10 Nov

The Case for Independent Internal Investigations

The United States Sentencing Guidelines (USSG) continue to make life tough for those in charge of corporate compliance and ethics. Corporate attorneys, both in-house and outside counsel, must ensure that companies are following protocols set for by the USSG. Rightfully, companies focus first on profits. But where does that leave the issues of compliance and ethics?

Although the creation and maintenance of a proper compliance program is secondary to core business pursuits, wise managers and executives know how critical it is to obtain specialized outside counsel to conduct internal investigations.

The USSG, created with the Sentencing Reform Act of 1984 and modified with the addition of Chapter Eight in 1991, strives to achieve uniformity in the criminal sentencing of business organizations. The goal of Chapter Eight is to force companies to police themselves by mitigating sentences for companies that have been proactive prior to statutory and regulatory code violations. The scoring system for sentencing allows a subtraction for mitigating factors, and this is where effective compliance and ethics efforts can help cut companies a break. Incidentally, not have a good compliance and ethics function within a company will serve to increase the punishment at the time of sentencing.

One major step toward proving that the company is aware of the law and proactively trying to comply with it is through the performance of independent internal investigations. What does this really mean? Companies need to be proactive in the search for fraud and malfeasance. Internal investigations are critical to this process, but making those investigations as independent as possible takes things to the next level and puts the company in an even better light.

The purpose of this proactive search for fraud and other violations of law is to allow companies the chance to find problems on their own and self-report unlawful conduct to law enforcement. And in the case that an internal investigation finds no violations of law, no self-reporting is necessary because there is no crime.

The penalties for violations of federal law can be huge. For example, look at health care fraud. Punishment for fraudulently receiving money for health care can include incarceration from 90 days to 20 years, as well as fines from $1,000 to $100,000.

In-house personnel have traditional been the ones charged with completing internal investigations as a part of a company’s compliance and ethics program. The investigators might have been managers, security staff, internal audit employees, general counsel, or any of a number of job titles. The government wasn’t keen on this internal control over the process, as it reeked of the fox guarding the henhouse.

So the move was made toward outside, independent parties performing investigations for companies. The government, in making sentencing decisions, will look for independent and impartial investigations for any mitigation.  It makes sense, then, to hire outside counsel and investigators to look into potential improprieties in the company. Of course, critics say the outside investigators can never truly be impartial if the company is paying their fees, but nonetheless it is the best option currently available.

An additional concern for companies surrounds the government’s ability to access the investigative files. When in-house personnel is performing the investigations, the results have little protection once the government issues a subpoena or discovery requests related to litigation. The obvious way to protect the results of an investigation, whether they are favorable or unfavorable to the company, is by having the investigation done by outside counsel who is shielded by the attorney-client privilege and the work product doctrine. These protections are even stronger when the outside counsel is not the company’s transactional or litigation counsel, and the appearance of impartiality is enhanced with specialized outside counsel.

Companies can best protect themselves when they hire independent, outside counsel to oversee internal investigations involving allegations of fraud or other improprieties. Outside counsel should then contract with independent forensic accountants or fraud investigators to dig into the allegations. The more independent the investigations, the more reliable the results.

5 thoughts on “The Case for Independent Internal Investigations

  1. I couldn’t agree more. I strongly support proactive internal investigations, as they not only shed better light on the company in the public eye, but it also sends a message to employees, letting them know that ethics and compliance are being taken seriously in the workplace. Carrying out the investigation using an external independent investigator for internal investigations shows that your company has nothing to hide. You mention the increased reliability of results when the investigator is independent, so it makes sense to do the investigation properly the first time.

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