Lawyer explains: internal investigation


What is an internal investigation?


Internal investigation (also known as internal audit) of a company is an analysis of the company's history and status quo. Estonian law does not define internal investigation. Swiss legal experts have defined internal investigation as a deep and systematic analysis of facts, initiated by a private company and usually conducted by an independent attorney or consultant. Internal investigation typically concludes with the preparation of a report, which includes a summary of the main findings and conclusions of the internal investigation, sometimes it includes recommendations for the client who commissioned the internal investigation.

Because Estonian law does not define internal investigation, companies are not obligated to conduct internal investigations in certain situations or at regular intervals. However, it is an increasingly common trend, for example, to enhance the credibility of the company in the eyes of the public or to uncover internal violations within the company. Therefore, an internal investigation may be necessary in situations where the public loses trust in the company, shareholders suspect someone of embezzlement within the company, or for unknown reasons the company's activities do not comply with the law.


When should an attorney-at-law conduct an internal investigation?


An internal investigation can be conducted by either the company's internal audit unit or by a neutral third-party entity, such as a law firm. In significant matters, companies have preferred to commission internal investigations from law firms. For example, in the case of the money laundering scandals involving Swedbank and Danske Bank. An internal investigation conducted by an attorney ensures high-quality analysis, compliance with legal frameworks, and impartiality.

A law firm should be commissioned for an internal investigation in situations where it is necessary to prepare a procedural strategy for a court case. Especially in the procedural stage of criminal cases where charges have not yet been filed but are likely to be. In major criminal cases, the volume of underlying materials is substantial, and the procedural deadlines are short. Therefore, it is beneficial to carry out information processing and preparations for the proceedings in a situation where there is sufficient time for it. Based on the internal investigation, procedural decisions can also be made. The attorney should, to a large extent, inevitably perform the same work. As the results of the internal investigation, it might be possible to prevent the progression or continuance of the proceedings, including the filing of charges and criminal liability.

Commissioning an internal investigation from an attorney is also sensible in a situation where the company suspects a board member or employee of committing a crime against the company. For example, if shareholders have doubts that a board member is embezzling the company's assets. In such a case, it is possible to gather necessary evidence before the board member destroys them; to ensure the validity of the suspicion and to take time-critical measures before terminating the relationship between parties. For instance, it may be necessary to take measures for securing an action so that the board member cannot hide personal assets.


Big benefits


The professional guarantees of the attorney's profession also extend to the internal investigation conducted by a law firm. The most important of these are quality control and confidentiality of information. The internal investigation report prepared by an attorney is protected by law, and investigative authorities cannot request it (if it is inculpatory for the company) or seize it during a search. If the internal investigation is conducted by the internal audit department, investigative authorities have the right to request or seize all relevant documents. The most significant meaning of attorney´s professional guarantees is in criminal proceedings, as it ensures non-interference by state authorities in the practice of the legal profession – the attorney's right to remain silent, stricter rules regarding the detention, arrest, or search of an attorney or a law firm. These rights do not extend to the company's own employees.

When commissioning an internal investigation from a law firm, one of the most crucial aspects is that the results of the lawyer's internal investigation cannot be used against the company. This is important in a situation where the company may face criminal liability. If the company wishes to conduct an internal investigation by its employees, the board must consider the risks of such activity. For example, if a violation is identified that the company does not want to report to investigative authorities, an employee may choose to do so independently. The European Union has also established various protective measures for employees, allowing them to report to investigative authorities without fearing sanctions from the employer. Additionally, the company must consider the possibility that an internal investigation report prepared by employees could serve as evidence of the company's later guilt, which investigative authorities could use in legal proceedings against them. If the report is prepared by an attorney during an internal investigation, then those risks are mitigated.


The course of an internal investigation


One of the main conditions for conducting a relevant and realistically reflective internal investigation is the collection of foundational information. The investigator must have a relevant understanding of the internal systems under investigation to analyse their compliance with requirements. Therefore, they need to request internal regulations, rules, guidelines, other documents, decisions, and extracts from relevant databases. In addition, the investigator needs access to the archives of related individuals (employees, board members), including email archives and, if necessary, archives of other internal communication channels (such as Slack) and individual profile files. The investigator is expected to conduct interviews with some or all the relevant individuals to listen to their explanations and statements regarding significant facts.

The attorney has the right to collect evidence. The client is presumably willing to disclose all relevant foundational information they have. However, it may be necessary to gather data externally from the company. Clause 2 of subsection 1 of section 41 of the Bar Association Act grants the attorney the right to collect evidence. Employees of the company do not have such a right under the law. Therefore, in certain situations, an investigation conducted by the company's internal audit department may rely on incomplete information, making it impossible to draw binding conclusions.

After collecting foundational information, including employee explanations and interviews, the next step is to start analysing the data. The results of the analysis, revealing the situation, need to be compared with the conditions prescribed by law. Following the analysis, an internal investigation report is prepared.


Outcome of the internal investigation


The main purpose of an internal investigation is for the company to understand the factual and legal situation and the differences between them, enabling informed decision-making – such as developing a defence strategy, modifying internal rules and procedures, filing a criminal complaint, etc. While conducting an internal investigation itself has a certain value, as the company gains an overview of the situation, conducting the investigation alone may not be a long-term solution if further actions are not taken based on the conclusions. A well-conducted internal investigation report also provides recommendations for follow-up actions.

As a result of a thorough internal investigation, the company has a greater chance of exerting pressure on supervisory or investigative authorities to decide on discontinuing proceedings, not beginning it, or conducting the proceedings on a smaller scale (e.g., opting for a misdemeanour offense procedure instead of a criminal proceeding). The prosecutor's office is obligated to conduct proceedings in case of suspicion (section 6 of Code of Criminal Procedure). Without reviewing the internal investigation report and addressing substantiated doubts, the prosecutor's office may not be able to decide against initiating proceedings.

If the conclusions of the internal investigation report indicate that a member of the board or an employee has committed a violation or a crime, the company can take appropriate measures. For example, taking measures to secure the action against the individual before their termination to ensure the enforcement of the claim after legal proceedings. Alternatively, the company may take possession of necessary documents before the wrongdoer has a chance to destroy them.

The results of an internal investigation may also prevent subsequent criminal liability. For instance, if a mid-level employee engages in unlawful activities to increase the company's profits, but the management is unaware of it, such actions should be ceased when it come to light. According to subsection 1 of section 14 of the Penal Code, in cases specified by law, a legal person is liable for an act committed in its interest or violating its legal obligations if it is committed by: its organs, their members, executive employees, or authorized representatives; or any person acting on the orders of the mentioned organs or individuals, or due to the inadequate organization or supervision of the legal person. Therefore, if the management becomes aware of the violation and orders its cessation, it cannot be considered as having been committed on the management's orders. Additionally, in such cases, the deficiency of the company's internal oversight can be denied, as the company discovered the activity before law enforcement agencies. Thus, an internal investigation can prevent lengthy and complex legal proceedings. Even in the case of winning a court case, the cost of time and money is too high and irreparable.

In conclusion, internal investigation is an important tool that can help prevent and mitigate more extreme consequences. It is advisable to commission an internal investigation from a law firm in complex situations or in situations that might involve criminal liability.

Read more about internal investigations from our assistant attorney-at-law Charlotta Rebecca Zobel's master's thesis.