Conducting internal investigations: key tips for in-house counsel
By Polly Pope and Kyline Dunn
Whether in response to inquiries from a regulator, or to investigate potential misconduct or operational failures, companies frequently conduct internal investigations.
Investigations raise a number of legal issues, including in relation to legal privilege, employment law and privacy. Questions of broader legal strategy also often come into play, in particular mitigating the risk of any enforcement action. This article identifies tips to assist in-house counsel to navigate the key legal issues that arise during an investigation.
Carefully consider the legal context before you proceed
Before undertaking an investigation, it is crucial that you understand the potential for a civil claim or criminal prosecution relating to the issues under investigation. This context allows companies to assess risk, to ensure the investigation is conducted by a person appropriate for the context, and to consider whether legal privilege may apply to the investigation report.
Where an investigation is triggered by a document request from a regulator, there are some particular issues that should be considered at the outset:
- What is the potential legal context of the request? Why is the regulator seeking information? What might happen next? Are there potential issues in more than one jurisdiction?
- Should the company investigate or volunteer information not strictly covered in the scope of the request?
- What are the legal consequences of non-compliance? (Is the request mandatory or voluntary? If it is mandatory, what happens if you don't comply?)
- Is the deadline for compliance realistic? Is there an ability to negotiate the deadline?
Keep that context in mind when deciding who should conduct the investigation
There is a range of people that could conduct an investigation – including management, directors, internal or external audit, in-house legal, compliance, external solicitors or forensic accountants. Factors considered in determining who is best placed to conduct an investigation will usually include capacity, expertise and cost. Independence from the issues and the people under investigation (perceived as well as actual) should also be considered.
Where a lawyer has been instructed to conduct an investigation, the work can potentially attract privilege. The courts have recognised that communications are privileged even if they do not contain advice on matters of law, provided they are directly relevant to the performance of the lawyer's duty to the client. However, a report that is not prepared by a lawyer will not usually be privileged, unless "litigation privilege" attaches. There are two key requirements for litigation privilege to attach:
- legal proceedings must be on foot or be "apprehended" (a definite prospect rather than a vague anticipation); and
- the report must prepared for the dominant purpose of preparing for those legal proceedings.
The application of privilege to investigations can be complex and fact-specific. It is prudent to obtain legal advice at the outset of the investigation, to understand the scope of any protection from disclosure offered by privilege.
Prepare terms of reference that carefully define the scope of the investigation and maximise the availability of legal privilege
It is good practice to draw up written terms of reference. This is particularly the case when an external party is being instructed and you want to ensure a tight rein is kept on the scope of the investigation. Key purposes of a terms of reference document include:
- setting out very clearly the aims of the investigation;
- defining the scope of the investigation, in terms of both issues to be covered and any proposed limitations in terms of access to people or documents;
- recording who is conducting the investigation and to whom in the company (and in what form – written or oral) they are to report; and
- setting time frames.
Privilege should be front of mind when drafting the terms of reference, as it provides an opportunity to maximise the ability to claim privilege over the report and communications with the investigation team.
Where litigation privilege may be claimed over a report, the terms of reference should record that the company anticipates proceedings and that the dominant purpose of the investigation is preparing for those proceedings.
Given privilege is a matter of substance and not form, this alone will not guarantee a claim of privilege is successful. The terms of reference will need to be implemented in the way intended for privilege to attach.
Take proportionate steps to preserve evidence and record those steps
You should act to make sure that relevant documents are not destroyed – whether inadvertently or otherwise.
In some circumstances you will be obliged to do this. For example, if court proceedings are reasonably contemplated, the High Court Rules impose a duty to preserve documents. This is a relatively low threshold and could be triggered by sending or receiving a letter before action or instructing external counsel.
Compliance with these obligations requires retention of "documents". This covers virtually all forms of information – both hard copy and electronic – "that are, or are reasonably likely to be, discoverable in the proceeding". This often requires specialist assistance from forensic computing specialists.
For in-house counsel, this means ensuring appropriate confidentiality agreements are put in place (often at pace) and that the forensic specialists' data security measures are sufficient to meet your Chief Information Officer's requirements. It may be prudent to have standing measures in place to ensure action can be taken in a timely manner without raising alarm bells.
It is only relatively recently that this duty became codified in New Zealand and if experience in other jurisdictions is any guidance, as time goes on we can expect to see some potentially serious consequences where a company lets this obligation slip.
Possible consequences include costs implications, adverse influences in the proceeding and action for contempt of court.
Keep internal disclosures of the fact the investigation is taking place to those who "need to know" and consider whether you should disclose the fact of the investigation to third parties
Disclosure should be carefully considered. It will usually be necessary to disclose the existence of the investigation to employees who will be interviewed or who need to preserve or provide documents. It is important to keep this internal communication to a "need to know" basis, particularly because internal communications between employees about the investigation will not usually be privileged.
There are three guiding principles when communicating internally:
- provide enough information to stop speculation and to obtain the co-operation you need;
- ensure employees understand enough about the investigation to be able to identify and preserve relevant documents (to the extent this is required) and are advised about creating further documents/commenting on the investigation in documents; and
- remind employees about their duty of confidentiality.
Broader internal communication may need to be reconsidered if there is a fear that the investigation may become public. If it does, it is better for employees to hear about it from the company, not the media. This would also provide an opportunity to remind employees how to handle any media enquiries.
Consideration should also be given to external communication. In some situations, disclosure will be required (for example, to insurers and continuous disclosure obligations to the market). In other situations, communication is optional, but may be desirable (for example, to the FMA and Commerce Commission, which have policies around voluntary disclosure and co-operation with consequences for potential penalties imposed).
Conversely, in some situations, disclosure is prohibited. For example, a regulator may have imposed a confidentiality obligation or the matter may fall within the "tipping off" offence in the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
If it is permissible to disclose externally and you decide to do so, there are some pointers to keep in mind:
- Generally it is a good idea to distinguish between the facts found and the legal consequences. You should not volunteer a view that a company or an employee has acted in breach of the law.
- Consider any confidentiality obligations (such as bank secrecy obligations) when you are dealing with a voluntary disclosure. Can customer information be redacted? Would it be better (for PR reasons) to wait until disclosure is required by law?
- Where you are considering disclosing information or a communication that is privileged, consider whether there is any way of maintaining privilege. Can privileged material be redacted? Can a limited waiver of privilege be negotiated?
Keep in mind your obligations as an employer when conducting interviews
An employer remains subject to all usual employment obligations (both statutory and contractual) during an investigation. This includes a statutory obligation of good faith (which includes an express duty to be responsive and communicative). Critically, the employer remains subject to this obligation even if a third party is conducting the investigation on the employer's behalf.
The consequences of a heavy handed investigator could be a range of personal grievances or good faith claims from employees who do not feel they have been treated fairly.
It is important from the outset that everyone is clear about the nature of the process. An employee's participation in an investigation is just that – it is not a disciplinary process.
Dismissal or other disciplinary sanctions should not be an outcome of the investigation, although a disciplinary process (culminating in dismissal) may be. This important distinction has consequences for statutory obligations regarding process and provision of information (although, regardless of the type of process, obligations regarding access to personal information under the Privacy Act will continue to apply).
Should the investigative process be triggered by a "whistle blower" employee, consideration may also need to be given to the Protected Disclosures Act and any workplace policies.
- Carefully consider the legal context before you proceed, including the possibility of claiming/preserving privilege.
- Ensure the legal context is reflected in who you instruct to conduct the investigation and how that process is conducted (as recorded in the terms of reference).
- Understand – and comply with – your legal obligations to preserve documents.
- Carefully consider internal and external communications.
- Ensure the investigation and interviews are conducted in a manner which complies with employment obligations.
Polly Pope is a litigation partner of Russell McVeagh and Kylie Dunn is a senior associate in the firm's employment team.
This article was also published in LawTalk 863, 24 April 2015, page 30.
Last updated on the 22nd July 2015