Companies face difficult decisions every day.  In the last ten years, federal law enforcement investigations have become more frequent.  The criminalization of civil or regulatory violations increases risks for companies and most importantly, senior executives and board members.

The enforcement environment reflects the government’s increasing reliance on criminal prosecutions.  It is easy to see why – criminal prosecutions involve large fines and threaten individual corporate officers and employees with jail time.  In addition, criminal cases are quickly resolved and take priority over civil cases on court calendars.  Prosecutors can quickly get the attention of a corporation by executing a search warrant or serving a grand jury subpoena.    

The criminalization of enforcement also has led to an increase in internal investigations as a tactic to deflect, delay or avoid a full blow government investigation.  The increasing frequency of internal investigations reflects a growing phenomenon – companies are investigating themselves under the direction and oversight of government prosecutors. 

Some have criticized the government for relying on companies to conduct their own investigations.  But what choice does the government have?  There is no way the government could conduct the number and extent of criminal prosecutions with existing resources, especially in this tight budget environment. 

Whether corporate self-investigations are fair or appropriate is a question for another day.  Companies are very familiar with the internal investigation routine – hiring of outside counsel, appointment of a special committee at the board, regular reports from the investigators, and action items which are recommended while the investigation continues.

This internal investigation formula skips over an important question – when should a company conduct an internal investigation?  It is too easy to punt on that question and answer with former Justice Potter Stewart’s refrain, “You know it when you see it.”  It is a worthwhile exercise for every company to try and outline decision factors for internal investigations.

First, it is important to define an “internal investigation.”  Most internal investigations are conducted by an in-house team of attorneys, compliance officers, human resources staff and/or auditors.  The focus of these internal inquiries is employment or routine disciplinary issues.  In these cases, there is no reason to bring outside counsel to handle the matter.  In-house staff are able to conduct these quickly and efficiently.

A second category of “internal investigations” which I will focus on are those where there are allegations of corporate wrongdoing which can result in corporate criminal liability for violations of federal or state law.  I do not intend to ignore important investigations of individual employees who commit fraud or theft, but I want to focus on instances of wrongdoing where corporations have potential liability. 

The decision to launch an internal investigation is important.  Once launched, it is very hard to stop or ignore the course and results of the investigation.  If a corporation is divided on whether or not to conduct the investigation, such a conflict will undermine the ability of the investigators to conduct a full and fair investigation. 

In addition, internal investigations are not limited to instances when the government has launched its own investigation or there is some immediate outside threat.  To the contrary, internal investigations can be conducted for important fact-gathering purposes.  Professional investigators know how to focus on important facts and ignore diversions from the overall purpose.  In certain circumstances, an investigation can play a critical role in corporate decision making.

Here are the factors which support a decision to conduct an internal investigation:

1.  The company has discovered credible evidence of a potential violation of law for which the company could be held liable.

2.  The potential violation of law would have a material impact on the company. 

3.  The company does not have sufficient information to assess the nature and extent of any violation of law.

4.  In order to make a decision concerning the potential of law, the company needs to understand the law and the facts surrounding the conduct.

5.  The company does not have the capability to quickly gather and analyze such facts though its internal resources.

These factors frame a company’s decision-making process for launching an internal investigation.  In a separate posting, I will examine who should conduct an internal investigation – regular counsel or special counsel.