Compliance experts share tips on managing internal investigations
A study released last month by German law firm Noerr and EBS law school found out that internal investigations are primarily launched by the company's management (52%) then by compliance departments (23%). The research, conducted towards 300 decision-makers from companies of more than 250 employees, flagged that internal investigations almost always start when there is a suspicion that employees are lining their own pockets and if there is a suspicion of corruption and bribery (92%). Possible breaches of compliance and capital markets rules remain a motive for initiating investigations for 86% and 61% of respondents respectively.
The financial industry still has in mind the recent GAM investigation over misconduct of its former absolute bond return chief Tim Haywood. The internal investigation had been triggered by a whistle-blower in November 2017 before the informant reached the FCA in March 2018. GAM released a first public statement over the case in the last days of July 2018 following media speculation and Haywood was eventually fired at the start of 2019. Though, when publishing its 2019 half-year earnings last July, the Swiss firm, whose reputation, earnings and valuation have been impacted significantly by the Haywood case, said it agreed with its ex-portfolio manager that neither party will sue the other.
Context around elements and files considered for a potential investigation is first needed prior to action, said Antony Whitehouse, UK head of compliance at Natixis, speaking at AFME's conference in Paris. "You need to know why you are investigating and what kind of information you may want to get," he pointed out. What information and when to communicate over the issue with the regulator matters. One problem there, Whitehouse noted, is to end up presenting different informations at different times to different regulators hence the need for a centralised protocol.
Getting the full picture before acting is crucial, reckoned Jeremy Stockwell, conduct, compliance, operational risk director at Llyods Bank Corporate Markets. He raised the importance of locking down all documents considered for investigation whatever their format as well as of trying to make an early decision on whether an internal investigation should be conducted. "How serious is the matter? How to conduct the investigation? If you find out criminal implications, it would push you down a different route," Stockwell said. Llyods Corporate Markets's compliance chief emphasised on the necessity of having protocols in place and being transparent with the top management. He said there was no right answer to the question of the least worst option in managing an internal investigation.
Senior management must be well briefed and prepared
Natixis' Whitehouse explained risk assessment in internal investigations is important to avoid wrong decisions. "What you need to close out first matters," he said in the event the company has to communicate on the investigation with multiple regulators. Stockwell hinted that regulators talk to one another and that they share information, so there is no point hiding an information to one regulator and giving it to another. He advised warning the home state regulator first and at an early stage depending on the circumstances.
Martin MacKenzie, EMEA head of antitrust and compliance at JP Morgan, said he would wait three to four days to get better information before reaching the regulator. MacKenzie explained that the question around internal investigations is about missing or not missing the risk. "You need to ask basic questions to get the context right. Exchanging some sensitive information across the desk, is it an embedded process?" he illustrated.
Echoing Stockwell's words, Nicola Higgs, partner at law firm Latham & Watkins, said senior management individuals, being responsible for the business, must be well briefed and prepared for the dialogue with regulators. Responding to a question on what communication around internal investigations should be shared with media, Llyods' Stockwell suggested firms' comms should also be involved and briefed at a very early stage in order to respond to media requests if anything comes out in the press.