Encouraging Corporations to Investigate Potential Misconduct on Their Own – A Comparative View of Israel and the U.S.

One of the most serious corruption cases ever investigated in Israel is “Case 3000,” also known as “The Submarines Scandal.” It concerned suspicions that senior Israeli officers and public servants received bribes for over a decade in order to “fix” tenders related to the purchase of submarines and corvette ships from the German conglomerate ThyssenKrupp. As is common practice, ThyssenKrupp sought to conduct an internal investigation into the suspicions, with the goal of cooperating with Israeli investigative authorities. To ThyssenKrupp’s surprise, its attempt at cooperation with the Israeli authorities received a cold shoulder. In an interview with the press, ThyssenKrupp’s spokesman, Tim Proll-Gerwe, noted that “We offered them full cooperation through Israeli lawyers – documents and conversations – but no one came to meet with us or ask for documents.”[*] ThyssenKrupp was also warned that if as part of its internal investigation it contacted any of its Israeli representatives involved in the affair, it would be suspected of obstruction of justice. As a result, the internal investigation conducted by ThyssenKrupp was very limited in scope.

The Israeli enforcement authorities’ lack of interest in ThyssenKrupp’s attempt to cooperate is not surprising, as it represents one of the core perceptions of Israel’s law enforcement authorities: The sovereign (the state) has a monopoly over the authority to enforce the criminal law. Based on this perception, caution and even suspicion tend to arise at the possibility of investigative powers shifting from public law enforcement agencies to private corporations, whose motives and commitment to conducting a thorough investigation are viewed askance.

In the case of The State of Israel v. Meir Shemesh (“Shemesh”), Israel’s Supreme Court explicitly reaffirmed this perception. In Shemesh, Israel Railways conducted an internal investigation following two serious train accidents. Simultaneously, the Israel police launched a criminal investigation and asked for the materials gathered during the internal investigation. Israel Railways transferred the final reports of its internal investigations committee, but refused to forward notes from interviews with its employees, arguing that the interviewees have the right to be protected from self-incrimination. Israel Railways had good reason to make this assertion, as the notes were taken in accordance with the company’s internal protocols, which stated employees were obliged to fully cooperate with the investigation and did not have the right to remain silent or to be represented by lawyers before the investigative committees. In addition, the employees were not warned that they had the right to protect themselves from self-incrimination before being interviewed or that the notes from their interviews might be used against them in criminal proceedings.

The matter was brought before the Supreme Court, which held that the notes from the employee interviews were confidential and should not be disclosed to the police, inter alia, because the transfer of such material to the police could create a “chilling effect” on the willingness of employees to cooperate with internal investigative committees in the future.

However, the case went up again for a second review by an extended panel of the Supreme Court. Upon second review, the Supreme Court’s extended panel reversed its decision and ruled that the notes from the employees’ interviews were not privileged or confidential. The Supreme Court held that the question at issue is one of admissibility only and that the right time to answer it had not yet come (thus leaving the question to be answered at a later occasion). Addressing the concern raised in the previous decision about a possible chilling effect, the Supreme Court’s extended panel held that the public interest in finding the truth and imposing accountability on those responsible for the rail accidents was no less important than the public’s interest in providing internal investigation committees the power to conduct free and open discussions with employees. Furthermore, Justice Miriam Naor was of the opinion that despite the risk of causing a chilling effect, holding that a privilege applies to such notes would not serve the public interest because the law vests the authority to investigate criminal offenses only with the police and, therefore, there is no room for a private entity to conduct an internal investigation into criminal matters.

We believe this view to be wrong, as it overlooks the many public interests internal investigations may serve and promote. First, the Israel Railways ruling did create a chilling effect and a general concern among Israeli corporations that discouraged them from conducting their own internal investigations due to fear of having the fruits of their investigations discovered. The ruling also created a concern that internal investigations into criminal matters would be considered an obstruction of justice, just as ThyssenKrupp was warned. As a policy matter, then, the Israel Railways ruling provides a perverse incentive to corporations not to undertake meaningful internal investigations. An incentive not to investigate and amend wrongs, or improve internal compliance and policies, is the perverse outcome of that regime.

The U.S. approach stands in sharp contrast.  For much of the past two decades, civil and criminal regulatory agencies in the U.S. have viewed corporate internal investigations as a routine and valuable part of the process by which they identify, investigate, and resolve allegations of corporate malfeasance. Indeed, agencies such as the U.S. Department of Justice (“DOJ”) and the U.S. Securities and Exchange Commission (“SEC”), among others, view a corporation’s ability and willingness to quickly identify and investigate potential misconduct as an essential part of maintaining an effective corporate compliance program. Furthermore, U.S. courts have developed doctrines of confidentiality and privileges to protect internal investigative materials and ensure the effectiveness of a corporation’s internal investigation.

In the U.S., corporations can be held civilly and criminally liable for the misconduct of their employees and agents. U.S. agencies can seek civil fines and injunctions against corporations as well as criminal indictments. However, regulators maintain the discretion to settle with corporations in instances where they view the misconduct as not egregious or where the corporation has cooperated with the government’s investigation. In the criminal context, the DOJ may seek several different types of resolutions short of indicting a corporation, including entering into deferred or non-prosecution agreements, which involve the DOJ dismissing or declining to bring charges based on a period of good behavior by the corporation, or simply declining to take any action against the corporation.

When considering how to address potential corporate malfeasance, the DOJ and SEC rely on internal guidelines to assess whether enforcement is warranted. These guidelines typically require the government to consider, among other things, (i) the nature and seriousness of the misconduct, (ii) the corporation’s willingness to cooperate with the government, (iii) the adequacy of the corporation’s compliance programs, (iv) whether the corporation made a timely and voluntary disclosure of the misconduct to the authorities, (v) the remedial actions taken by the corporation, and (vi) the adequacy of other remedies, including the prosecution of individuals.

The DOJ also maintains leniency programs, such as the FCPA corporate enforcement policy and antitrust leniency program, which require corporations to self-report any potential malfeasance to receive the maximum amount of leniency. Once a corporation decides to disclose misconduct to the government, or to cooperate in an investigation already being conducted by the government, the corporation will be required to turn over all relevant facts and information it has learned through the investigation, including information it has learned about the misconduct of its employees and agents.

Unlike in Israel, law enforcement in the U.S. will typically not require corporations to turn over documents covered by the attorney-client or work product legal privileges, including notes of employee interviews. But this was not always the case. Nearly two decades ago, the DOJ, as a matter of policy, required corporations to waive legal privilege as a condition of seeking leniency. This policy was ended after it received intense criticism by the defense bar and federal judges, who held the policy potentially violated the U.S. Constitution. Nonetheless, corporations must be mindful that any disclosure of the results of a legally privileged internal investigation to the DOJ could potentially result in the waiver of privilege, such that the government or private litigants could obtain privileged information through subpoenas and civil discovery. Corporations should consult with external counsel about how to structure such disclosures to avoid privilege waiver.

As a practical matter, a corporation’s ability to obtain the maximum amount of leniency from the U.S. government will depend on the corporation being able to conduct a fast and effective internal investigation so that it may promptly disclose any misconduct to the government before the government learns of the misconduct on its own. Further, regulators consider a robust internal investigation function to be one of the hallmarks of an effective corporate compliance program. Thus, far from discouraging internal investigations, or viewing them as an encroachment on government prerogatives, the U.S. government’s corporate enforcement polices encourage corporations to investigate potential misconduct on their own.

Is Israel taking note of the U.S. approach? A State Attorney Directive issued in October 2019 (the “Directive”) recognizes, for the first time, the value of a corporation’s cooperation in detecting violations of the law and in disclosing them to the enforcement authorities, as well as an internal investigation’s ability to help promote the authorities’ investigation. According to the Directive, such cooperation may contribute greatly to the investigation’s progress, thus significantly streamlining enforcement efforts.

The Directive also provides, for the first time in Israel, an incentive for corporations to cooperate with law enforcement authorities. Reflecting a desire to adopt many concepts that have been recognized in the U.S. for some time, the Directive specifies that the degree of the corporation’s cooperation with the investigative authorities throughout all stages of the investigation, as well as the extent of its contribution to the investigation, will be significant factors in determining whether or not the corporation should be prosecuted.

The Directive also establishes clear criteria for determining the extent to which the corporation cooperated with and contributed to the authorities’ investigation. These criteria include the timing of the disclosure of the offenses; whether the information disclosed was voluntarily provided by the corporation without a prior request from the authorities; the extent of disclosure of information relating to the offenses committed, including disclosure of the processes carried out by the corporation to investigate the matter and to reach the investigation’s findings; disclosure with regard to the employees or officers involved; and disclosure of all relevant facts that the corporation found.

The Directive is an important and positive step in promoting and encouraging internal investigations and self-enforcement by Israeli corporations. We believe this change is necessary given current corporate realities.

For example, corporations often have subsidiaries located in several jurisdictions. Take, for instance, a situation in which the SEC has launched an investigation into an international company based in the U.S. that has Israeli employees based in Isarel. If the SEC should want to interview those employees, it must issue a formal request to Israeli authorities in accordance with the Hague Convention of 1970 on the collection of evidence abroad. This process is typically lengthy and expensive, and the SEC’s request will not necessarily be positively viewed. In another famous case, the Siemens case, the SEC investigated suspected bribery in connection with Siemens’ activities in the U.S. However, when it sought to investigate Siemens’ employees in Germany, the German authorities denied its requests. Therefore, in cases of cross-border jurisdiction, the company is often in a better position to assist the authorities in conducting an effective investigation, although it may be disincentivized from doing so. Thus, cooperation credit is one tool to properly incentivize corporate cooperation.

An investigation that covers several different countries, quite a common phenomenon today, is just one example of when it is advantageous for authorities to encourage corporations to conduct internal investigations. Authorities that credit corporations by, for example, offering reduced charges or deferred or non-prosecution agreements to encourage corporations to conduct meaningful investigations will benefit from expanding and diversifying their investigative tools and will enhance their ability to reach the truth. Encouraging corporations to undertake internal investigations is also cost-effective and serves the public interest by saving public resources, including time, effort, and money, that would otherwise be invested in collecting evidence, applying for warrants, and litigating to obtain information.

In our view, in order to fully benefit from the use of internal investigations as a tool to prevent and disclose corporate crime, it is necessary to re-examine the Israel Railways ruling. This would mean adopting the U.S. approach, which recognizes the need for privilege and confidentiality rules to be applied to internal investigations’ findings. Such doctrines help to ensure the effectiveness of internal investigations as a tool that significantly promotes the public’s interest in discovering the truth and fighting corruption.

ENDNOTE

[*] https://en.globes.co.il/en/article-thyssenkrupp-israel-spurned-our-help-in-graft-probe-1001198123.

This post comes to us from Joseph Facciponti and James Goldfarb at the New York law firm of Murphy & McGonigle and from Hadar Israeli and Eran Elharar at the Tel Aviv, Israel, law firm of Barnea Jaffa Lande.