Privilege and internal investigations
July 2015 | EXPERT BRIEFING | FRAUD & CORRUPTION
Conducting investigations into allegations of fraud or corruption can present serious legal and commercial risk if privilege cannot be asserted over the findings of those investigations. That risk may be compounded if boards choose to conduct fraud or corruption investigations in-house, often with compliance managers or in-house counsel reporting the findings of those investigations directly to the board. Waiving or losing privilege can have serious consequences if any conclusions (or preliminary findings) about who is culpable needs to be disclosed to a regulator before an organisation has concluded its investigation. This can obviously have repercussions for the organisation and potentially the directors themselves.
A timely warning from the SFO
In 2014, the Serious Fraud Office (SFO) in the UK warned organisations against asserting privilege over material to resist SFO fact-finding efforts in response to allegations of bribery and corruption. In a speech given at the Cambridge Symposium on Economic Crime, SFO Director David Green QC took aim at privilege claims that “amount to a strategy of deliberate obstruction” and indicated that the SFO will scrutinise and potentially challenge assertions of privilege over materials created during an internal investigation. Comments made by Mr Green also suggested that the SFO expects corporations to hand over reports prepared by in-house counsel which summarise witness interviews – documents that traditionally in Australia, the UK and the US would attract legal professional privilege.
Mr Green’s comments that “claims on legal privilege on witness statements taken by external lawyers can be questionable”, reported in The Times in August 2014, hint at serious questions that need to be considered when structuring and conducting an internal investigation. Whether Australian fraud and corruption regulators adopt a similar stance to that in the UK remains to be seen; however, recent Australian cases may shed some light on the instances in which claims of privilege might be challenged by a regulator.
Where issues relating to privilege can arise for in-house counsel
There have been significant developments in legal professional privilege in the last decade. The High Court has made it clear that legal professional privilege is a substantive right that cannot be abrogated by statute, save by the clearest words or necessary implication.
Australia’s adoption of the ‘dominant purpose test’ has brought it into line with other common law countries, now enshrined in the Uniform Evidence Acts.
For in-house counsel conducting internal investigations, it is important that they are careful not to act inconsistently with the maintenance of the confidence in the documents or communications over which privilege is to be asserted. The issue of legal professional privilege is particularly difficult for in-house or corporate counsel, because of the perceived difference in the role that in‑house counsel fulfil, as opposed to an outside lawyer. As a result, in‑house counsel must be particularly vigilant to ensure that they maintain independence and segregate any legal advice from other considerations that are being considered by the organisation, especially where investigations are concerned.
Assuming that a decision has been made to investigate an allegation or complaint in-house, and ensuring adequate protections are in place if the issue was raised by a whistleblower, it is possible that any company led investigation will not be covered by legal professional privilege. The current trend of decisions in Australia is that a report into an incident or investigation prepared or commissioned by an in-house lawyer may not be considered by a court for the ‘dominant purpose’ of providing advice or for use in litigation. This is because in most cases the reports have multiple purposes.
Even where it is accepted that the most important reason for the report or investigation is for the purpose of providing advice or for use in anticipated litigation, courts have not accepted that this is always the dominant purpose for the report of an investigation. The NSW Court of Appeal in Sydney Airports Corp Ltd v Singapore Airlines Ltd  NSWSC 380 expressed the view that “an in-house solicitor is, by reason of his or her position, more likely to act for purposes unrelated to legal proceedings than an external solicitor”. Tamberlin J in Seven Network Ltd v News Ltd  FCA 142 stated that the dominant purpose test may be of more significance in the context of an in-house counsel because “they may be in a closer relationship to the management than outside counsel and therefore more exposed to participation in commercial aspects of an enterprise”. For these reasons, ensuring that any investigation is properly established to best ensure privilege can be asserted will be critical if organisations wish to be in a position to make such claims in response to queries from a regulator.
Being clear about the dominant purpose of the investigation
Being clear to establish the parameters and scope of any investigation at the outset might assist in establishing a claim for legal professional privilege over any material produced during the course of that investigation.
The Full Court of the Federal Court considered the position last year in Bartolo v Doutta Galla Aged Services Ltd.  FCCA 1517. In that case, Mr Bartolo, an employee of Doutta Galla Aged Services (DGAS), challenged DGAS’ assertion of privilege over a report previously prepared by solicitors commissioned to investigate allegations made against Mr Bartolo. Mr Bartolo claimed that as the report was made during an investigation separate from the proceedings, it was not produced for the dominant purpose of obtaining legal advice or use in litigation and sought disclosure of the report.
The Federal Circuit Court held that the dominant purpose of the investigation was to provide legal advice and the report was therefore subject to legal professional privilege. However, the Court found DGAS had waived privilege when DGAS set out the reasons for Mr Bartolo’s dismissal in its defence and referenced the board’s recommendations to dismiss Mr Bartolo which were based on the findings of the investigation.
The decision highlights the principles of privilege in relation to documents produced in internal investigations and the circumstances in which such privilege will be waived. It also serves as a reminder to organisations to clearly articulate where documents are prepared for obtaining advice or in preparation for litigation, and understand in what circumstances the privilege will cease to apply, particularly in the context of subsequent legal proceedings.
The importance of clarity in the status of documents prepared in internal investigations was also considered in Belle Rosa Holdings Pty Ltd v Hancock Prospecting Pty Ltd (unreported, Supreme Court of Western Australia 2105 of 1992), where the Court rejected a claim for privilege in respect of communications between accountants and the company secretary, who was also the company solicitor for the purpose of overseeing investigations in preparation for the proceedings. The Court held in that case that the communications were made for mixed purposes by the company secretary who was not acting in his capacity as in-house solicitor at the relevant time.
The approach in the United States
Last year in the United States there were also several challenges to privilege assertions over materials in connection with internal investigations or the provision of compliance advice. Of particular note, the US Court of Appeals for the DC Circuit affirmed that attorney-client privilege will apply to internal investigation files only where “obtaining or providing legal advice was one of the significant purposes of the internal investigation... even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion” (In re Kellogg Brown & Root, Inc No. 14-5055, (D.C. Cir. June 27, 2014)). While the decision may provide in-house counsel in the US with greater comfort than those in Australia, it reminds those conducting investigations that taking steps to ensure privilege is maintained should be a key consideration for the investigation team.
What can in-house counsel do?
Whether legal professional privilege can be maintained over documents created by in-house counsel is not an easy question. However, some approaches can be taken to argue that privilege applies in the case of internally created investigation. First, keep legal advice about the investigation and operational advice separated. Document the dominant purpose of your legal advice. Avoid referring to legal advice in board minutes and papers. If legal advice must be discussed, ideally the minutes should briefly state that an issue the subject of legal professional privilege was discussed, rather than dealing with that issue in detail. If the legal advice must be recorded, keep it in a separate document which can be annexed to the minutes or in a separate section with the heading ‘subject to legal professional privilege’. Do not refer to specific legal advice in correspondence with other parties, including to third party vendors who might have been retained to assist with an investigation. Ensure internal investigation policies are in place that create a clear chain of reporting findings and which ensures that legal advice is only provided to those who need it and upon confidential terms. Be admitted to practice and maintain a current practising certificate (or report to someone who does). Finally, ensure that you sign legal advices (including email advices) in your capacity as the organisation’s solicitor, not in a dual capacity.
Ben Allen is a partner at Norton Rose Fulbright Australia. He can be contacted on +61 2 9330 8190 or by email: firstname.lastname@example.org.
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