Internal Investigations and Disciplinary Proceedings

What to do if the unthinkable happens

CHRIS BRENNAN, NICHOLA PETERS, ANNABEL MACKAY and BARRY COFFEY, ADDLESHAW GODDARD

Jack Bauer was able to complete an investigation (and kill a lot of bad guys) within 24 hours in the television show “24”. Indeed, Jack managed to achieve this feat on no less than eight separate occasions (the Fox network apparently declined to commission a ninth series because it was felt that the storylines in the show were becoming unbelievable).

Suffice to say, if your business receives a whistleblower report suggesting that a fraud has been perpetrated by one of your organisation’s employees, you will not be able to complete an investigation within 24 hours. Indeed, it is more likely that your business will have lawyers, forensic accountants, and potentially regulators and law enforcement buzzing around for many months.

Having said this, your business’s response during the first 24 hours of an internal investigation can have a profound effect on how events subsequently unfold. The simple truth is that if your business is able to exert control from the genesis of an investigation it is going to be in a much better position to manage a crisis and avoid a disaster.

Set out below are some simple steps to take, as well as some questions that your business should consider at the outset of any investigation:

Steps to take

  • Who should manage the investigation internally? Often it is best to form a small executive committee to consider immediate next steps. Consider what skill sets should be represented on that committee.
  • Identify and ring-fence individuals involved and safeguard access to funds.
  • Preserve evidence.
  • Avoid generating any more emails or paperwork in relation to the matter.
  • Check your business’s insurance cover.

Questions to consider

  • Is there an immediate need to inform regulators or law enforcement, or the market?
  • Is there a need for an internal and external media strategy?
  • What are the business’s immediate objectives?
  • Do we need to instruct a firm of lawyers (so the investigation is protected by privilege)?
  • And a firm of forensic accountants (to follow the money)?

When a serious issue, such as an internal fraud, occurs a natural reaction can be panic and dither. Running through a set of pre-planned steps, and asking a set of rudimentary questions, can be enough to give your business the knowledge to avert panic, launch a proactive response and reduce a crisis situation into a manageable problem that can be tackled. Many organisations have put in place investigation policies and procedures so that when something does go wrong, key issues are not neglected.

It is also important not to lose sight of the employment law angle when running these internal investigations. Jack never had to worry about this but he was operating in the unique environment of a national security organisation in the US. He also tended to act first and ask questions later! UK employers do not have that luxury. The internal investigation process raises a number of difficult issues from an employment perspective.

Suspension
It is common practice to suspend employees so that they are out of theoffice when investigations are taking place and cannot tamper with the evidence/interfere with the process. Although suspension would be fairly typical in connection with an alleged fraud, employers need to be aware that suspension of an approved person is not a neutral act. It will trigger the filing of a qualified Form C and may affect future approval. Careful thought must be given as to whether suspension is absolutely necessary, and a duty of care will be owed to the employee in relation to the information provided on the Form C. Does this also fit with any law enforcement reports/investigations?

Employers also need to ensure that they do not act in a manner which undermines the trust and confidence between employer and employee. For example, suspending an employee for an excessive period may cause significant distress, particularly where their career may be at stake. Where trust and confidence is breached, employees may resign and claim constructive dismissal. Putting the employment claim to one side, the employee’s absence could compromise the internal investigation process.

Investigation
There can be a tension between the employment and the regulatory position during the investigation stage. The employer’s compliance department may be involved in the initial investigations and may have their own view of the severity of the conduct. From a fairness perspective, if the matter proceeds to a disciplinary hearing, the decision may have the benefit of advice from compliance but the decision to dismiss or apply another sanction must be the decision-maker’s own; it cannot be a joint decision. Even if the findings of the compliance team at the investigation stage look pretty damning, the disciplinary hearing should be a genuine opportunity to examine the evidence and to hear what the employee has to say. Any decision should not be prejudged at the investigation stage.

Disciplinary hearing
Employees with two years’ service may claim unfair dismissal if the disciplinary process is mishandled. A high standard of fairness is expected in this context as the disciplinary can have a significant impact on long-term career prospects, while dismissal may result in loss of approved status. The person hearing the disciplinary must be even-handed and consider any evidence that would exculpate the employee as well as anything damaging. In some cases, where approved person status is at issue, the employee may even ask for legal representation at the disciplinary hearing. While this would not be the norm, it may be appropriate where the outcome could render the employee unable to work again in his or her chosen field.

Termination of employment
During the process an employee may resign and try and negotiate an exit in order to avoid a disciplinary finding against their record. The employer must be mindful of their regulatory obligations to supply information to the FCA and any new employer, regardless of any agreement reached with the employee. The employer must never agree anything in relation to the Form C or any reference which would compromise its regulatory position. In addition, depending on the severity of the conduct, the employer may choose to proceed with the disciplinary process, irrespective of the employee’s resignation.

By giving careful thought to the matters outlined above an employer can avoid costly unfair dismissal claims which can put sensitive issues in the public domain.

Summary
Whilst Jack was always able to wrap things up within 24 hours, no organisation will have that luxury. However, prior planning and consideration of likely issues will mean that the first 24 hours is less painful, and ultimately the investigation is likely to be better planned and organised as a result.

Chris Brennan is a partner in Addleshaw Goddard's fraud, regulatory and corporate crime team specialising in financial services regulatory matters.

Nichola Peters is a partner in the corporate crime team at Addleshaw Goddard specialising in advising corporates, directors and senior management on financial and corporate crime issues.

Annabel Mackay is a managing associate in the employment team.

Barry Coffey is an associate in the fraud, regulatory and corporate crime team.