With the football association hiring lawyers to look into the Sven Goran Eriksson affair, more law firms are considering offering investigatory services, writes Jeremy Fleming
Former MI5 officer Peter Wright may have written in Spycatcher how in the 1960s he and his colleagues ‘bugged and burgled our way across London’, but espionage in the 21st century is now a game played by private companies as much as governments.
Helping companies defeat this threat is increasingly big business, so it is perhaps no surprise that last month medium-sized London firm Lawrence Graham launched a corporate investigations group, saying there is now a market for law firms to offer investigations as a stand-alone service for clients.
Andrew Witts, a partner in the firm’s dispute resolution department and head of LG Corporate Investigations, says: ‘I noticed that the substance of our work was changing. We were doing less direct litigating and more work of an advisory and risk-related nature.’
He says the type of work involved attempts by companies to ensure that board members had not been making secret commissions, or committed breaches of their fiduciary duties, or employee procurement fraud.
He adds: ‘Then it struck us that – as Lawrence Graham does not already act for a huge number of FTSE 100 clients – there was an opportunity to act for boards or individual directors in relation to this kind of work.’
He gives as a recent example the firm’s work for the UK board of WorldCom, which was advice given independently of its troubled US parent and the UK company. The company routinely uses Simmons & Simmons as its corporate adviser, ‘but the board asked us for separate advice on the solvency of the company’. This came at the time of the company’s well-publicised problems in the US, and related to directors’ duties generally and particularly solvency issues. There were no accounting irregularities involved.
Simon Dawson, a solicitor and former partner in the forensic accounting department of PricewaterhouseCoopers’ London office, now heads the corporate investigations team of The Risk Advisory Group (TRAG).
He says it is hard to assess the extent to which corporate requirements for investigations are a response to an actual growth in fraud or misconduct. ‘There are no public audits of fraud in the UK. Organisations such as the Serious Fraud Office and the British Bankers Association do publish figures, but these tend to be specialist rather than all-encompassing.’
He explains that one of the main reasons for this is that companies are reluctant to discuss their involvement for fear of adverse publicity. He adds: ‘My sense is that there has probably been no baseline increase in corporate fraud, but that companies are more aware of the need to investigate instances of corporate fraud because of their need to demonstrate that they have adequate controls in place.’
Nick Pearson, head of litigation at Baker & McKenzie’s London office, says: ‘The big motivator for companies’ boards and individuals to seek independent advice and request investigations has been US legislation, especially Sarbanes-Oxley, which empowers audit committees to use their own advisers. This standard is spreading beyond the US, and the recent Higgs report in the UK places more responsibility on directors to take advice.’
He cites the recent problems at the Football Association – which saw the FA appoint lawyers to carry out an independent investigation into the events surrounding coach Sven Goran Eriksson, chief executive Mark Palios and secretary Faria Alam – as an example of the encroachment of these duties into the wider corporate arena.
But investigations work could also come to law firms by other routes, as Mr Witts explains: ‘We act for venture capitalist 3i, which has large shareholdings in many FTSE companies and may pressurise the boards to hold investigations into aspects of these companies from time to time.’
Alex Bomberg, managing director of International Intelligence Ltd, a company that carries out investigations for law firms and other companies, suggests that fraud and malfeasance may be on the increase because the stakes are becoming higher.
He says: ‘If a company is willing to spend billions of dollars or pounds on an acquisition, there will always be the temptation for them to make a comparably small additional investment to acquire price-sensitive information that might enable them to obtain a discount of, say, £50 million.’
Mr Witts says there are always people involved in transactions who will step beyond the bounds of acceptable behaviour – using bribes or peddling price-sensitive information – which will give rise to the need for investigations.
He says: ‘Even within law firms, many of the City players have their boardrooms swept regularly for bugs because someone seemingly innocuously walking in with a pot of coffee could be bringing a bug into the room. It happens – and there is scope for it to happen.’
Mr Witts insists that his new group goes further than offering a bundle of services available at any law firm but dressed up to target itself at investigations.
He says: ‘Many companies facing an internal fraud do not know what to do. They act before they think and get the police involved immediately. We are able to make sure that a rational process is adopted, in which the investigation takes place properly and correct procedural steps are taken.’
But if law firms such as Lawrence Graham are beginning to explore the idea of offering investigations as service departments for their clients, how much are they likely to come up competitively against the existing companies – such as TRAG – which already occupy established positions in the investigations market?
Mr Pearson says that the difference between law firms’ capacity to offer investigation services and those of the existing companies is that ‘they are coming at it from a different angle’.
He explains: ‘They [the specialist companies] tend to deal with risk more generally, and to case out the ground for people. For example, they might check out the feasibility of setting up a contract in Kazakhstan.’
He says that where lawyers can really add value in investigations is where there is a need for evidence-based research. ‘If the investigation requires taking evidence from individuals and then presenting it in an analytical way, that clearly is a skill that litigators have,’ he says.
Mr Dawson says that where TRAG’s services would differ is in offering more focused specialist services, such as computer forensics and fraud-related forensic accounting, or in carrying out investigations of individuals or companies, which law firms without a global network might find difficult.
City firm Taylor Wessing sought to bridge this gap late last year by joining forces with niche investigation consultancy Cobasco Group. They offer what is described as a unique fraud prevention and investigatory service for business owners and managers, combining a security and health check for companies.
The pair compare databases to check for conflicts of interests of employees; review anti-money laundering systems, data protection, employment contracts, monitoring and fraud prevention policies; and gather evidence and take legal action to recover proceeds of fraud.
Mr Dawson explains that investigations into individuals usually start with a public record search against the name to unearth directorships, property registered against the name, outstanding litigation against the target or bankruptcy and county court orders, and any press comment surrounding them.
These primary leads would then follow onto more involved interviews with other individuals whose associations with the target individual have become apparent from the investigation.
He adds: ‘For example, TRAG is often asked to investigate the background of individuals who are engaged in litigation with a law firm’s clients. In such cases, an understanding of the circumstances of other litigation in which those individuals may have been involved can be important.’
Some of these roles seem on the face of it to involve work similar to that carried out by litigation departments in law firms.
So perhaps many firms will soon be opening shop as investigators.
Mr Pearson says that whether firms set up their own investigations teams – like Lawrence Graham – or not, ‘it is an area that firms should be looking at to draw together their expertise – it’s certainly something that we’re doing’.