Follow your leads, instincts, and integrity to do your job fairly and fully – free from improper influence and bias. And let the ‘chips fall where they may’.

—Former FBI Director and US federal judge Louis J. Freeh, as quoted in Fraud Magazine, April 2014

On 29 June 2009, Bernie Madoff, the prominent New York financier and philanthropist, was sentenced to 150 years in prison for running a massive Ponzi scheme that defrauded thousands of investors out of billions of dollars. The criminal complaint against Madoff charged him with 11 federal crimes and alleged that his clients had lost nearly $65 billion in total. It remains the largest investment scam in history.¹

The Madoff story is an extraordinary one for many reasons: the magnitude of his scam, the degree of harm it caused, the fact that he had been such a renowned figure prior to his downfall. But perhaps the most extraordinary element of the story is how long it took for the fraud to be brought to light. Madoff's name first appeared in a fraud investigation as far back as 1992 when two people complained to the US Securities and Exchange Commission (SEC) about investments they had made. At the time, Madoff returned the money and the SEC closed the case.

In all, the SEC conducted six investigations of Madoff, all of which had, for one reason or another, led to no charges. A financial analyst, Harry Markopolos, who tried for 10 years to convince authorities, the industry, and the media that Madoff's stated gains were mathematically impossible, published a book in 2010 called No One Would Listen: A True Financial Thriller.

The Madoff case provides some important lessons on how even the best investigators sometimes miss important clues. Madoff himself has said that he would have been caught earlier if investigators had asked the right questions. ‘I was astonished,’ he said in an interview. ‘They never even looked at my stock records. If investigators had checked with the Depository Trust Company, a central securities depository, it would've been easy for them to see. If you're looking at a Ponzi scheme, it's the first thing you do.’

Authorities had the opportunity to stop Madoff's scheme more than 15 years before they actually did. How many more victims was he able to recruit during that time? How much more money was he able to steal?

Corporate leaders who are dealing with allegations of serious misconduct should heed the lessons of the Madoff story. You cannot afford to simply go through the motions of looking into the issue. Nor can you rely on the assumption that a matter has been adequately examined in the past when related allegations continue to surface. A robust, expeditious, and independent investigation must be undertaken to uncover the true nature and extent of the misconduct so that it can be stopped, the offenders held accountable, and all systemic weaknesses addressed. Otherwise, the problem will continue to fester, with potentially catastrophic consequences for the organization and its stakeholders.

Over the past decade, I have had the privilege of working on a number of investigations in the private sector with former FBI Director Louis J. Freeh, whose quote opens this chapter, and I have benefited greatly from his insight on how to conduct wholly credible and thorough independent investigations.

Going into global companies to investigate serious allegations of fraud, corruption, and other forms of white-collar crime is never an easy task. While less sensational than the murder investigations we see on police procedural TV shows, the investigation of corporate misconduct is complex, difficult, and frequently disruptive work; not for the faint of heart. It requires expertise, integrity, and the courage to ask uncomfortable questions and leave no stone unturned. A robust, thorough investigation of sufficiently broad scope is also an indispensable part of the Empowering Integrity process: there can be no remediation without first gathering the facts, and all the facts, on the misconduct that necessitated it in the first place.

This chapter explores how to do it properly.

WHO'S IN CHARGE?

An effective internal investigation should begin with a clear signal to authorities and the public indicating the company's commitment to respond to an allegation. Whatever the triggering event – a damaging media report, a whistle-blower's complaint, or a raid on corporate offices – the organization's response should include: timely actions to stop any ongoing misconduct; the gathering and understanding of the facts surrounding the incident; the development of initial plans for remedial measures to prevent future misconduct; and the rebuilding of confidence of stakeholders.

The development of remedial measures will be discussed in more detail in the next chapter, which looks at Step 3 in the Empowering Integrity process (Define a Roadmap to Recovery and Remediation). But the reality is that Step 2 and 3 are happening in tandem. As issues are uncovered during the investigation, remedial actions need to be taken, such as suspending employees involved in improper activities and/or installing additional internal controls. Meanwhile, the investigation continues and more facts come to light. This leads to more remedial actions to prevent future improper conduct. And so on. There is no sense waiting for the investigation to be fully complete before taking actions in response to investigative findings.

Likewise, the company should not wait for authorities to complete an investigation before taking ownership of the process. The external investigation could take years (yours is not the only case they are working on), and the company cannot afford to delay efforts to understand and address problems that exist within its walls. Good corporate governance dictates that the company's leaders should initiate their own response immediately to protect the company's reputation and send the message that leadership places the highest priority on matters of integrity and ethics. At the same time, cooperation with regulatory and law enforcement agencies is an important component of the response, and there needs to be sharing of information during the parallel investigations.

This brings us to two key questions that need to be answered before the internal investigation can begin. First, who conducts the investigation? And second, to whom do the investigators report? That is, who is ultimately in charge of the process?

On a particularly high-profile or sensitive matter, the answer to the first question is simple. The investigation should be undertaken by an independent third-party, with a high level of familiarity with the company's industry, business model, and geographical footprint. The independent investigator should also maintain credibility with regulators and prosecutors.

The answer to the second question is only slightly more variable. Simply put, in the case of serious allegations implicating senior employees of the company, it is likely that the Board, or a committee of the Board, will need to direct the corporate investigative response. It is possible that the CEO could oversee the investigation providing that the alleged misconduct was sufficiently distanced from his or her office, but there are risks to this approach.

I recall one case where a newly appointed CEO elected to personally conduct an investigation into corruption allegations involving one of his direct reports, the head of the company's largest division. That employee, one of those superstar managers, laid the blame on his predecessor and hid behind the fact that earlier investigations into his conduct had yielded no conclusive findings against him – the same defence used by Madoff and many others. This deceptive but charismatic figure was able to steer the new CEO off the scent and hide his involvement in the misconduct under review. The CEO's investigation was stalled, but eventually the fullness of the situation was brought to light by the continued scrutiny of law enforcement and the media. By that point, the CEO's credibility was severely undermined, compounding the damage to the company's reputation.

In the interest of an objective investigation – and to send a strong message to authorities and the public – it is ideal for the Board to take charge, and to do so with support from the CEO. If the CEO or any other senior manager is found to be in any way connected with the allegations, they will of course need to recuse themselves from the process.

For the Board, selecting and overseeing the independent investigation team is a delicate balancing act. The investigators must be able to pursue the facts tenaciously but without ‘scorching the earth’ and causing undue disruption within an organization already dealing with crisis and uncertainty. They also need to possess the experience and judgement to discern faint signals from vast amounts of noise. Furthermore, they must never lose sight of the human aspect of their work – being mindful that their presence inside a company can be a source of fear and distraction – and conduct their inquiry with respect, courtesy, and impartiality.

A typical investigative team will be led by experienced lawyers as they can provide attorney–client privilege to certain documents produced by the investigation, provide legal precautionary warnings to interviewees, and ensure that legal protocols are followed. Where cross-border investigations are required, various laws may apply concerning the movement of data (e.g. privacy laws and blocking statutes), interviews of employees, and other activities; so it is important to retain counsel with experience and networks in the relevant jurisdictions.

Companies may choose to retain either their regular external counsel – who will possess familiarity with the organization and its issues from the outset – or hire a separate special counsel who brings independence and expertise and may help avoid a conflict of interest (the latter being the better choice). Forensic accountants and technology specialists support the attorneys by combing through the books and records, securing and reviewing email systems, following bank trails, tracking third parties, and doing other work to collect evidence on improper conduct. Although the investigative team should report to the Board in most cases, they must also work in close coordination with other key stakeholders such as an organization's General Counsel, Head of Audit, Chief Compliance Officer, external corporate counsel, prosecutors, and other parties as necessary.

COMMUNICATING THE INVESTIGATION

Once the decision has been made to launch an independent internal investigation, it is essential to develop and execute a communication plan to convey important information about the purpose, progress, and outcome of the inquiry. Internal and external stakeholders need to be informed as to what is happening and why, because an absence of communication creates a void that the grapevine will more than happily fill on your behalf.

Communication needs to be fact-based and honest. The company will need to be as transparent as possible and keep the flow of communication going, while being mindful that there are limits to what can be revealed publicly during an open investigation.

In announcing the investigation, the message internally to staff should be consistent with the message communicated externally to shareholders, media, and others. It is important to describe the general nature of the allegation under review, explain who will be conducting the investigation (and their credentials), and express that the Board or one of its standing committees will oversee the process. The company should also assure stakeholders that they will receive periodic updates during the investigation, including information on investigative findings and planned remedial actions. It is also an important opportunity to affirm that the company takes all allegations seriously and will not tolerate illegal or unethical behaviour from its employees and business partners. In keeping with this, staff should be informed that while daily business continues, the investigation takes precedence and that their full cooperation will be expected.

Communication to regulatory authorities and prosecutors will be considerably deeper as you support them in their own investigation. You will need careful coordination with them and must work out a system for exchanging information. Although this will likely entail a certain amount of negotiation, you need to respect their efforts and not undermine or hinder their work in any way. Doing so will irrevocably endanger the company's settlement prospects. It will also ultimately deprive the company of important information that will be necessary for effective remediation in the long term. As sophisticated as national regulators have become in working together and sharing information across jurisdictions, a company's own investigative team is still better positioned to piece together misconduct that crosses political borders and regional operations. Certainly, it is more cost-effective for regulators to compel companies to self-investigate and self-report, and, when it comes time to prosecute, they will usually reward companies who willingly took this cooperative approach. We will look more closely at how these agreements work in Step 4: Achieve Criminal and Civil Resolution.

GETTING TO THE FACTS – CORPORATE CSI

A corporate investigation is not too different from those seen on TV crime shows, except the autopsies are performed not on bodies but on balance sheets, invoices, emails, chats, and audit reports. There are witnesses to corral, interviews to conduct, and evidence trails to follow. There will be dead ends, unexpected twists and turns, and witnesses who begin to turn on each other. After a great deal of time and effort, the pieces of the puzzle will begin to come together into a clear picture.

At the outset of an investigation, it is essential for the investigative team to move quickly to preserve relevant evidence. They should work closely with the company's IT and legal staff to understand the full scope of data systems and prevent destruction of documents. Where litigation or a regulatory investigation is anticipated, it may be necessary to issue a document-hold notice that informs employees of their duty to retain evidence that may be relevant to the case.

Corporate books and records, alongside email correspondence, provide essential insights into the nature and extent of dubious transactions. Often, these transactions involve the movement of funds through several countries and bank accounts. It is only through far-reaching investigative efforts – including exhaustive document review – that these complex criminal schemes can be traced and reconstructed.

Ultimately, the investigation will need to determine whether there is substance to the original allegation and establish a full set of facts. It will also have to answer a number of specific questions. Who are the key players? How high up the chain of command does the misconduct go? Is there wilful blindness of executives and does the misconduct implicate them in the wrongdoing? What kind of scheme was used? What were the motives for the conduct? What gains were achieved? Was any other misconduct discovered? Were there any audits, reviews, and what was the timeframe involved? Getting the complete story depends on two separate, but closely intertwined processes: forensic procedures to uncover and analyse evidence, and interviews to understand the means, events, and perspectives of those involved. Hence the importance of a skilled, multi-disciplinary investigation team working in close coordination under strong and experienced leadership.

EMPOWERING WHISTLE-BLOWERS

Another critical element during the investigation is the empowerment of whistle-blowers. Although these individuals are often unfairly stigmatized, they are a gift to a company facing an ethical crisis. As much as it may seem like an investigation is trying to find needles in haystacks, the reality is you are often dealing with open secrets that people in the organization are simply afraid to discuss. You need to empower those who can muster the courage to speak up.

Unfortunately, the contributions of whistle-blowers are often summarily dismissed by corporate leaders who, in moments of candour, are quick to question their motives. I once bumped into a former colleague who had become a divisional CFO within a major, global financial institution. He went on at length about whistle-blowers. He told me, ‘I stopped listening to these guys because everyone I fire turns into a whistle-blower.’ His view was that they were just disgruntled employees or former employees seeking revenge and that they couldn't be trusted.

While it is true that whistle-blowers may be abrasive and not very popular with their co-workers and bosses, a company that dismisses the message, based on assumptions about the messenger, does so at its own peril. During an investigation, they are indispensable; while others will be reluctant to rock the boat, whistle-blowers may be the only people who tell their leaders and the investigative team what has really been going on.

Many major cases have been brought forward due to the extraordinary efforts and courage of whistle-blowers. Recall that the whistle-blowers were named Time magazine's ‘Person of the Year’ for 2002 in recognition of the actions of Cynthia Cooper, Sherron Watkins, and Coleen Rowley – whistle-blowers who had exposed misconduct in WorldCom, Enron, and the FBI, respectively. In 2017, Time took a similar approach when it declared ‘The Silence Breakers’ as ‘Person of the Year’ in recognition of women who spoke out against sexual assault and harassment.

Sometimes, extraordinary measures are necessary to expose the extent of open secrets within an organization and to draw a line in the sand against widespread misconduct. In these cases, it may be appropriate for a company undergoing an internal investigation to implement an amnesty and leniency programme to help empower anyone who wants to speak up. Such a programme incentivizes the timely disclosure of misconduct by protecting those who come forward with information from certain disciplinary measures as long as they cooperate fully and openly with investigators.

More importantly, an amnesty and leniency programme plants the seed for a new ‘speak up’ culture at the company (to be looked at further in Step 6: Reshape the Culture). It not only helps unearth pertinent facts; it also helps paint a broader, contextual picture of the crisis. The information provided by employees under such a programme will assist the company in understanding whether a toxic environment has forced people into silence about ethical issues. In some cases, there may be employees who were reluctant to speak up for fear of losing their job or being overlooked for a promotion. In other cases, people have been silenced by guilt because they were accomplice to something they knew was wrong, wanted to protect close friends and colleagues within the company, or feared being seen as a traitor against the organization.

CLOSING THE INVESTIGATION

After all pieces of evidence are gathered, it is time to present investigative findings to the Board. This can be done orally or in writing. The choice of report is dependent on Board preferences and considerations regarding current and future litigation.

Another major consideration in finalizing an investigation report is the method of sharing facts with prosecutors and other stakeholders, as necessary. Because of multiple channels of litigation, whether to waive the attorney–client privilege is an important consideration that should be discussed with legal counsel.

There may be some Board members who, having tired of the weekly crisis calls, simply want to move on, close one part of the investigation and defer other parts to management in the organization. Sometimes this may be an appropriate course of action, where the preliminary findings suggest that the conduct under review is isolated, low-level, and under control. However, there is great risk in leaving serious allegations partially addressed. Now is the time to show persistence, leadership, and the good judgement to ensure that all facts are brought to light so that the Empowering Integrity process can continue from a solid foundation.