The telephone rings. It’s reception. Financial Services Authority investigators are downstairs with a search warrant. How prepared are you to respond to such a knock at the door? That question has been put high on the agenda of in-house lawyers as the regulatory and business crime regime becomes ever more powerful.
Draft guidance on the ‘adequate procedures’ that companies must put in place to have a defence against corruption charges under the new Bribery Act 2010 were published on 14 September. The coalition government is proposing to set up a new economic crime agency to tackle ‘white collar’ crime; while the message from regulators, such as the FSA, is that businesses should be ‘very frightened’ of them.
A change of emphasis by the FSA has led to more search warrants, increased use of their criminal powers and the first use of a ‘cooperating defendant’ in a plea deal. As Tracey McDermott, head of wholesale in the FSA’s enforcement division, explains: ‘We want to be seen as a credible deterrent so people need to fear that they may be caught; they need to fear that if they are caught, we will investigate; and they need to fear that the consequences they will suffer will be meaningful.’
Against that background, anyone who hopes the new government will be more business-friendly should ‘read their lips,’ says Rob Moulton, who heads City firm Nabarro’s Financial Services Regulation group. ‘There are votes in being seen to be tough on business.’
Be afraidSo, how ‘frightened’ should in-house lawyers be and what strategies should they employ? There is a balance to be struck, says Nina Barakzai, chair of the Commerce and Industry Group’s corporate governance committee. ‘Companies which haven’t engaged in assessing the risks of regulatory scrutiny should take notice. But from the perspective of in-house lawyers, they already routinely assess compliance and regulatory risks and bring them to the attention of their board well in advance of any regulatory issues.’
A number of C&I’s members have experience of being the subject of a raid, and Barakzai says there has been a lot of discussion about how to have a defendable position and ‘what to do if you are concerned the regulators might be on a fishing trip’. As a committee, they have been able to provide guidance which covers the fine line between being as supportive as possible to the regulator, in line with your duty as a solicitor, ‘while not giving them carte blanche to take what they want’ without first checking their warrant or authorisation.
Being prepared is about identifying the potential risks you face. ‘You are then able to take a common sense approach,’ she says, ‘so you don’t put your organisation through a goldplating solution for every regulatory query when it is not necessarily relevant to your company.’
Who’s there? For Moulton, the first thing in-house counsel need to recognise is that there are so many different regulatory and law enforcement bodies which might come knocking on their door, that no one person can know the powers, scope and procedures of each one.
For instance, the Serious Fraud Office, which will be the lead agency investigating and prosecuting Bribery Act cases, has greater authority than the FSA to compel witnesses to cooperate, while the Office of Fair Trading has more scope to grant leniency, putting pressure on companies to be the first to blow the whistle.
‘You need a plan which enables you to get the right help as quickly as possible,’ Moulton says, adding: ‘There are three things I would want to know on day one of a new job as in-house counsel – I would want to know intimately the investigative powers of my primary regulator; I would want to be working on the Bribery Act to ensure we benefited from any safe harbours it offers; and I would want to know what procedures were in place should anyone other than my obvious regulator turn up.’
But there is a plus side to the more threatening stance taken by regulators, he believes. ‘General counsel and those in compliance should be grateful because it means that, when they talk to their senior management, they are taken seriously. In some industries, it is about measuring risk, and if you think the risk of being caught is low and the outcome is a civil fine, it can be seen as part of a financial calculation. People don’t do that calculation when there is the risk of going to jail.’
Regulatory raids are an ‘occupational hazard’ for business, says Jeanette Harwood, head of Leeds-based Walker Morris’s regulatory services team. Previously in a senior in-house role at Provident Financial, she gained insight into the regulator’s perspective during a secondment to the FSA’s enforcement law and policy team. ‘Good compliance policies and practices will minimise the risk of the knock on the door but they can't eradicate it. If you are raided, you need to respond quickly.’
Searching questionsThe FSA’s McDermott says that when the regulator executes a search warrant, there is a high degree of internal concern about what it is looking for, the implications for the business, what they can tell staff, clients and the investigators. He says: ‘We expect people to provide the material we want and work with us in a way which minimises disruption to their business.’
However, establishing the facts can be a massive task in today’s electronic age. Companies are increasingly calling in forensic investigators to copy everything taken by the regulatory team during a raid to try to find out what they are looking for so they know how to respond.
Forensic investigators are also called in if a company is worried it may be in breach of regulations, perhaps because of comments made by a whistleblower, an anonymous letter or an exit interview with a senior sales person.
Tommy Helsby is chairman of global risk consultancy Kroll’s EMEA region: ‘If you have suspicions of anti-competitive behaviour or internal corruption, it is a serious regulatory matter, so you want to secure the data.’ This means imaging computers and email servers (making a carbon copy of the crime scene, without changing relevant metadata), so that if the matter turns out to be the bad news you fear, you are able to demonstrate to the regulator you have done all the right things.
But, while it is important to react quickly, he adds: ‘It is equally important not to overreact. There is pressure to get in first, but you could end up with investigators crawling all over you when it wasn’t such a big problem – perhaps something was contemplated but not executed or the allegation was malicious – and you have opened the door to an investigation which might be extremely damaging to your credibility. When you go to a regulatory body, you need to make sure you have all the facts.’
On the hookThe pressure from regulators has led to the role of in-house lawyers ‘metamorphosing’ into an early warning system involving risk awareness and risk management rather than a straight legal role, says Barakzai.
Compliance is certainly a key function for in-house lawyers, says C&I Group chair John Bleasdale, legal director of TNT UK. A senior lawyer heads TNT’s integrity group, which is tasked with ensuring compliance with regulations throughout the company, providing training and awareness from top to bottom.
‘But how companies respond depends on their resources,’ he says. ‘Your in-house legal team may be just one or two people so you may need to turn to external lawyers for specialist advice.’
General counsel are certainly ‘on the hook’ for legal risk management, and compliance clearly falls into that, says Randal Barker, general counsel and company secretary of Eurasian Natural Resources Corporation.
Barker is head of the standing group on corporate responsibility and health and safety for the GC100, which represents senior legal officers and company secretaries at FTSE 100 companies. ‘I personally have line responsibility for compliance,’ he says. ‘But even if compliance reports to the CEO, if you have a failure, general counsel is going to be implicated in it in some way, shape or form.’
This has prompted concern among in-house counsel about how the Bribery Act will operate given its broad reach. Its implementation has been put back to April 2011 to give businesses time to comply with the new regime. All commercial enterprises must have adequate procedures in place or risk potentially devastating financial and reputational sanctions. However, the draft guidance doesn’t provide a specific test on ‘impropriety’ in relation to corporate hospitality.
Neil Swift, partner in London practice Peters & Peters’ fraud and regulatory team, says that a simple ‘tick box’ exercise will not be enough. ‘It is imperative that all companies review and amend their existing policies and procedures.’
That sort of review is not always unwelcome. Barker has been leading the GC100’s engagement on the Bribery Act, and notes: ‘Business is supportive of the new act because everyone wants to act in an ethical way. We are in favour of more principles than prescriptive, detailed rules because one size won’t fit all.’
The SFO has listed ‘corruption indicators’ on its website and gives guidance on self-reporting, with the carrot of civil rather than criminal sanctions.
For your eyes onlyWith so much pressure on companies to identify potential breaches and decide what action to take, it is crucial any legal advice or internal investigations are protected by legal professional privilege, particularly if there is a raid.
‘First you have to identify it,’ says Harwood. ‘Good housekeeping requires the separate storage and identification of LPP material to be able to assert privilege quickly during a search and seizure operation. You do not want a regulator to read privileged material – even if its status is later upheld, the knowledge of what it contains and the legal advice you have received may be useful to inform the regulator's strategy.’
Both the C&I Group and the GC100 have spoken out strongly against the European Court of Justice’s judgment in Akzo Nobel Chemicals Limited and Akcros Chemicals Limited v European Commission, which means that advice from in-house lawyers in EU competition law investigations is not privileged, irrespective of the status of the lawyer’s advice in their national legal system.
Barker says: ‘You cannot have a proper respect for law and compliance if a company is inhibited in seeking candid and clear legal advice on whether a proposed or current business activity is appropriate.’ He adds that senior management in major FTSE companies do not see in-house counsel as ‘lacking the necessary independence’. On the contrary, they tend to preserve it ‘by ensuring, for example, that the general counsel has direct access to the chairman.’
Looking ahead, practitioners are watching the government’s plans for bringing the enforcement against economic crime under one umbrella.
For Moulton, it is ironic that the FSA may have power taken away from it just as it has achieved some high-profile convictions, ‘despite chancing its arm’ on some high-risk cases. ‘The flipside is the OFT’s BA/Virgin price-fixing case earlier this year which went down in flames,’ he says. ‘It is like being a parent. If your credibility goes, your kids stop listening to you. The best thing about having a super prosecutor is that if they lose, it won’t reflect so badly on the regulator.’
He remains fascinated by those regulators who want their own criminal prosecution powers because these are tough cases to win: ‘At some point, you will end up looking stupid.’
If the knock on the door comes, the key is to have a well-prepared plan, says Walker Morris’s Jeanette Harwood:
Train staff how to handle a raid. Reception or security staff will be the first point of contact with the investigating officials. Prepare an in-house raid manual;
Appoint a ‘raid controller’ and have a raid team trained to ‘shadow’ the officials, making notes of what they look at and taking copies of all documents they take;
Check the warrant/authorisation and identity of the investigating officials. Check the scope of the officials’ powers. If the warrant has not been signed or the date or premises is wrongly stated, it will be invalid;
Call your lawyers. The officials will wait a reasonable amount of time for the legal advisers to arrive before starting their search;
Do not obstruct an investigating officer and never destroy evidence – both could lead to jail;
Privileged documents. If there is a dispute over privilege, documents should be bagged, sealed and labelled in the presence of the inspector for the issue to be determined.Grania Langdon-Down is a freelance journalist