Internal affairs

Internal affairs
When the non-governmental organization Transparency International hosted its 16th annual anti-corruption conference in Malaysia in early September, one of its keynote speakers might have seemed, at least on the surface, to be an unusual choice.

Robert Card, the then president and chief executive of SNC-Lavalin, addressed delegates and was part of a panel discussion entitled “keeping business clean and stopping illicit financial flows,” at the three-day conference.

The Montreal-based engineering company operates in nearly 100 countries worldwide, with 40,000 employees and $10 billion in revenue. Yet its reputation continues to suffer as a result of an ongoing criminal fraud prosecution against several former executives, including its former CEO, in connection with alleged payments to obtain the McGill “superhospital” project in Montreal. Other former executives have been charged related to dealings in Bangladesh and Libya. Finally, in February of this year, the RCMP charged SNC-Lavalin and a subsidiary criminally, alleging nearly $50 million was paid out in bribes and there was a fraud of almost $130 million in business dealings in Libya.

After the charges against the company were announced by the RCMP, the company issued a news release that stated the “alleged reprehensible deeds” were by former employees who left the company long ago. In the statement, the company added that it had been co-operating with the authorities for the past three years.

Card was named the chief executive at SNC-Lavalin in the fall of 2012. At the anti-corruption conference in Malaysia, he warned that innocent parties could be harmed if the company faces future sanctions, such as restrictions on bidding for government contracts in Canada. In an interview with CBC radio at the conference, Card stated that the 40,000 employees at SNC-Lavalin had already been “injured in the process” and that the company now has the tools to conduct its business “cleanly” and in a transparent fashion.

Part of the restructuring of the company has included a revamped compliance process that has been posted online and the hiring of several new executives, including Hartland Paterson, who assumed his role as general counsel in September, after many years as general counsel with CAE Inc. Paterson, the company said in a statement, will report directly to the chief executive and his duties will include overseeing the ethics and compliance sections of the multi-national company.

Two weeks after attending the anti-corruption conference, SNC-Lavalin announced that Card was stepping down in a “smooth transition”, with chief operating officer Neil Bruce taking over the top spot.

Despite the ongoing efforts of the top executives to wipe away the negative perceptions about SNC-Lavalin as a result of the allegations and the criminal charges, the task is likely to remain a difficult one for some time (the company declined requests for comment about its new compliance and ethics practices).

However, the problems at SNC-Lavalin have likely served as a cautionary tale for other large companies — especially those with operations in multiple countries, about the need to be able to conduct cross-border internal investigations that are effective and independent. Uncovering internal wrongdoing, before allegations come to the attention of regulators or law enforcement, is critical and will ultimately save companies both money in the long term and its reputation, say lawyers who are experienced in this area.

Whether it is probing allegations of corruption overseas or something as potentially mundane as a star professional athlete allegedly conspiring with low-level employees to deflate footballs, the public brand of the company is going to be impacted by the quality of the internal investigation. As a result, companies need to plan in advance how to deal with potential issues and not react on the fly, after a potential trouble spot comes to its attention.

At some point, “every company, especially those with cross-border operations, is going to have to conduct an internal investigation,” says Kristine Robidoux, a partner in the Calgary office of Gowling Lafleur Henderson LLP and a member of its white-collar defence and investigations group. “You need to have a detailed protocol in place,” she explains, which provides a road map to investigate any type of alleged wrongdoing.

She divides the potential misconduct into “high-incident, low-impact” concerns such as expense account fraud and “high-impact” situations, such as allegations of insider trading, data breaches, or foreign corruption. Regardless of the allegation, if you already have a template in place to decide what is going to be investigated and who will lead it (internally or externally), “you are halfway there,” says Robidoux. One of the most common themes for companies where something has gone wrong is that they did not have an investigation plan in place in advance, she states.

Jeremy Devereux, a partner in the Toronto office of Norton Rose Fulbright Canada LPP, says he believes a couple of trends are emerging in this area as a result of the increased spotlight on alleged corporate wrongdoing.

Companies are increasing the resources applied to this area and there is “more rigour” put into the investigation process, including the development of protocols and templates, says Devereux, who is part of the firm’s business ethics and anti-corruption team.

Devereux agrees with Robidoux that setting up a framework for the response to various types of allegations will make it easier and likely more cost effective for companies to deal promptly with these issues.

The next step is to decide whether to retain external counsel for an investigation and Devereux says that often depends on the gravity of the allegation. If it is unlikely there are going to be significant regulatory or public relations issues, then the matter can probably be investigated by internal staff. “If you have an issue that might expose the company to real risk with regulators or media,” then it may be necessary to seek an outside firm to investigate, says Devereux.

Once the decision is made to retain a firm to conduct an internal investigation, what follows next is crucial, says Andrew Matheson, a partner at McCarthy Tétrault LLP in Toronto.
“Companies need to be mindful of what the reasonable scope is of the investigation. The counsel instruction memo at the outset must have a definite scope. If it is overbroad, it could end up being destructive for the company and a self-sustaining engagement for a law firm. You don’t want it to become an endless saga,” says Matheson, who specializes in white-collar defence and investigations and who began his legal career working for the late Edward Greenspan.

Once the scope of the investigation has been defined, “it has to be a genuine and principled fact-finding exercise,” says Matheson. If it turns into a “scapegoating” exercise or an attempt to blame the wrongdoing on a few individuals, that risks undermining its credibility, he adds.

There are potential problems with regulators and investors if there are public concerns raised about a company and it does not investigate the allegations fairly, says Alexander Cobb, a partner in the Toronto office of Osler, Hoskin & Harcourt LLP. “My view is that the market will punish you mercilessly if they don’t think they can trust the information you have released publicly,” says Cobb, who has conducted numerous cross-border investigations for the firm’s clients. A flawed investigation will also not sit well with regulators. “If they think the company has created a scapegoat,  they will see through that and you will be worse off. If you are forthcoming, you will take a hit, but you should be able to deal with it,” Cobb says.

Robidoux says it’s a virtual certainty that any major internal investigation will “be challenged after the fact” by regulators or plaintiff side litigators, so the process must be credible. At the same time, “the investigation needs to be calibrated to the nature of the allegation” so it is not overbroad, she adds.

Another significant call for companies to make once an external investigation is commissioned is whether it is appropriate to retain a law firm that already provides significant legal services for that corporation.

Devereux says it depends on the nature of the investigation. “There are times you will want someone completely independent when you are looking for a fact finder,” he states. An example of this type of investigation he says is the one conducted by Toronto lawyer Janice Rubin for the CBC in the wake of the sexual harassment allegations against former radio show host Jian Ghomeshi.

“A lot of the time though, larger internal investigations are not about a single discrete issue. It may require a lot of specific subject matter expertise and knowledge about the company,” says Devereux. “You are conducting an investigation so you can provide legal advice at the end of it,” he explains.

While the specific fact scenario of any allegation will drive this decision, “if there is any doubt, err on the side of not using regular counsel,” suggests Cobb, so the investigation is considered objective.

One example where an internal investigation came under public criticism was the multi-million-dollar probe in “Deflategate.” The National Football League retained a Washington law firm to probe allegations that star quarterback Tom Brady asked low-level staff on the New England Patriots to tamper with the inflation level of the footballs. A 243-page report, issued after a four-month investigation, found it “more probable than not” that the team was involved in tampering and Brady was “generally aware” of these actions. However, the lead investigator, lawyer Ted Wells, faced criticism because his high-profile law firm had done previous work for the NFL, including defending it in litigation stemming from the impact of concussions on former players.

For cross-border investigations, in addition to ensuring that the probe is seen to be independent and objective, there are a number of other complexities involved in the task.

“You have to know the law in all of the jurisdictions. You will likely need local help,” says Cobb. For example, “different jurisdictions will have different rules in terms of what you can access and what you can do with employee information,” he adds.

The rules and conventions about privilege may also be different than in this country, notes Devereux. “In-house privilege is generally recognized in Canada, although not necessarily elsewhere,” he says. In some European countries, the privilege is stronger for external counsel than for in-house lawyers. Depending on the importance of a witness interview, Devereux suggests it is normally conducted by a local lawyer and someone based in the main jurisdiction of the company.

Once all of the relevant documents are accessed, the next important step in a cross-border investigation is the witness interviews, says Matheson. “The object of these interviews is not a cross [-examination]. You are not trying to trap anyone. A “gotcha” style of interview is short-sighted. The answers you will get tend to be unreliable and the findings you make may not hold up,” he suggests.

All of the lawyers agree that interviews in other countries require the investigators to be aware of cultural sensitivities so as not to offend a witness.

“Canadians are well placed to do that work. We have a good international reputation and are not seen as aggressive” as lawyers in some countries, says Matheson.

As well, the phrasing of the questions may assist in obtaining more complete witness responses, without causing any offence, says Robidoux. “You can’t ask questions the same way you would in Calgary. If you ask anyone if they pay bribes, they are going to say no. But if you ask about speeding up the bureaucracy, you may receive a more complete answer,” she says.
Another form of cross-border investigation for in-house counsel to consider is if the alleged wrongdoing is within the Canadian operations of a large United States-based company. In this scenario, it may be U.S. investigators leading the probe rather than a Canadian firm.

Donald Dowling, a partner with K&L Gates LLP in New York, says it really depends on the nature of the allegation. “Canada and the U.S. are pretty much on the same page on this” when it involves a need for cross-border investigations, says Dowling, who specializes in international employment law issues.

If the allegation is one that “is confined to the local office,” then the U.S. firm will likely leave it to be dealt with by its Canadian subsidiary. However, “if the allegations, if true, will rattle the cage of headquarters, then there may be a reason to do it the American way,” says Dowling. At the same time, he cautions U.S. companies to be mindful of coming across as too aggressive in a paper he published earlier this year about cross-border workplace investigations.

The “American way” may also impact a Canadian-led cross-border investigation as a result of the sweeping powers of entities such as the U.S. Securities and Exchange Commission.
Any investigation “should be done at the standard of the most rigorous regulator” that could have jurisdiction over a company, says Devereux. In most cases, that is the U.S., although he adds that regulators in Canada also have broad powers.

Along with ensuring that the focus of an investigation is defined at the outset and that it is conducted in a thorough and fair fashion, a company must also decide what information to disclose and the level of co-operation with regulators and, in some cases, law enforcement.

To be in a better position to make that decision, it is crucial that a company has first moved quickly to conduct its own investigation. “You don’t want to be lagging behind the government, especially in a highly regulated environment,” says Matheson. “If you sit on your hands, the government or regulator will be asking what have you done?”

 In the case of whistleblowers who allege misconduct within a company, there is a good chance they will have brought forward the complaint at the same time to the relevant regulator, says Cobb. It is good practice to let the regulator know as soon as possible about the complaint and that the company in looking into the issue. “They may let you investigate” without starting their own probe right away, Cobb says.

For serious situations where there is a parallel investigation by regulators or law enforcement, all the lawyers say there is a delicate line to walk between co-operating to try to reach a good resolution for the client and protecting privileged information.

There is not significant case law in this area and, in one ruling earlier in the year, Ontario Superior Court Justice Ian Nordheimer found that settlement privilege did not apply at the proffer stage of the “immunity” or “leniency” program offered by the Competition Bureau. The ruling, part of an ongoing chocolate price-fixing prosecution, involved companies that provided information to the bureau in exchange for leniency.

In a general sense, says Devereux, if a company is “forthright” with regulators, there might be some “middle ground” as to what is disclosed and could be ultimately made public. “What you don’t want is a road map for plaintiffs’ lawyers,” he says.

Regulators don’t want the legal advice, “they want the fruits of the [internal] investigation,” adds the Norton Rose lawyer. That could be problematic though because sharing even some of the information may be seen as a waiver of privilege. “At the same time, regulators generally want to know that it has been done right,” says Devereux.

If there is a formal report produced to a board as a result of the investigation, “you should try to establish a privilege fence around the report itself,” says Cobb.

Even the language and writing style of any investigative report should be carefully considered, in case it is ever made public, says Matheson. “Any findings must be well supported. You should be factual and accurate, but there is no benefit in overstating your findings. Excess language is not in the company’s interest,” says the McCarthy’s lawyer.

In some cases, an oral report might be sufficient, suggests Robidoux. “It is a live issue whether there should be a fully written report. The methodology can be committed to paper so that it shows that all the right questions were asked and the company took appropriate action,” she explains.

There are certain instances though when it is appropriate to co-operate fully not only with regulators but also with law enforcement, says Robidoux. She represented Griffiths Energy when it pleaded guilty in 2013 in the Court of Queen’s Bench in Alberta to having paid $2 million to a diplomat’s wife to secure oil properties in Chad. The trial judge accepted a joint submissions and the company was fined more than $10 million, without any probation order.

When new management discovered the wrongdoing, it decided to do a “credible and robust” investigation, says Robidoux. “The company was able to achieve credit by voluntarily disclosing. There was a large fine, but its reputation was restored, and the company was praised by law enforcement and the judge,” she adds. The company was renamed and purchased outright last year for more than $1.5 billion by a Swiss-based company. In the case of Griffiths, the voluntary disclosure and co-operation was the right thing for the company to do, says Robidoux. In general, however, “the credit you receive [for co-operation] can be very unpredictable,” she notes.

Meanwhile, despite the wishes of its former chief executive, the stigma that hangs over SNC-Lavalin is likely to remain, at least as long as the court proceedings continue. One of the other fallouts may be the creation of a growth industry in at least one section of the Canadian legal community — the corporate litigator as international investigator.

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