corrupt Practices Act (FCPA). The FCPA Guidance says “An effective compliance program should include a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation. Companies may employ, for example, anonymous hotlines or ombudsmen. Moreover, once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response, including any disciplinary or remediation measures taken.” From this I believe that the FCPA Guidance requires that companies not only have “in place” an efficient [and] reliable process for investigating an allegation, but that the investigation be properly funded as well.

Moreover, as with the Navy, the inclusion of specialized counsel to handle the investigation may be appropriate as it is viewed as a best practice. There are several reasons to bring in an outside investigation firm. Initially, the investigation must be perceived as fair. If your employees do not believe that the investigation is fair and impartial, then it is not fair and impartial. Further, those involved must have confidence that any internal investigation is treated seriously and objectively. You need to also consider the relationship between the investigation firm and the company, which hired it. If a company utilizes its regular outside counsel to perform the investigation and the results turn out favorably for the company, the regulators may ask if the investigation was a “whitewash”. If a regulatory authority, such as the Securities and Exchange Commission (SEC) or Department of Justice (DOJ) cannot rely on a company’s own internal investigation, it may perform the investigation all over again with its own personnel.

Additionally, if there are serious allegations made concerning your company’s employees engaging in criminal conduct, a serious response is required. Your company needs to hire some seriously good lawyers to handle any internal investigation. These lawyers need to have independence from the company so do not call your regular corporate counsel. Hire some seriously good investigative lawyers. I believe that there is another reason to hire outside counsel. It is also important because, no matter what the outcome of your investigation, you will most probably have to deal with the government. If the investigation does reveal actionable conduct, your company will need legal counsel who is most probably an ex-DOJ prosecutor or ex-AUSA to get your company through that process. Even if there is a finding of no criminal activity, you will need very competent and very credible counsel to explain the investigation protocol and its results to the government.

So why did the Navy not perform any adequate investigation of Inchcape Shipping before suspending them after having the company’s records for over two years? Did the Navy not have the technical expertise to read, review and analyze the Inchcape Shipping billing records? Are US Navy auditors too busy with other allegations of fraud and corruption to hav e reviewed the documents subpoenaed from Inchcape Shipping? No one knows the answer but in the realm of private sector corporations it required that the company have the ability to investigate itself or bring in outside counsel who can perform the investigation. Under any definition of a best practices compliance program, such a resource is a requirement.