By Sharon Zealey[1]

Aggressive criminal prosecution of corporations is a fact of life, and it’s getting more frequent. In 2002, the Department of Justice recovered $9.8 billion for corporate fraud. In 2003, that amount nearly doubled, and 2004 figures, when released, will be even higher. Corporations are investigated for everything from antitrust violations to money laundering. There is no sign that the trend will abate any time soon. To the contrary, successful prosecutions and well-publicized indictments have yielded tremendous additional resources for prosecutors’ offices, allowing them to put even more resources into corporate investigations.

Investigations cause havoc in any corporation, even when no criminal activity is found. And if indictments follow an investigation, the costs can be gigantic. Accordingly, every CEO should know (1) how to prevent criminal activity in the company, and (2) how to respond when government investigators arrive at your door with subpoenas. Corporations can be liable vicariously for their employees’ criminal violations. Although companies usually argue that the wrongdoer was a “rogue employee,” that defense rarely works. The best way to prevent criminal investigations is to prevent criminal violations by employees—by instituting policies that lead to early detection and self-reporting of criminal activity.

A corporation can take several steps to avoid the experience of receiving a grand jury subpoena from the U.S. Attorney’s office:

Adopt a compliance program to prevent violations of law and ethical breaches. Tailor the program for your business. Don’t rely on canned programs—if the program isn’t designed for your company, it probably won’t be effective. The U.S. Sentencing Guidelines describe elements of an effective program at www.ussc.gov.

Training is crucial. All employees should know how to follow and implement the compliance and ethics program. Managers should be diligent in promoting a corporate culture that encourages and requires lawful, ethical conduct, and prompt reporting of violations. Periodic communications on standards and procedures for compliance is critical.

Provide numerous channels for receiving internal complaints and tips. Consider that a prosecutor receives tips of criminal violations in many ways: from your employees, your competitors, public records, litigation filings, etc. Likewise, the company must be flexible in receiving reports of misconduct. For example, employees could report suspected misconduct to the compliance officer, audit committee, general counsel, ombudsperson, hotline, or even the board of directors.

Investigate all complaints quickly and thoroughly. The effectiveness of your program will be judged by actions the company takes to deter wrongdoing, discover wrongdoing, and enforce its compliance program. A complaint given short shrift can come back to haunt you.

Monitor and audit to detect criminal conduct early. The type of monitoring and auditing will depend on the particular industry and prior history of the company. Certain types of criminal conduct are more likely to occur in certain businesses. A program designed to discover and punish criminal activity will also serve to deter it.

Retain independent counsel immediately upon learning of serious allegations that could lead to criminal prosecution. A prosecutor is less likely to question the thoroughness of counsel with no prior ties to the company. Former prosecutors are often appointed for internal investigations because they’re familiar with government investigations. Also, if a government investigation results, independent counsel can establish a rapport with the prosecutor.

Protect the attorney-client privilege. Mark all legal opinions from independent counsel and the investigation team with appropriate notation such as “Attorney Client Privileged” or “Attorney Work Product.” All memos and meeting agendas should indicate that they were created “in anticipation of legal action.” These documents should be kept separate from routine business records in clearly marked files.

Take strong corrective action when necessary. A history of corrective action shows you’re serious about enforcing the policy. Ensure protection of whistleblowers.

If a government agency opens an investigation, be prepared to cooperate to the fullest extent possible. Consult immediately with independent counsel who specializes in corporate criminal investigations. Employees should know in advance through training that they should not submit to be interviewed by the government or any other adverse party without the presence of counsel. Separate counsel for employees may be necessary. Notify employees immediately to retain all documents and other evidence.

Update your compliance program periodically. View it as a living thing. You don’t have to love it, but make sure it’s fed and watered. Learn from the mistakes of others who’ve been prosecuted, especially in your industry. Your early warning system is best planned from analyzing worst-case scenarios.

Once criminal activity has been discovered at your company, a government investigation may be inevitable. Your best position with the government is to show that you have a strong compliance program, conducted an independent investigation, took proper corrective action, self-reported the crime, and cooperated with government investigators. Although this doesn’t guarantee that no criminal charge will be filed against the corporation, it certainly reduces the chances of it. You don’t want your company to be the next one in the headlines due to a criminal indictment.

References

The views and opinions contained in this article are not intended to be legal advice and should not be considered as such. Further, the views and opinions expressed in this article are solely those of the author.