Internal Investigations & Independence

by Michael Volkov

Ask any attorney if they can conduct an internal investigation and the answer is “Yes, of course.”  It is easier said than done. 

There is an “art” to conducting internal investigations.  A practitioner has to be able to establish a “vision” of the investigation.  I like to analogize the process to a painter starting with a large canvass and visualizing the end product.  The practitioner has to visualize the process, starting with a purpose, adding in document collection, interactions with the government (if applicable), and keeping the eye on the ball. 

Companies do not want to be surprised by the results of an internal investigation.  If the company has no idea what the results will be, then the company’s governance is seriously lacking.  A major disconnect can lead to a disaster, and an internal investigation will not fix the problem.  

There are a number of ways in which an internal investigation can be derailed.  There are a number of pitfalls along the way.  One critical issue that has to be addressed at the beginning is the independence of the internal investigation.  If there is a question as to the independence of the internal investigation, the entire investigation can be undermined.

The value of an internal investigation is premised on an independent and objective view of the evidence.  Government prosecutors will not credit an investigation which has been conducted by a biased party.  It is easy to identify a slanted internal investigation when issues were ignored or downplayed or evidence was omitted.  Credibility is the key to every investigation.

The selection of outside counsel is only one piece in the puzzle.  Independence does not start with the selection of outside counsel – it starts from day one: the company has to appoint a special committee consisting of independent directors to oversee the internal investigation.  If there is any question as to the “independence” of outside directors, the company’s board needs to appoint a special committee consisting of distinguished individuals, some of which may be non-board members.

Senior management, including the General Counsel or the Chief Compliance Officer, should play a limited supportive role in the internal investigation by facilitating outside counsel’s access to documents and personnel.  If the conduct of any senior manager may be investigated, they must be walled off from any role in the internal investigation. 

The independent special committee should facilitate outside counsel’s access to the company and should supervise the conduct of the investigation to make sure there are no barriers to access.  If outside counsel does not have unfettered access to the special committee, then the investigation will be threatened by interference from subjects of the investigation.  That is unacceptable and creates serious risks for the company.    

The selection of outside counsel is always a balancing act.  One the one hand, outside counsel who is familiar with the company and has worked with the company before may be a good candidate because of his or her ability to navigate the company and quickly move the investigation.  On the other hand, the existing relationship between outside counsel and the company will create the appearance of a potential conflict of interest – did outside counsel go soft on the company in order to curry favor for future work? 

My advice on this issue is to steer clear of any potential conflict of interest – if the stakes are high, independence is critical.  If the investigation is more routine in nature and deals with a more common occurrence (e.g employment issue, regulatory infraction), then existing outside counsel may be appropriate.

I subscribe to a straight-forward principle — the larger the stakes the more important the independence of the fact finder.  In the context of an FCPA internal investigation, I consistently recommend an independent outside counsel – the stakes are simply too high to cut corner on this fundamental requirement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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Michael Volkov

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