The Privilege to Conduct an Internal Investigation
By Simon Airey & Joshua Domb
If you are a U.K. lawyer or in-house counsel specialising in corporate crime and investigations, the chances are that you slept well last night.
After almost a year and a half of uncertainty caused by the judgment of Justice Andrews in SFO v ENRC
The Court of Appeal has confirmed the following key principles:
A company does not have to definitively establish a set of facts indicating a criminal offence before litigation privilege can apply to protect the work product generated as part of the investigative process.
A dialogue between a company and the Serious Fraud Office (“SFO”), entered into at an early stage with a view to reaching a civil settlement, does not mean that a prosecution is not in the reasonable contemplation of the company.
Whilst not every occasion on which the SFO expresses a concern can properly be said to constitute adversarial litigation, a clear indication from the SFO of the prospect of a criminal prosecution and the fact that legal advisers have been engaged to deal with the matter are likely to support the conclusion that a prosecution is in the reasonable contemplation of the company.
Litigation privilege can apply before a company knows the full details of a matter following an internal investigation, or a decision to prosecute has been taken. The fact that a formal investigation has not been commenced by the prosecuting authority is relevant to the determination of whether litigation privilege applies but is not determinative.
The fact that a lawyer prepares a document which is ultimately intended to be shown to the opposing party (for example, the SFO or a prosecutor) does not automatically deprive the related work product of litigation privilege. Advice given and documents created to avoid or settle litigation that is reasonably contemplated are protected by litigation privilege, unless and until that privilege is waived.
Work undertaken by way of response to concerns of misconduct can, in appropriate circumstances, be covered by litigation privilege, even if it is not directly related to the potential litigation. For example, it might be the case that work product generated as part of a compliance audit, a books and records review, or a review of existing policies, procedures and controls is protected by litigation privilege where (i) the work has been instigated as a result of genuine concerns that have been raised (whether by a whistle-blower or otherwise); and (ii) failings in the areas that are under review might result in a criminal or civil sanction.
What are the circumstances in which it might be right to say that criminal legal proceedings are reasonably in contemplation?
In taking the fairly unusual step of substituting its own view of the facts for the view taken by the judge in the lower court, the Court of Appeal noted the following factors which it said supported the conclusion that the company was concerned about a real likelihood of criminal prosecution when it retained lawyers to conduct an internal investigation and engage with the SFO (see paragraphs 91 – 92 of the judgment):
the receipt of a whistle-blowing report alleging criminal conduct and the fact that independent lawyers had been appointed to investigate the allegations;
communications between senior in-house legal counsel and members of the Board, raising concerns that the company was being scrutinised by the SFO and that a criminal investigation was likely;
taking steps to review and upgrade dawn raid procedures in anticipation of a raid by the SFO;
the receipt of legal advice confirming that, based on the preliminary findings at that stage, the matters being reviewed were potentially criminal in nature and might result in both criminal and/or civil proceedings;
the fact of proactive engagement with the SFO with a view to possible self-reporting; and
the receipt of legal advice in relation to the circumstances in which privilege might in due course be waived over one or more classes of documents.
There are a number of practical matters which should be borne in mind when conducting an internal investigation which flow from the matters considered in the judgment.
There must be a genuine or legitimate basis upon which to conclude that a criminal investigation or prosecution is a real likelihood if a claim to litigation privilege is to succeed. This can be as simple as the receipt of a whistle-blowing report (depending upon the nature of the allegations being made and any evidence presented in support).
Appointing external lawyers to investigate may support the conclusion that the company considers there to be a risk of prosecution. Engagement letters should be structured and drafted to reflect these concerns and record, so far as is appropriate, the bases upon which claims to privilege can be supported.
Communication with the Board (or a body appointed by the Board) including advice and presentations (where appropriate) might help demonstrate that an investigation or prosecution is in the reasonable contemplation of the company.
The types of work often undertaken by forensic accountants/auditors as a result of concerns being raised can be protected by litigation privilege. The engagement should be structured through the company’s lawyers, and the engagement letter should make clear that the purpose of the work being undertaken is to support the investigation, help the company evaluate its risk of prosecution and, if needed, help the company avoid, settle or resist legal proceedings.
Companies can engage in early discussions with the SFO, even when at the stage of ‘fact finding’, without a presumption arising that all related work loses its protection. Care should be taken to structure and characterise the communications with the SFO appropriately, if necessary making it clear that there is no intended waiver of privilege, or a qualified waiver only.
Whilst the SFO under David Green QC always resisted the suggestion that it was under-funded, doubts persist that the SFO lacks resource, particularly by comparison to its U.S. counterparts. The SFO has an extensive case load of on-going and prospective investigations and, in practice, does not have the teams of investigators required to conduct multiple, simultaneous, large-scale, cross-border investigations.
The judgment of Justice Andrews undoubtedly had a chilling effect on internal investigations. Companies inevitably became less willing to investigate allegations of wrongdoing for fear of a lack of control over the related work product and findings. Companies should be encouraged to investigate concerns of wrongdoing but, invariably, will only feel inclined to do so in a protected and privileged environment in which they have a degree of control over the outcome. This is a point that was expressly noted by the Court of Appeal at paragraph 116 of its judgment:
"It is, however, obviously in the public interest that companies should be prepared to investigate allegations from whistle blowers or investigative journalists, prior to going to a prosecutor such as the SFO, without losing the benefit of legal professional privilege for the work product and consequences of their investigation. Were they to do so, the temptation might well be not to investigate at all, for fear of being forced to reveal what had been uncovered whatever might be agreed (or not agreed) with a prosecuting authority…"
This is particularly important in light of the recent development in the U.K.’s still relatively new, deferred prosecution agreement (“DPA”) regime. Whilst the exact requirements to qualify for a DPA will differ from case to case, a key factor appears to be a timely self-report to the SFO. In practice, such a self-report can only take place after at least some investigation has taken place. As noted above, it is crucial that companies are free to undertake these investigations without fear that their work product is not protected against disclosure to the prosecuting authorities.
In a side bar comment, the Court of Appeal took the interesting step of pointing out that nothing in its analysis should be taken to adversely impact the DPA regime. It noted that the fundamental principle underlying a DPA remains cooperation with the SFO. In determining whether this requirement has been met, the Court stated that an important consideration will undoubtedly be the extent to which the company has been prepared to waive privilege over work product, particularly notes of interviews.
It remains to be seen whether or not the SFO will seek to appeal the judgment to the Supreme Court. The SFO’s decision in that regard may offer an interesting insight into the approach that will be taken to future investigations by the new Director, Lisa Osofsky, who has dual experience as a prosecutor and defence counsel and on both sides of the Atlantic.
Yesterday’s judgment was inevitably a blow to the SFO, which has been on something of a roll in recent years. However, once it gets over the initial set-back, it may come around to the view that, for the reasons of public policy set out above, it is happy to leave the position as it now stands. However, if that is the case, it may give rise to revised guidelines in relation to matters such as self-reporting and the DPA regime. It is likely that the SFO will also seek to be very clear with companies about the nature and extent of any dialogue and the basis upon which it is being conducted. The SFO may also get stricter in holding companies to their offers or promises of a self-report or the provision of evidence or documents.
If the original decision in this case has been interpreted to suggest that privilege cannot apply to an internal investigation, the Court of Appeal has exploded that misconception. Whilst the judgment emphasises that a successful claim to privilege will depend on the particular circumstances of each case, the court made it clear that privilege is capable of applying to interview notes and other work product created as part of a fact-finding exercise.
The decision represents a victory for common sense and removes the uncertainty and turmoil that flowed from the judgment of the lower court. After a year and a half of sleepless nights, it appears that the thorny issue of litigation privilege in internal investigations may finally have been put to bed.