The damage wrought by inept internal investigations can go well beyond wasted time and money; they can cause civil litigation, enforcement risk and, of course, bad publicity.

Consider an internal investigation at IBM. In 2014, James Castelluccio, a former vice president, was awarded millions for wrongful termination. In its decision, the court stated, “There was reason to suspect that the investigation was designed more to exonerate IBM than to determine if Castelluccio was treated fairly.”

Deliberately ineffective investigations can influence the penalties levied on the organization. In a May 2015 speech, Assistant Attorney General Leslie Caldwell discussed the $8.9 billion fee levied on BNP Paribas for violations of U.S. sanctions against Sudan, Iran, and Cuba. The financial institution “affirmatively hindered the investigation by dragging its feet … BNP’s lack of cooperation was a key factor in the decision to seek a parent company guilty plea.”

Given the prevalence of internal investigations, handling them properly is critical. “They’re beyond pervasive. They’re almost a fact of life,” says Kevin Michels, associate professor and director of the School of Business Center for Innovation and Ethics at the College of New Jersey.

Effective internal investigations require investigators who have full access to information and individuals. The investigators must be independent and shouldn’t report to the individuals under investigation. Transparency is also crucial; readers of any report produced should be able to make an informed decision as to the investigation’s thoroughness and integrity.

“You need clear communication at the outset on the scope of the investigation.”
Neal Stephens, Partner, Jones Day

Ensuring all this happens isn’t easy. Internal investigations contain inherent limitations, Michels says. In contrast to many modern legal systems (where two adversaries present often divergent versions of the facts, law, and their interpretation to a neutral third party), in an internal investigation one person or team is charged with uncovering the facts and assessing their legal significance. While this can boost efficiency, it means one avenue for seeking the truth is lost, Michels notes. On top of that, the company subject to an investigation usually is the one paying for it.

When allegations against an employee important to an organization—perhaps he or she has skills that are particularly needed, or holds a high position—are found to be credible, internal politics sometimes override the findings. “Things can go sideways once the political machine is in action,” says Natalie Ivey, a human resource consultant with Results Performance Consulting in Boca Raton, Fla.

For example, an investigation at one of Ivey’s clients determined that a senior executive had been selling company assets and pocketing the funds. Although the transgressions should have been grounds for dismissal, the board of directors issued a warning that the individual no longer could liquidate the organization’s assets without board approval. “They didn’t want to deal with the evidence,” Ivey says.

Even when companies don’t go that far, some try to hinder investigations by dragging their feet instead of cooperating. One tactic: claiming data privacy laws prohibit them from providing the information requested by investigators, says Ruti Smithline, a partner with Morrison Foerster. “Companies are trying to use the laws as a shield.”

Caldwell mentioned that in her May 2015 speech, too: “Your first instinct when providing cooperation should be, ‘How can I get this information to the government?’ It should not be a kneejerk invocation of foreign data privacy laws designed to shield critical information from our investigation.”

None of those limitations are reasons to skip internal investigations. Organizations and investigators, however, need to be aware of and take steps to mitigate the concerns, Michels says.


The following is an excerpt from a speech by Leslie Caldwell, assistant attorney general in the Justice Department’s Criminal Division, regarding the significance of cooperating with the government during investigations.
The department has long made clear the benefits of cooperation, should a company choose to cooperate.  Most companies have no obligation to cooperate with the Department of Justice.  And it’s a decision for the company whether or not to cooperate, but if a company decides to cooperate, then we expect that cooperation to be candid, complete and timely.  Our recent case filings have set forth both the advantages of cooperation as well as the real and sometimes severe consequences for non-cooperation and foot-dragging.  Still, I recognize that questions remain about both the value of cooperation and the department’s expectations.
As you all know, the basic parameters we consider in deciding what to do about corporate wrongdoing are in the Principles of Federal Prosecution of Business Organizations, also known as the Filip Factors.  Cooperation obviously is a key factor.  And the Filip factors do give guidance about what we expect corporate cooperation should include. 
We expect that when a company learns about potential criminal wrongdoing, it will investigate.  What that investigation should look like will depend on the nature of the misconduct.  Whether to engage internal or outside counsel, how narrow or broad, those are the company’s decisions in conjunction with outside advisors.
Source: Justice Department.

Like Hitting a Golf Ball

Much of the success of an internal investigation starts with the initial discussion between the organization and the investigators, says Christopher Madel, a partner with Robins Kaplan. He compares the preparation needed before an internal investigation to that which should occur before hitting a golf ball. “Ninety percent of problems are solved if you think about everything before you hit the ball,” Madel says. That is, the initial discussions between an organization and the investigation team are key to laying the ground rules that largely determine the effectiveness of the investigation.

“You need clear communication at the outset on the scope of the investigation,” says Neal Stephens, a partner at law firm Jones Day. Without that conversation, the time, cost, and access to people and information the investigator needs to conduct a thorough investigation can catch companies off guard, he adds. Among the items to discuss: how the investigation team will handle access to documents, document preservation, and witness interviews. 

For instance, at the start of an investigation, Madel usually creates a mirror image of the servers and hard drives within the organization and runs his own searches through those data centers rather than ask someone from within the company to handle the task. “When it’s all done, I want to know if anything was missed, I did it”—rather than error or wrongdoing by employees with the organization under investigation.

It’s also critical to “be very explicit at the outset that the investigator is not charged with being an advocate for the company,” Michels says. “The goal is to arrive at an accurate account based on a good faith, independent inquiry.”

While these principles sound fundamental, they’re easy to overlook, especially when an allegation has become news and triggered intense media coverage, Stephens says. “There’s a rush to get going.”

Once an investigation is underway, organizations need to be willing to accept the evidence, no matter the implications. It’s not unusual for investigators to come across individuals who say they have nothing to hide at the outset, but then balk at providing information, especially as the questions become more targeted.

“A lot of folks don’t have a handle on what their culpability is,” says Tim Purdon, also a partner with Robins Kaplan. Some don’t understand the law or its application; others are in denial. While that’s natural, organizations whose goal is an effective investigation can’t blindly adhere to their initial assumptions as to guilt or innocence. 

Instead, investigators—and by extension, the organizations that engage them—need to elicit information respectfully while also challenging it.

One common obstacle: by their nature, investigations begin with a lack of information. That can give rise to initial assumptions that are inaccurate or incomplete. The investigating team has to be driven by evidence—not any preconceived theories of guilt or innocence.

At the investigations’ conclusion, the organizations should expect a thorough, transparent report of the findings that provides a detailed accounting of the facts and legal analysis, and discloses any limitations on the investigation, such as material witnesses who couldn’t (or wouldn’t) participate. “It’s not enough to say “we investigated, and here’s the conclusion,’” Michels says.

Initiating and overseeing a credible, effective internal organization ultimately requires leadership, Purdon says. “It’s not easy to make the decision to conduct an investigation, but real leadership requires getting ahead of” allegations of wrongdoing.

Moreover, executives who find themselves thinking “maybe we need an investigation” most likely do need an investigation, Purdon adds. While investigations are expensive, time-consuming and distracting, the potential alternative—a squad of government agents at the company’s door—is worse.

“Most companies want to get it right and do it in a responsible way,” Stephens says.

Accomplishing that requires an understanding and appreciation of the costs and challenges of unilaterally developing an accurate narrative of the facts and identifying and applying the appropriate legal standards, Michels says. “It’s not inherently undoable, but it has to be done mindfully.”