FCPAméricas Blog

Investigating Oneself: Why Latin American companies should conduct internal reviews

Author: Matteson Ellis

internal investigation

For companies managing FCPA compliance for years now, the importance of investigating allegations of internal wrongdoing might seem obvious. When an indication of an improper payment arises, it is better to get to the truth than to ignore it or to assume an innocent explanation that may not be supported by the facts. Indeed, this approach is an explicit expectation of FCPA enforcement officials. The FCPA Guide states, “[O]nce 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.”

But for many Latin American companies just beginning to implement anti-corruption compliance controls, the value of investigating oneself might not necessarily be self-evident. For one, internal investigations can be costly. They represent a cost center, not a revenue source, so the business justification might not be readily apparent. Moreover, why should a company do the government’s job for it? If law enforcement authorities want to learn about a potential violation of law, the burden should be on them to build their cases. Relatedly, in many Latin American jurisdictions, the concepts of cooperation and plea bargaining are not well developed and the notion that a company would admit a violation to prosecutors might seem outlandish.

Nonetheless, despite these considerations, there are multiple reasons why conducting internal investigations, both before and after the government learns about an issue, can be crucial to protecting a company’s own interests.

Internal Investigations Before the Government is Involved

Even when enforcement authorities are not yet asking questions about a compliance issue, companies may still want to conduct an internal investigation regarding the issue.

Adequately resolving the problem. If a company has a bribery problem, it can only fix it if it knows the facts. Without understanding the full scope of the issue – such as the people and business units involved, the extent of funds at stake, and how high the problem goes in the organization – it is difficult to adequately address. Wrongdoers can only be disciplined if a company can identify them. Controls weaknesses can only be remediated if a company understands them.

Preventing bigger problems. When a company ignores a problem, it will likely get worse, not better. Bribery has a way of growing – bribe requests get larger, and business becomes more dependent on shortcuts. Hidden accounts initially designed to transfer funds to public officials might be put to use to transfer money back to employees themselves. Allowing a problem to fester can have a broader effect of encouraging more bad actors within an organization. When one employee sees a colleague get away with misconduct, he or she might be more inclined to violate policy too.

Avoiding bad business. Ignoring a bribery issue can have negative effects on business. Bribery often goes hand in hand with management issues – people who are not effective managers sometimes use shortcuts to ensure effective performance. Since companies base their investment decisions on performance, they will want to know the basis of performance, including when it is based on unsustainable conduct.

Meeting disclosure obligations. Publicly listed companies need to be aware of material developments to comply with disclosure requirements. If a company is not following up on allegations raised, it is difficult to be fully confident that it is giving the market accurate information. There might be a large contingent liability that it does not yet understand. In this way, disclosure obligations can have the effect of compelling companies to conduct internal investigations in situations where the might not otherwise have done so. 

Preparing for a potential inquiry. Simply because a company is not yet aware of any law enforcement investigation into its conduct does not mean it is not occurring. An employee, a vendor, or some other third party may already have reported an issue to authorities and they may already be investigating the matter, and intentionally not alerting the company to the existence of the investigation. If and when the authorities do confront the company with an investigation, the company will be in a markedly better position to respond having already conducted its own investigation into the matter.

Internal Investigations After the Government is Involved

In practice, an internal investigation is much easier on a company when conducted before the government gets involved. A review by independent lawyers is usually much less painful than a dawn raid by authorities. After a company has already become a target in a government review, it can be subject to seizure of documents, grand juries, and other unpleasant realities of formal criminal investigations.

However, even when the government has commenced its own investigation before a company understands an issue, there are still reasons why companies will want to conduct their own internal investigations in parallel. 

Controlling the message. When a company develops and analyses the facts itself, it is better positioned to control how facts are interpreted and presented to others, be it the government or the public. For example, while a prosecutor might look at a narrow set of information suggesting egregious wrongdoing, a company could be able to highlight context showing that conduct was isolated or limited to low-level employees. While one bad email could significantly shift a prosecutor’s interest in a case, a company might be able to explain why the one email is not actually that bad or how the company has already disciplined its author. By not investigating an issue, a company runs the risk of ceding control to prosecutors. By not proactively correcting failures that might eventually become public, companies could find themselves scrambling to respond to bad press.

Protecting privilege. Internal investigations led by lawyers allow companies to establish attorney client privilege over material related to the investigation, at least as to the United States. Knowing the facts in a privileged way gives a company greater control and options that it might not otherwise have when responding to government inquiries. Protecting information is also extremely important given the potential for follow-on civil litigation that may occur. An eventual plaintiff could seek to discover company information and statements made to the government. One bad email in the hands of a zealous plaintiff can significantly move a company’s own settlement calculation.

When companies consider these various components, they begin to realize that not managing an indication of wrongdoing appropriately can have serious cost consequences as well. Yes, internal investigations can sometimes be expensive. But they can also, in the long run, result in cost savings that include lower fines, less chance of larger civil judgments, protected reputation, and sustainable business practices.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

© 2015 FCPAméricas, LLC

Matt Ellis

Post authored by Matt Ellis, FCPAméricas Founder & Editor

Categories: English, FCPA, FCPA Guidance, Internal Investigations

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