So your company is under internal investigation in China? Join the club. The next steps you take will be crucial in identifying risks and ensuring your legal bases are covered, write Leon Liu and Jared T. Nelson
Almost every business entity in China has been exposed to investigation triggers, whether from a disgruntled employee whistleblower, a government dawn raid, a social media post, an investigative TV report, or even a customer complaint. As a result, one of the most common issues for every company in China, in every industry, is how to conduct an internal investigation.
Finding the right approach requires careful preparation and experience to navigate several important issues that often arise related to core legal factors, business partner relationships, public relations strategies, interactions with the government, and employee terminations. One wrong step in this process could suddenly double your liability by creating new violations when attempting to uncover existing issues. This risk is highest when attempting a “DIY” strategy inside the company, or hiring outside consultants or firms that lack adequate legal training or basic understandings of key legal issues that typically arise during an investigation.
[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”1″ ihc_mb_template=”2″ ]
Internal investigations can come from a variety of legal issues and allegations. In the past few months, we have handled cases triggered by allegations of bribery, manufacturing standards violations, tax evasion, embezzlement, illegal business operations, procurement fraud, kickbacks, food safety violations, trade secret theft, and customs violations. These legal issues are complicated and difficult to resolve, particularly because the resolution of these underlying legal issues can also trigger secondary related legal issues involving employee and customer privacy during an investigation, criminal law issues during negotiations with the government, and labour law issues during employee terminations and punishments.
Key takeaways:
–
1. The process of an internal investigation could create significant risks under PRC law.
2. Engaging outside counsel will help preserve privilege and create effective leverage.
3. The key to rapid implementation of a compliant investigation is to have procedures and protocols prepared that build in multi-jurisdictional safeguards.
4. Consent is a crucial part of evidence collection to maximize the utility of evidence and reduce risks.
Many of these issues arise because companies are unprepared for a crisis management situation, or because they hire outside vendors that have insufficient understandings of key legal issues. It is crucial to avoid creating a new liability while investigating an existing crisis trigger, and failure to use legal professionals for an investigation dramatically increases this risk.If your company or client is conducting an investigation, what laws should you focus on to avoid creating any new risks during the process? As the first priority, you need to ensure that investigators are compliant with local Chinese laws. This has been an alarmingly consistent source of liability in recent years as part of widely discussed recent violations and common misunderstandings of Chinese data protection and privacy laws. There have been frequent media reports about investigation and consulting firms being found violating personal information laws, accounting firms suffering setbacks due to incorrect interpretations of state secrets laws, and local companies being caught in the middle of complying with both domestic data protection laws and foreign jurisdictions’ evidence production requirements.
Every investigation will have a primarily legal issue, such as corruption, as well as a set of secondary legal issues that include privacy, data transfers, labour laws, evidence rules, privilege, and a variety of other issues that often arise in the context of an investigation. Even if the primary legal issue is related to foreign laws, such as the US Foreign Corrupt Practices Act (FCPA), it is important to have a locally licensed attorney advise on the secondary issues in order to reduce the likelihood of creating a new violation while investigating existing risks.
Protecting sensitive information
A core issue of investigations is how to protect the sensitive information that is being obtained during the process. Investigations need to be creative, open and exploratory for every lead or red flag, and each investigation might see hundreds of false positives or dead-end leads before finding anything relevant. No company wants to openly expose each of these false leads, but cases involving issues that even indirectly touch on US laws, no matter where the case happens, potentially open themselves up to US discovery rules, which are broad and wide-reaching.
In China, companies can help protect this sensitive information by engaging an outside law firm. In a recent example involving a Chinese entity trying to prevent locally stored sensitive internal investigation documents from being produced into the US, District Court Judge Shira Scheindlin stated in a ruling that “neither the attorney-client privilege nor work-product protection apply [to protect] these documents because the record indicates that after [the Chinese entity’s] chief compliance officer [learned about the trigger, he] set about performing the investigation within the compliance department – without the involvement of any outside counsel, and not for the purpose of obtaining legal assistance. Privilege does not apply to ‘an internal corporate investigation … made by management itself’.”
As a result, a significant number of sensitive internal documents describing investigative suspicions, details and preliminary conclusions were exposed to discovery by an adverse party during a US litigation halfway around the world. These documents, which originated in China and may have had little to do with the US action, likely would have been more protected if the local compliance team in China had hired an outsider law firm to conduct the investigation.
In addition to the legal privilege issues, findings and opinions from an outside law firm are also more credible and dependable to government enforcement agencies. Internal efforts, whether from the company’s compliance or legal departments, are still susceptible to internal pressure or influence by the CEO, CFO, COO, HR head, or other key leaders who are often higher in the organization than compliance and legal managers, and who also often happen to be the same people who are typically implicated during an investigation. Having a formal legal opinion by a locally licensed outside law firm that is independent and objective about the investigation findings is the most efficient and effective way towards an adequate and streamlined resolution of the matter.
Carefully designing procedures
As a more practical part of the investigative approach, companies need to follow a standardized procedure that has been designed, tested, vetted, approved and implemented by a specialist domestic law firm with experience in investigations. Procedures, protocols and principles are the necessary framework for an investigation, each of which requires careful design by experienced investigators, and each of which involves significant legal risks at every decision point. The end goal of most investigations is an employee termination, government settlement, or a criminal trial, and it is vital that all procedures and protocols, from the very first communication with the employee to the final decision or sentencing, be designed to optimize the company’s legal position, maximize the admissibility of probative evidence, and protect the company’s business interests.
Particularly important is the implementation of labour law considerations during the entire process. Chinese labour laws famously have significant protections for employees, and without adequate labour strategies from the outset of a case, companies can often find themselves in the unsatisfying position of having to pay large termination settlements to employees who may have committed violations that harmed the company and its business interests. Carefully structured investigation procedures, with labour considerations woven into every step, can significantly increase a company’s leverage against employee misconduct.
Reducing risks in collecting evidence
A key consideration in any investigation is how to collect and analyze evidence in a way that is both legal and valid for use in potential disputes. Several investigation and consulting companies have had high-profile problems in the past after illegally obtaining evidence in China, and in addition to these concerns there are also significant issues about evidence collections that may invalidate key pieces of evidence in a legal proceeding due to a lack of understanding or awareness of evidence admissibility rules.
From a data privacy and evidence collection standpoint, companies usually run into two challenges: employee data on company devices and company data on employee devices. These challenges can often be resolved through consent, with the strongest form being both general prior consent from policies and contracts together with specific contemporaneous consent for evidence collection at the time of the investigation.
However, even this point is not as straightforward as it seems. We have recently advised some outside vendors, which often help companies with investigations, about the standard consent forms that they use, only to discover that in some cases the standard form would not be an adequate legal protection for the vendor, or the company, due to a lack of sufficient and clear legally binding language in the form. This is another symptom of non-lawyers doing legal work and creating significant risk exposure for themselves and their clients.
There have been many recent headline-grabbing cases where investigators have crossed the line and created criminal liabilities resulting in prison sentences or other penalties. This predictable result can be expected when non-lawyer consultants or accountants try undertaking legal work without understanding the significant liabilities they are opening for their clients and for themselves.
Internal investigations are one of the most complicated and risky activities that companies routinely perform. There are significant risks at every step and at almost every decision point, and all of this usually takes place in the context of an urgent crisis that requires immediate and critical action. Navigating these difficult, complex and serious legal issues requires detailed analysis by seasoned lawyers in locally licensed firms who also understand the potential international criminal and civil implications of every step in this challenging process.
[/ihc-hide-content]
Leon Liu is a partner and Jared T. Nelson is a foreign counsel at MWE China Law Offices, a Shanghai-based law firm with an exclusive alliance with global law firm McDermott Will & Emery.
Liu leads a multidisciplinary team of compliance lawyers focusing on crisis management and investigations, while Nelson leads the MWE China Data Centre, which focuses on digital evidence analysis, data privacy and data security.
