Prior to the Schrems decision by the European Court of Justice, US based law firms could rely on Safe Harbor to use and analyze information from investigations conducted in Europe. However the Schrems decision and subsequent EU privacy rulings and regulations have brought the entire issue around internal investigations into question.

In a podcast interview with UK solicitor and data privacy expert Jonathan Armstrong about the decision, Armstrong noted that the decision puts real roadblocks in the path of a US company that could be investigating potential anti-corruption allegations in the UK or EU member country. The biggest issue would be around personal privacy and information. Unlike the US, work emails are covered by the privacy rights afforded to individuals and are not the property of the company. The same is true of other information. Under the Schrems decision, the ability of a US corporation to access that information and then take it back to the US under the safe harbor provision is no longer available.

I asked Armstrong how a company might be able to move forward and internally investigate potential FCPA violations. Armstrong suggested that that the only way at this point was to obtain the consent of the person being investigated. However the obtaining of such consent raises a host of other problems. He said, “Can I really get consent in an internal investigation? Can I go along, speak to my Austrian agent and say, “Peter, I just need you to sign this form to transfer your data to the US”? Now, for consent to be valid the European legislation it has to be fully explained, it has to be honest, it can’t be deceptive. I’ve got to say to him, “I want you to sign this form because I want to investigate you. I want to run a full FCPA investigation; you’re the prime suspect. I want to take a look at your emails and I have to inform you that by the way, you have the right not to consent and if you don’t consent there’s no way I can investigate you. Could you sign the form, please?”” As Armstrong went on to note, “What answer is he likely to give in an internal investigation and how would the US authorities feel if I go and tip off the main suspect that he’s under investigation?”

With these two key components of any best practices compliance program, hotlines and internal investigations, seemingly now unavailable to CCOs or compliance practitioners for EU sourced information; I believe there will be additional pressure put on the compliance function. Obviously any US company with EU based operations will have to take steps immediately to ring fence such data originating in Europe. It may also mean that any inquiries will need to be headed by locally based compliance practitioners.

Moreover, if you couple this ruling in the Schrems decision with the Yates Memo, you immediately see the issue involved for any company which is seeking cooperation credit because such company is required to turn over any and all information to the Department of Justice (DOJ) as soon as possible. But now, even if companies can still develop facts and data through internal investigations, in the manner suggested by Pirrotta in using local law firms, you might not be able to get the information back to the US to use.

Worse yet, is the option laid out by Armstrong to obtain consent from an investigation target? Not only do I find it very improbable that anyone, European or otherwise, would give such a consent but in the unlikely event such consent is given, you have told the target, they are the target and other data sources might well begin to disappear. Armstrong put it starkly when he said, “you’re going to get no sympathy from the bribery prosecutors, bribery regulators if you mess this up. The SFO [Serious Fraud Office] have already lost the case, allegedly, on the way in which the US firm involved conducted the investigation. They will have, rightly I think, no sympathy at all for people whose investigations are themselves conducted unlawfully. It’s going to need a lot of careful thought to structure data transfers, even to structure interviews. How do you move those interview notes about, how do you look at emails, all of this stuff is going to be absolutely critical not only so that you don’t break data privacy data protection laws, but also tipping off witness, you know, interfering with the scene of an investigation, et cetera, et cetera. All of these things are critical.”

How does the Schrems decision contribute to compliance at the tipping point? If you can use two of the key components in a best practices compliance program; based upon the DOJ/Securities and Exchange Commission (SEC) Ten Hallmarks of an Effective Compliance Program or another standard; it will put significant pressure on other parts of the program. A compliance program will have to be structured more rigorously to prevent FCPA violations through the use of internal controls and transaction monitoring tools. CCOs and compliance practitioners will also have to be more involved and have more visibility into the entire lifecycle of transactions so they can determine how to begin to move from even prevention to proscription of any FCPA violations.

Just as the compliance world changed with the announcement of the Yates Memo, the DOJ Compliance Counsel and the VW emissions-testing scandal; the Schrems decision will change the need for a more robust compliance program going forward to help protect a company.

Three Key Takeaways

  1. The Schrems decision significantly impacted US based internal investigations.
  2. Study the privacy laws of the country where you are performing your investigation.
  3. Informed consent is difficult to obtain but it may be critical for your investigation.

 

 

 

 

 

 

The concept of privilege in an internal investigation is critical. Two important privileges are the attorney/client privilege and the work product privilege. Unfortunately both are often miss-understood, miss-applied and consequently lost.

One such recent example of the miss-application of the attorney/client privilege was in the trial of former PetroTiger co-Chief Executive Officer (co-CEO) Joel Sigelman has brought the issue of the parameters of the attorney/client privilege yet again. As part of its undercover operation the FBI wired up the then PetroTiger General Counsel (GC), Gregory Weisman, and instructed him to go meet with Sigelman to discuss the payments by the company to the wife of an official of the Columbian state owned energy company Ecopetrol.

Sigelman’s counsel sought to have the video and audio recordings of this meeting suppressed based upon the attorney-client privilege that generally protects open communications between lawyer’s and their clients, where legal advice is sought by the client. To determine whether Sigelman has a valid claim, it is encumbent to understand the parameters of the attorney/client privilege. In an article, entitled “The Evolving Attorney-Client Privilege: Business Entities”, David E. Keltner wrote that under US federal law, the attorney/client applies when the following are present:

  1. A client is seeking legal advice or a lawyer’s services;
  2. The person to whom the communication is made is a lawyer or his or her representative;
  3. The communication relates to a fact disclosed from a client (a representative) to a lawyer (a representative);
  4. Strangers are not present;
  5. A client requires confidentiality.

The significance of meeting each of these five prongs is critical. If they are met, “Absent privilege, once the attorney-client privilege is properly invoked – the privilege is absolute.” However the failure to meet Prong 1 is what doomed former co-CEO Sigelman’s efforts; as he was not seeking legal advice. It was former GC Weisman who flew to Sigelman’s home to confront him over the fact that the FBI had come to his house asking questions about the payments made in Columbia. Finally, it is important to note that the attorney/client privilege belongs to the corporation and not to any one individual.

The attorney/client privilege can be waived. While there is a general recognition that “only an authorized agent of a corporation may waive the privilege of the corporation” Keltner advises that the “most frequently encountered instances of losing the privilege through selective disclosure” are in responding to a government investigation; supplying information to a government agency; information disclosed in certain Securities and Exchange Commission (SEC) filings or other required financial disclosures; in certain circumstances disclosures to external corporate auditors or accounting responses; any disclosure made to a third party not affiliated with a lawyer; and insurance disclosures.

How should we apply the above to the situation faced by former co-CEO Sigelman? Was he simply meeting with his lawyer or was he seeking legal advice? As reported by Joel Schectman in the Wall Street Journal (WSJ), in an article entitled “Secret Informant Recordings to be Allowed in PetroTiger Case”, the trial court distinguished between having an attorney/client relationship from the attorney/client privilege. Schectman reported, “a judge in U.S. District Court in Camden said last week that merely having an attorney-client relationship isn’t enough to make all conversations privileged–a client needs to be actively seeking legal advice. “I cannot find a shred of indication that Weisman is there with the intention of giving legal advice to Sigelman,” Judge Joseph Irenas said, “or the converse, that Sigelman was seeking legal advice from Weisman.””

Interestingly the trial court did not opine on the question on who was the client in this situation. My experience is that most CEO-types think of a GC as their personal lawyer. That view is also misplaced as a GC works for a company and the client is the corporation. While he did not have to reach the question of who was the client in the Sigelman/Weisman meeting, the trial court might well have allowed the current corporate owners of PetroTiger to waive any privilege asserted by a former co-CEO. Schectman quoted G. Derek Andreson, a lawyer specializing in the Foreign Corrupt Practices Act, that “Attorney client privilege is often misinterpreted as broader than it is.”

Did the FBI take advantage of some special type of relationship between Sigelman and Weisman? As reported in the article, in his brief attempting to suppress the evidence, Sigelman’s counsel said, ““Messrs. Sigelman and Weisman had a “long standing attorney-client relationship, one that fostered candor and trust between them–as any good attorney-client relationship should. The government took advantage of this trust.”” Such would seem to be the nature of wiring up cooperating witnesses; if they cannot engender trust with those they are speaking to and surreptitiously taping; it would seem they are of little use to authorities.

For the attorney/client privilege to be of use to you, certain hard work must be done to establish the attorney/client privilege in the corporate context. The five prongs listed by Keltner must be fulfilled for the privilege to apply. Simply having a chat with your lawyer or even the company’s lawyer will not invoke the privilege or protect you.

In addition to the attorney/client privilege there is another privilege which can come into play around internal investigations. It is the attorney/work product privilege. Keltner noted, “The attorney-client privilege and the attorney work-product doctrine are often asserted interchangeably. While there is some overlap between the two, the attorney-client privilege is significantly different than the attorney work-product doctrine.” Moreover as “codified in Fed R.Civ. P. 26(b)(3), [the attorney/work product] provides a qualified protection to materials prepared by party’s counsel or other representative in the anticipation of litigation.” The doctrine exists “because it permits lawyers to “work with a certain degree of privacy, free from unnecessary intrusion by opposing parties . . .”

The key is that it be prepared in anticipation of litigation Unlike the attorney-client privilege which belongs to a client, work-product immunity may be asserted either by the lawyer or the client. While the attorney-client privilege is included in the Rules of Evidence, the work-product doctrine is included in the Rules of Civil Procedure in the series relating to discovery. This makes it problematic to assert in the context of a criminal investigation.

For in-house lawyers in the UK or EU countries however, there is no such work product privilege. Two recent examples brought up this key difference in US and UK and EU legal systems. First was the raid by German prosecutors of Volkswagen’s outside counsel, Jones Day’s offices for information surrounding the law firm’s investigation relating to the company’s emissions-testing scandal. The raid was based on a court issued subpoena.

The second is the recent judicial decision out of the UK, involving Eurasian Natural Resources Corp. (ENRC). The UK’s highest court held the company must produce to the UK’s Serious Fraud Office (SFO) documents the company claimed were privileged, including attorneys’ notes of employee interviews conducted during the company’s internal investigation. The SFO sought the documents as part of its criminal investigation into allegations of fraud, bribery, and corruption. The court largely rejected ENRC’s claims of the work product privilege, holding that it does not apply when a document is not prepared for the sole or dominant purpose of conducting adversarial litigation. ENRC was required to produce the bulk of the contested documents because the investigation was a fact-finding exercise.

Three Key Takeaways

  1. Note the differences in the attorney/client and work product privileges.
  2. Both privileges can be waived intentionally or through inadvertent conduct.
  3. Take care on attorney work product outside the US, where there may be no privilege at all.

 

 

 

 

 

 

In this episode, James Koukios, a partner at Morrison & Foerster returns to discuss the firm’s newsletter Top Ten International Anti-Corruption Developments for April 2017. In this episode we highlight the three following matters for discussion and what lessons can be garnered from them.  

World Bank Veteran to Change Positions.The World Bank announced that Pascale Helene Dubois would become the new head of the World Bank Group’s Integrity Vice Presidency, known as INT. The INT is an independent unit within the World Bank Group that investigates and pursues sanctions related to allegations of fraud and corruption in World Bank Group‑financed projects. Dubois is well known in the anti-corruption community and has long been a thought leader in this space. In her current post, she has worked to increase transparency and due process at the World Bank generally and in the Office of Suspension and Debarment specifically. Koukios relates how Dubois’s work and that of INT has helped foster greater cooperation between the World Bank and law enforcement agencies around the world.

Engineering Firm and Its Executive Debarred by World Bank for Bribery in Southeast Asia.

In April the World Bank Group announced the debarment of Denmark-based Consia Consultants ApS and its managing director. According to the World Bank, INT’s investigation revealed evidence that the company made payments to officials to influence contract awards in connection with the World Bank-financed Strategic Road Infrastructure Project in Indonesia. The World Bank stated that the company further failed to disclose its agreement and commissions paid to its agent in connection with the project and misrepresented the availability of key staff it has claimed would be assisting with the execution of its technical assistance contract under the project. The World Bank also said it found evidence that the company made corrupt payments in Vietnam in connection with the Hanoi Urban Transport Development Project, in addition to fraudulent misconduct relating to the Second Northern Mountain Poverty Reduction Project. The World Bank debarred the company for 14 years and its managing director for 3.5 years.

Former Diplomat Pleads Guilty to FCPA Charges in United Nations Bribery Case, While Judge Denies Motion to Dismiss FCPA Charges against Another Defendant.

On April 28, 2017, Francis Lorenzo, a former deputy ambassador from the Dominican Republic, pleaded guilty in the Southern District of New York to conspiring to violate the FCPA and to pay and receive bribes and gratuities in a bribery scheme allegedly involving Ng Lap Seng, a Chinese national and real estate developer accused of bribing former U.N. General Assembly President John Ashe. Lorenzo pleaded guilty to related charges in 2016 and is expected to testify against Seng at trial, currently set to begin May 30, 2017. Two days before Lorenzo’s guilty plea, on April 26, 2017, Southern District of New York Judge Vernon S. Broderick denied Seng’s motion to dismiss FCPA and related charges against him, finding that the superseding indictment sufficiently presented the essential facts underlying the charges and that the prosecution had made sufficient disclosures concerning the nature of the charged offenses by other means, including through the various complaints filed in the case, extensive discovery, agent affidavits, and a written response to Seng’s letter request for a bill of particulars.

To read a full copy of the firm’s newsletter, click here.

In this episode, I visit with Roy Snell about his recent announcement that he is stepping down as head of the SCCE. We review the current state of the SCCE and how the Roy has seen the compliance evolve from its start after the 1992 US Sentencing Guidelines. We discuss where Roy sees compliance going in the next several years and where the SCCE may go to support the profession.

This announcement comes when the SCCE has grown to 50 staff members and one of the has one of the strongest boards in the professional association world. the SCCE has a strong footprint in the US and is a material player internationally with 17,500 members in 95 countries. It has a great reputation and its success to date has been quite remarkable.

The call for applications will close on August 20th 2017.  A detailed job description and position summary are available at http://www.corporatecompliance.org/CEO.  SCCE plans to complete the interview and selection process in the Fall of 2017 and onboard a Deputy CEO in early 2018. The Deputy CEO will likely assume the role of the CEO sometime in 2019. Roy will stay on with the organization for roughly one year to work on special projects. To be considered for the CEO of SCCE and HCCA, please fill out the questionnaire with return instructions available at: http://www.corporatecompliance.org/CEO.

Must an investigator warn an employee that concealing information from company lawyers conducting an internal FCPA investigation could be a federal crime? Even if the company attorneys handling the investigation provided the now standard corporate attorney Upjohn warnings, does a company attorney asking questions morph into a de facto federal agent during an internal company investigation regarding alleged FCPA violations and is the attorney thereby required to provide a Miranda warning to employees during a FCPA investigation?

In a recently released paper entitled “Navigating Potential Pitfalls in Conducting Internal Investigations: Upjohn Warnings, “Corporate Miranda,” and Beyond” Craig Margolis and Lindsey Vaala, of the law firm Vinson & Elkins, explored the pitfalls faced by counsel, both in-house and outside investigative, and corporations when an employee admits to wrong doing during an internal investigation, where such conduct is reported to the US Government and the employee is thereafter prosecuted criminally under a law such as the FCPA. Margolis and Vaala also reviewed the case law regarding the Upjohn warnings which should be given to employees during an internal FCPA investigation.

Employees who are subject to being interviewed or otherwise required to cooperate in an internal investigation may find themselves on the sharp horns of a dilemma requiring either (1) cooperating with the internal investigation or (2) losing their jobs for failure to cooperate by providing documents, testimony or other evidence. Many US businesses mandate full employee cooperation with internal investigations or those handled by outside counsel on behalf of a corporation. These requirements can exert a coercive force, “often inducing employees to act contrary to their personal legal interests in favor of candidly disclosing wrongdoing to corporate counsel.”  Moreover, such a corporate policy may permit a company to claim to the US government a spirit of cooperation in the hopes of avoiding prosecution in “addition to increasing the chances of earning meaningful credit under the US Sentencing Guidelines or the FCPA Pilot Program.

Where the US Government compels such testimony, through the mechanism of inducing a corporation to coerce its employees into cooperating with an internal investigation, by threatening job loss or other economic penalty, the in-house counsel’s actions may raise Fifth Amendment due process and voluntariness concerns because the underlying compulsion was brought on by a state actor, namely the US Government. Margolis and Vaala note that by utilizing corporate counsel and pressuring corporations to cooperate, the US Government is sometimes able to achieve indirectly what it would not be able to achieve on its own – inducing employees to waive their Fifth Amendment right against self-incrimination and minimizing the effectiveness of defense counsel’s assistance.

So what are the pitfalls if private counsel compels such testimony and it is used against an employee in a criminal proceeding under the FCPA? Margolis and Vaala point out that the investigative counsel, whether corporate or outside counsel, could face state bar disciplinary proceedings. A corporation could face disqualification of its counsel and the disqualified counsel’s investigative results. For all of these reasons, we feel that the FCPA Blog summed it up best when it noted, “the moment a company launches an internal investigation, its key employees — whether they’re scheduled for an interview or not — should be warned about the “federal” consequences of destroying or hiding evidence. With up to 20 years in jail at stake, that seems like a small thing to do for the people in the company.”

Let’s keep on skipping down the lane and see where we go. What if the company gets its investigation wrong and wrongfully identifies an employee? At least in a few states, a wronged employee can sue for defamation. Yet not in Texas and a recent Texas civil case demonstrates why companies and internal investigators need to be aware of local laws, regulations and requirements.

The Texas Supreme Court in Shell Oil Co. v. Writt, held that an internal investigation report Shell provided to the U.S. Department of Justice about potential FCPA violations is “absolutely privileged” in a defamation proceeding and cannot be used to form the basis of a defamation claim.

Writt had alleged that Shell defamed his character when the company “voluntarily” reported to the DOJ on the findings of an internal investigation the company conducted into its relationship with Panalpina — an investigation that culminated in the company’s 2010 FCPA settlement with U.S. enforcement authorities. Writt claimed that Shell’s internal investigation report falsely implicated him in the payment of bribes and accused him of providing inconsistent statements during multiple interviews conducted in the course of the investigation.

The trial court initially granted summary judgment in favor of Shell, dismissing Writt’s suit on the basis that Shell enjoyed an “absolute privilege” to make statements to the DOJ regarding its internal investigation. The Texas Court of Appeals overturned this decision, refusing to characterize a “voluntary” pre-prosecution internal FCPA investigation as a judicial proceeding. Instead, the Court of Appeals held that Shell was only entitled to qualified privilege, under which a speaker can still be liable for defamation if the speaker “knows the matter to be false or does not act for the purpose of protecting the interest for which the privilege exists.”

The Texas Supreme Court held “at all relevant times” Shell had been the target of a DOJ FCPA investigation and asserted that this investigation, which eventually resulted in a criminal settlement with Shell, satisfied the standard that “the possibility of a proceeding must have been a serious consideration at the time the communication was made.”

The Supreme Court also highlighted “the DOJ’s leverage over Shell vis-à-vis the FCPA and its somewhat draconian penalties…,” which “compelled [Shell] to undertake its internal investigation and report its findings to the DOJ.” The court specifically pointed to the dramatic increase of FCPA enforcement actions before mid-2007 when the DOJ notified Shell of its investigation, noting that “businesses that chose not to cooperate were subject to substantially greater punishments….”

At a time when the DOJ and SEC have become increasingly vocal in calling for companies under investigation to secure and provide evidence of individual culpability, a decision that did not provide Shell with absolute privilege could have had a far-reaching impact on how companies conduct internal investigations and cooperate with enforcement authorities.

As it stands, the Texas Supreme Court’s decision in Shell Oil Co. v. Writt may incentivize cooperation by companies in the early stages of the enforcement process by providing certainty to potential corporate defendants, particularly those located in Texas, that good faith efforts to disclose the results of internal investigations and expose individual culpability will not leave them open to defamation claims.

Three Key Takeaways

  1. Make sure you provide an Upjohn warning.
  2. If an employee demands counsel to represent them during an internal investigation, who bears the cost?
  3. Always check state law requirements around internal investigations.