From its early years of heady mergers and acquisitions, Chinese outbound investment has matured, settling down into a phase of post-completion integration, management and operations. With the recent pandemic and shifting political and economic conditions, many companies had to restructure to re-align to the new global landscape. During this journey, Chinese companies, as they continue to grow internationally in size and stature, have had to deal with the complexities of managing an international conglomerate. Part of this has involved dealing with cross-border corporate misconduct across different jurisdictions, ranging from simple internal breaches of company regulations and ethical lapses, to serious misconduct, and to criminal violations (e.g. fraud, bribery, corruption and other white-collar offences).
In this article, we share some practical guidance based on recent case experience on how to structure, plan and manage international white-collar offence investigations.
Pre-empt the problem
Companies should set up a robust internal anti-corruption compliance program with a whistleblower reporting and protection mechanism. This would enable companies to pro-actively comply with applicable laws and regulations. Companies can monitor and act on initial transgressions, before they escalate into serious problems or infect the company to become an entrenched and widespread problem.
Having a proper compliance program in place may also be used to as a defense or mitigating factor to reduce liability in the event of prosecution. For example, in the UK, there is an "adequate procedures" defense under the UK Bribery Act 2010. In the US, use of the "facilitation payment" exemption under the Foreign Corrupt Practices Act (FCPA), which allows for payments meant to secure non-discretionary routine government action, would require companies to have a proper reporting, approval, and record keeping system in place. In China, however, there is no equivalent to the said UK "adequate procedures" defense or US "facilitation payment" exemption.
Focus on the big picture
Understand the allegations and the background of the matter, outline the issues at stake, and rank the issues according to their level of importance and severity. Top of the list would be issues that attract criminal liability and legal reporting obligations, followed by issues that involve civil liability and compensation, and next by issues that involve internal corporate breaches.
Doing so would allow companies to strategize and formulate a proper action plan. Companies can prioritize actions, set an appropriate investigation scope, and allocate resources to what is most critical. Investigations can be costly and time-consuming, as white-collar offences are by nature secretive with obscure money and paper trails, which makes the process of gathering evidence challenging. Investigation processes can be more arduous where the offence spans across different jurisdictions, where varying local laws, business cultures, and languages come into play.
Apply the right mindset
Companies sometimes make the mistake of thinking that investigations are only successful if the outcome justifies the allegations, and that someone is found guilty at the end of the day. That is the wrong mindset to adopt. Investigations are a fact-finding exercise, not a finger-pointing or scapegoating exercise. They should also not be treated as a tick-the-box exercise just to satisfy internal compliance requirements.
Investigations help companies uncover misconduct and violations, find out how deep the problems are in order to eradicate their root, and identify lapses and weaknesses in internal compliance so as to prevent the same problems from occurring again in the future. They help companies prepare for future police or regulatory investigations, and to protect themselves in the event of future legal action.
Form a core investigation team
A small, core team should be formed to handle the investigations, supported by legal and other professional advisors as required. Team members need to be trustworthy and independent, not being implicated to the investigations or connected to the suspects in any way that could create a conflict of interest. A direct and sole reporting line from the team to key senior management overseeing the matter should be established to protect the integrity of the investigations. The team should be given the necessary mandate and powers, exercising their powers with care and discretion to preserve confidentiality of the investigations.
The team needs to be objective, competent and experienced in handling complex, multi-jurisdictional investigations. It needs to be tenacious in gathering facts, and methodical in organizing information collected. It needs to be skeptical in accepting the truth of information presented, and imaginative in connecting disparate dots to form a complete picture. It needs to be shrewd in handling sensitive investigations where senior officers or multiple employees across different departments in the company are implicated.
The order of interviews should be strategized in order to extract the most value from each interview. Neutral third party witnesses should generally be interviewed first, followed by lower-level suspects and associates, and then lastly followed by key suspects. The interviewer should prepare for interviews thoroughly, craft his questions well, and conduct interviews effectively by tailoring an appropriate approach based on the subject and his level of co-operation. The timing of interviews also needs to be coordinated to prevent subjects from alerting or colluding with one another to present consistent stories. The team needs to have a basic legal understanding of the elements of the applicable offences, and to ensure that the admissibility of evidence is not compromised in subsequent legal proceedings (e.g. if given under threat or duress).
Protect the whistleblower and witnesses
Whistleblowers often step up in reporting suspected misconduct or violations at great risk to themselves. The same applies to witnesses who cooperate in investigations. Should their identity be disclosed, they could face retaliation, lose their jobs, and risk personal harm. In some jurisdictions, there is no statutory protection or leniency regime for whistleblowers.
As such, whistleblowers and witnesses need to be supported and protected throughout the process. In particular, their requests for anonymity (sometimes extending to key senior management overseeing the matter) should be respected and adhered to.
Maintain strict confidentiality
Every aspect of the investigations should be kept strictly confidential, and not be disclosed to anybody outside of the core investigation team. This includes both third parties and other people within the company. Information reviews should be conducted in compliance with data privacy laws and other legal requirements.
Public leaks of ongoing investigations can undermine the integrity and success of investigations. Wrongdoers could cover their tracks, hide or erase evidence, and collude with one another to invent alibis and corroborate stories. This would compromise further investigations and make gathering evidence even more difficult. Public leaks could also cause the company to suffer reputational damage from negative publicity, prematurely attract the attention of authorities and regulators, and face legal action from suspects if the allegations turn out to be untrue.
Know your investigation options
The company's legal team is a core component of any investigation exercise. They work with the company in formulating investigation strategies and approaches, advising on legal risks and obligations, conducting due diligence and interviews, liaising with authorities and regulators, and handling legal proceedings. The company's accounting and business teams also play an important role by conducting financial audits and operational audits respectively.
Other investigation options are also available. IT forensics experts can retrieve more personal background information, such as digital footprints and source of wealth checks, via the darknet, where information not accessible via traditional search engines would be retrievable. They can also conduct computer and mobile device forensics to locate and recover missing or deleted data. Accounting forensics experts can analyze financial data to track and uncover money trails and fund flow patterns. Security experts can conduct physical and electronic surveillance, contractor audits, and undercover operations.
Managing reporting obligations
When faced with allegations of serious criminal offences, it is important, for each jurisdiction, to know what the penalties for such offences are (i.e. civil and/or criminal), and to understand the statutory reporting thresholds for such offences (e.g. whether a duty to report arises on mere suspicion, or if knowledge or reasonable grounds of suspicion are required). Thereafter, the company needs to monitor the situation and regularly assess if such thresholds are met as investigations progress.
The advantage of reporting the matter is that the police are more likely to be able to uncover clear evidence of the wrongdoing (if it exists). They have extensive legal and investigative powers (e.g. search and seizure, interview of suspects and witnesses, obtaining of bank and other financial information, powers of arrest etc.). They have more resources and are better equipped to investigate the matter.
Once the matter is reported to the police, however, investigations would be largely out of the control of the company. Therefore, companies should plan in advance how to assist with and manage police investigations, so as to protect its legal interests, minimize disruption to its office and business, and maintain confidentiality as much as possible. Companies should plan on how to handle any adverse public leakage, so that it may properly account to its employees, clients and stakeholders, and minimize potential damage to its business and reputation.
If the company is or is part of a listed company, there would also be a general duty of disclosure of any price-sensitive information, which would likely be triggered if serious offences involving the company is reported. This would affect a company's ability to preserve confidentiality during the investigation process.
Cross-border white-collar offences are getting harder to investigate with rapid advancements and proliferation of technology, the global nature of modern commerce, and cross-jurisdictional gaps in international investigations. A specific investigation strategy and approach would need to be formulated in each case based on the particular background and circumstances. In so doing, companies can maximize the chances of success of investigations, protect its legal interests, and minimize potential business and other risks.
Originally Published 11 June 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.