Best Practices on how to Conduct an Internal Investigation

Mini microphone and pen on paper

Independent Investigation Counsel

Historically, the general counsel would conduct an internal investigation to serve the company’s interest to avoid making the matter public and cause a drop in share price. However, the general counsel was often involved in establishing compliance protocols for their corporations and was therefore in a conflict of interest in investigating alleged failures of those protocols.

U.S. statutes such as Sarbanes-Oxley and Dodd-Frank changed the game. There is now a presumption that independent counsel will be retained early in the process. This can establish confidence in stakeholders that the matter will be investigated thoroughly and that the findings can be confidently relied upon.

Government and regulatory investigators and prosecutors will not tolerate any appearance of bias or accountability issues related to an internal investigation. The cooperation “credit” sought from enforcement authorities may be compromised if there is any appearance of bias in the appointment of the investigator and conduct of the investigation.

No director, officer, employee, or agent whose conduct is the subject of the investigation should participate in the investigation – except as a witness. Management, especially managers of a department that is the subject of the allegation, should not oversee the internal investigation and should recuse themselves from any of its reporting. Further, any member of the board of directors or senior management that may be implicated in the allegation (directly or indirectly) should not oversee the internal investigation. Other governance rules and policies may also disqualify management from being involved in any way — other than as a witness — to an internal investigation.

As a best practice, the board of directors should appoint a committee of independent board members (often the audit committee) to retain outside counsel to conduct the internal investigation and report directly to them.

The independence of counsel is critical and should be guided by the following:

  • Board of directors should pass a resolution authorizing the independent committee to retain counsel and counsel’s agents (e.g., forensic accountants and other experts) to conduct an internal investigation and report its findings directly to the committee.
  • Independent committee should retain investigative counsel in writing setting out the scope of the retainer. It is recommended that an investigator’s retainer letter set out the allegations under review, scope of the inquiry and clarify that counsel will advise the independent committee of its rights, obligations and potential liabilities.
  • External counsel must be impartial and independent from the interests of the board of directors, senior management, employees and agents of the corporation. Counsel must show the utmost discretion and ethical standards.
  • External counsel must be experienced and familiar with the industry in which the corporation operates.
  • Independent committee should communicate that cooperation with investigatory counsel includes providing all relevant documentation, access to all employer authorized and personal digital devices and participation in witness interviews.
  • Absent any potential bias, conflict of interest or restriction on confidence, in-house counsel or regular external counsel to the corporation can advise the corporation of its related rights, obligations, and potential liabilities.
  • Independent committee and investigative counsel should agree on clear and specific reporting procedures. Timely and frequent reporting from investigative counsel to the independent committee may be done orally rather than in writing.
  • Investigative counsel frequently retains third-party experts or consultants in white-collar crime internal investigations. While their retainer should be within the scope of the retainer agreement between investigative counsel and the independent committee, ongoing dialogue and approval should be encouraged to ensure that independent counsel is acting within the scope of the retainer with the independent committee.
  • Third party experts and consultants should sign retainer and confidentiality agreements with investigative counsel, confirming that their retainer covers matters that are protected by solicitor-client privilege and that there shall be no reporting by the expert without prior written consent.

Document Preservation, Collection and Review

Corporations should proactively adopt policies and procedures for evidence preservation and collection in anticipation of investigations. For example, Information Technology (IT) professionals should be consulted to set up an organization’s systems to ensure records can be centrally accessed and saved for an amount of time even if a user manually deletes them.

Corporations should consider issuing a document hold notice to inform potential record-keepers to keep any records that may be relevant to the investigation. Failure to adequately preserve and collect evidence by establishing document holds can lead to the destruction of key evidence (intentionally or not) and compromise the investigation. It can also lead to adverse civil, regulatory, or even criminal consequences.

Counsel must tread carefully. On one hand, it is not counsel’s responsibility to make it easier for the authorities to obtain evidence of wrongdoing. On the other hand, counsel must avoid doing anything that could be considered obstruction of justice.

Note: Privilege Considerations: Pre-existing documents will almost certainly not be privileged and therefore could potentially be obtained by authorities. Communications between certain non-parties may also not be privileged and producible. For example, communications with enforcement authorities are typically not privileged.

Forensic IT specialists will often create images of hard drives of relevant parties and identify categories of documents that must be preserved and collected. Internal investigations can produce thousands of records so corporations must find a balance between overproduction and underproduction of documents. While overproduction can slow the investigation and increase costs, it is preferred to the pitfalls of underproduction. To address overproduction challenges, counsel should use targeted searches to ensure that time and resources are spent on identifying relevant documents.

Counsel should monitor document collection to ensure compliance with document hold/retention policies, review protocols and investigative mandates.

Electronic documents and data create special problems for counsel. For example, if counsel obtains copies of electronic documents and data, this information will have been brought into the jurisdiction where counsel works. This information may then be accessible to local authorities, who may conduct a search of the law firm.

To avoid this problem, observe the following guidelines:

  • Do not bring documents containing evidence of an offence into a jurisdiction that may be subject to an investigation. This applies to paper and electronic documents.
  • Ideally, counsel should review documents where they are held. Alternatively, counsel could review them through a cloud-based service, provided that the service does not result in any locally stored copies. This is a riskier option, however.
  • Examine how the client accesses documents – particularly how different branches in different jurisdictions access documents. Existing safeguards preventing access to documents from outside the jurisdiction should be maintained. However, before implementing additional safeguards, counsel should consider if doing so would constitute obstruction of justice.

When all documentation is collected, it should be organized and recorded in a similar method to traditional litigation. Duplicates of any hard copy/original documents should be made to ensure preservation.

Witness Interviews

Witness interviews are integral to internal investigations. In addition to providing context to documentary and other evidence, key information is often only available through witness statements.

Initial interviews can occur prior to completing the document review to better understand issues and assist with finding documents. However, it is preferable if most interviews are conducted after the document review has been completed.

Pre-document review interviews typically occur with individuals that can offer initial details and are available for follow-up interviews. If the investigator is likely to get access to a witness only once (e.g. third party or alleged wrongdoer), it is better to complete the document review and conduct background interviews first. This will allow the investigator to be as informed as possible for the key interviews.

In-person interviews are generally preferable to remote interviews because they allow an interviewer to better assess one’s credibility and ensure that the room is secure. In some cases, however, face-to-face interviews are not practical.

Prior to a remote interview, the interviewer should confirm certain "housekeeping" items, including that the interview is not to be recorded and that there is no one else communicating with the witness — either in the same room or through electronic messaging.

Detailed outlines or scripts should be prepared in advance of all witness interviews. Indemnity, compensation or advances for legal fees and issues related to subsequent disclosure of witness statements should be addressed. All witnesses should be made aware of the corporation’s positions on these issues prior to the interview.

At the beginning of each interview, witnesses should be given an overview of the investigation’s purpose and made aware of their rights and obligations if they are contacted by regulators or prosecutors.

There should be a record that memorializes the interview. Discretion must be exercised when deciding to digitally record an interview. While it is the most accurate method of creating a record, it can have a chilling effect on a witness, such that in most cases a written summary of the interview is preferred. In addition, there is case law in the U.S. holding that recorded interviews are not privileged because, unlike written interview memorandums, they may not contain the thoughts and impressions of counsel.

Accordingly, in most cases, a written summary of an interview highlighting the important points is preferred. Written summaries should be prepared immediately after each interview. The content and form of the memorandum should be at the discretion of external counsel and include the counsel’s impressions to help with preservation of privilege. The lead questioner should be accompanied by a note taker (often a junior lawyer) to ensure accurate memorialization of interviews.

Employees Witnesses and Upjohn Warning

Individuals required to be interviewed during an investigation will commonly be employees of the corporation.

There are two important advantages to employee witnesses. First, as employees, they have a duty to assist in the investigation and refusing to participate could be grounds for termination. Second, the corporation has some control over these witnesses that could prove helpful down the road. For example, if the corporation wishes to participate in an immunity or leniency program offered by an enforcement agency, the ability to obtain evidence from employees would be an important part of the cooperation.

To retain these advantages, a corporation should generally not formally terminate an employee until they have provided their evidence to the corporate investigator. Indeed, because the value of the employee as a witness is largely lost if the employee is terminated, the threat of termination is not likely to be effective in forcing an employee to cooperate. The corporation may find that the price of cooperation is continued employment after the investigation, or payment of the employee’s legal expenses. However, in some circumstances, it may be necessary to put an employee on paid leave during an investigation.

It is also essential that counsel avoid creating conflicts when dealing with employees, particularly with respect to whether or not they can rely on privilege. To this end, it is good practice to commence an interview by giving an "Upjohn warning” (also called a "corporate Miranda warning") to ensure there is no confusion about the purpose of the interview and the privilege attached to it. In a typical Upjohn warning, counsel will inform the witness that the:

  • Corporation’s counsel is not the employee’s lawyers, they are the corporation’s lawyers.
  • Employee is free to retain counsel of their own if they wish.
  • Interview is privileged and the privilege belongs to the corporation, not the employee.
  • Corporation, in its sole discretion, may elect to waive that privilege at anytime without notice.
  • Corporation is entitled to share information obtained from employee witnesses with other authorities, and it may do so.

An Upjohn warning, named after the U.S. Supreme Court's decision in Upjohn Co. v. United States, 449 U.S. 383 (1981), is intended to dispel any doubt concerning whom counsel represents and who controls the confidentiality of the conversation that is about to occur. While Canada does not have the same formal legal requirements as the U.S., it is recommended to provide an Upjohn warning to employee witnesses.

Though providing this warning at the outset of an interview may result in employees being less forthcoming and cooperative, it is nonetheless essential to help ensure that employees cannot argue that there has been any unfairness in the interview process or that their statements should be excluded because of privilege.

The employee witness should be given a general description of the purpose of the interview. For example, they should be told that the interview is required to obtain information that will assist the corporation in connection with an investigation into matter XYZ. However, it is not necessary to share all information (e.g., the corporation’s overall legal strategy should not be disclosed). While all information need not be shared, misleading a witness about the purpose of the interview can lead to increased damage awards (see Chapell v. Canadian Pacific Railway, 2010 ABQB 441).

The investigator should also advise the employee witness of the importance of giving truthful and candid information as dishonesty during internal workplace investigations has resulted in just cause for employee dismissal. See for example the following cases:

The employee should be notified if the corporation has obtained immunity or leniency that affords the employee protection from personal prosecution.

Where counsel determines that an employee has likely committed an offence, it is often prudent to recommend that the employee retain their own legal counsel. The corporation should consider whether to cover the expense of separate legal counsel. This may help maintain the employee’s willingness to cooperate. The corporation should also determine if any directors’ and officers’ insurance policies will cover the cost of legal counsel.

Data Protection and Privacy

Nearly every country maintains legislation protecting privacy and personal data. Privacy legislation will not generally prevent a corporation from conducting an internal investigation and using that information in its dealings with enforcement agencies, but it may impose some limits.

For example, Canada’s Personal Information Protection and Electronic Documents Act (PIPEDA) allows an entity to collect personal information without knowledge or consent to investigate the breach of an agreement or a contravention of the laws of Canada or a province and to use personal information in an investigation of a contravention of the laws of Canada, a province, or a foreign jurisdiction. As such, PIPEDA allows an entity to use personal information in investigating a contravention of foreign laws, but, strangely, not to collect it for that purpose.

Consequently, counsel should be aware of the privacy legislation that may apply to the collection and use of personal information in connection with an investigation.

Final Investigation Report

At the conclusion of the investigation, counsel should report all information and conclusions. Careful consideration should be given to the medium of the final report.

A written report has the advantage of clearly documenting the process, conclusions and required remediation. This assists board members to properly discharge their fiduciary duty to come to their own conclusions based on all the information available to them.

The primary disadvantage of a written report is that it often creates a clear record of criminal or improper conduct, which, while privileged, may be sought by regulators, prosecutors, adverse counsel in civil litigation and counterparties in future transactional due diligence. A written report also increases the risk of leakage and loss of confidentiality and privilege.

Where organizations have decided not to prepare a written report, it is common for counsel to provide a detailed oral report (supported by a slide presentation), that is maintained in counsel’s privileged files. Even where key findings are reported verbally, however, it is good practice to document the investigative process as this memorializes the corporation’s good-faith response. Often, counsel will seek to balance the pros and cons of a written report by giving a detailed written report of the investigative steps and recommendations for remediation, while verbally reporting on the particulars of any wrongdoing.