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Legal Investigative Audit

Introduction

Corruption, financial irregularities and frauds, if not eliminated, will become a problem for many countries globally. Corruption and financial crimes or, generically known as white-collar crimes are often committed by those in authoritative positions in a particular organization or by individuals who have been entrusted to take care of or manage the funds of such organization.

So severe and adverse the effect and implications of such white-collar crimes, once they are committed, the organizations in question would turn to legal investigative audit in order to fully investigate and unravel, mitigate or rectify the adverse effects and implications of such white-collar crimes. Lessons learnt from the outcomes of the legal investigative audit can be used as a reference and guideline in the future to assist the organizations in preventing the recurrence of similar situations.

In reality (although unfortunate but it is the current truth), the white-collar crimes keep on occurring and increasing in frequency day by day, and become more sophisticated corresponding with the advance growth and momentous development of the business. However, this serves as a catalyst sparking the increase in attention and demand for the legal investigative audits.

Besides that, nowadays, sole reliance on the internal audit team is often inadequate. Therefore, in addition to the investigation which is internally conducted, organization should sought external advice especially in terms of investigation in relation to the detection or identification of the white collar crimes as well as subsequent remedial plans and actions.

Distinguishing Characteristics and Advantages

Whilst forensic audit or investigative audit is the domain of accounting firms, if such audit would transform itself into legal investigative audit, the choice would be obvious; corporate law firms would be retained. In respect of legal investigative audit, lawyers certainly have the necessary means and skills to provide comprehensive analytical views and assessments in respect of the legal implications and appreciations of laws, in order to determine, among others, compliance or breach of any laws or rules, remedies under relevant laws that will be available to the aggrieved organizations, strategies on legal recovery process, and next actions the which may entail civil or criminal consequent onto the perpetrator.

In performing the services of legal investigative audit, lawyers work solely and independently from any other relevant professionals or experts although, in certain cases, minimal involvement with such professionals or experts or governmental authorities might be necessary and crucial in order to confer good and optimum, if not perfect, legal investigative audit services to the client. However, in some cases, lawyers do work together with forensic accountants and other external experts, if so requested by the client.

Clients who retain the services of lawyers to perform the legal investigative audit services enjoy certain privileges and advantages compared to hiring accountants or auditors to conduct such services or other specialist services such as forensic accounting. For example, confidentiality is guaranteed in respect of the legal investigative audit since the services are carried out by lawyers on the basis of the legally established lawyer-client privilege.

Other than that, lawyers ensure and maintain professional privilege, they are specialists at gathering evidence, they can protect their clients from the negative impact of discovery, they confer privilege to corporates the right not to disclose the forensic report to a regulator and they are loss recovery experts.

Framework

Legal investigative audit should ideally be organized and managed according to the generally accepted investigation standards for international organizations as laid down in the ‘Uniform Principles and Guidelines for Investigations’ adopted by the 10th Conference of International Investigators (“Investigation Guidelines”) which is consistent with other international conventions such as Article 101, paragraph 3 of the United Nations Charter, the Standards of Conduct for the International Civil Service, the United Nations Staff Regulations (Staff Regulations and Staff Rules), the Regulations Governing the Status, Basic Rights and Duties of Officials other than Secretariat Officials, and Experts on Mission.

Although the Investigation Guidelines only serves as a set of guidelines and are not mandatory to be adopted and strictly followed by the legal investigative auditor, it offers best practices ensuring consistency, thoroughness and efficiency.

However, to certain extent, there are some components and principles of the Investigation Guidelines that should be adopted in order to avoid adverse effect, futility or loss of valuable evidence pertinent to the investigative process, for example, the need to preserve evidence before notifying the investigation subject i.e. the person or one of the persons who is the focus of the investigation, either by virtue of an allegation made or evidence gathered during the course of an investigation.

Areas of Services

Lawyers performing and undertaking legal audit typically perform such services, as part of the legal investigative audit, upon request from the client, in connection with the following offences, which may have been committed:

– fraud;
– corruption and bribery;
– theft and embezzlement;
– fraudulent or criminal misrepresentation;
– failure to comply with financial disclosure requirements;
– abuse of authority;
– failure to comply with local laws/abuse of privileges and immunities;
– any other misconduct, such as willful, reckless or grossly negligent disregard of an organization’s regulations, rules and administrative instructions;
– money-laundering;
– criminal breach of trust;
– criminal misappropriation of property;
– information theft;
– technological theft;
– intellectual property theft; and
– breach of confidence.

Objectives

The primary objective of the legal investigative audit varies from one case to another very much depending on the subject of the investigative process, for instance, as follow:

• With respect to the employees, the primary objective is to establish the facts relevant to an allegation in order to enable the employer to initiate necessary actions, including disciplinary proceedings and legal proceedings, whether of civil nature or criminal nature as a consequence of the damage inflicted by using the employer organization’s confidential and proprietary information such as strategic plans and trade secrets.

An example can be discerned in a civil suit between Alliance Bank Malaysia Bhd (“Alliance Bank”) and AMMB Holdings Bhd (“AmBank”). In this case, the former employee of Alliance Bank was hired by AmBank to lead a new division which is expected to spearhead AmBank’s growth in the coming years. Alliance Bank later discovered that the former employee had been utilizing sensitive information gained during his employment at Alliance Bank for AmBank’s purposes. Hence, the civil suit was initiated by Alliance Bank for the alleged misappropriation of sensitive information by AmBank via the former’s ex-employee.

• With respect to the contractors, the primary objective is to establish the facts relevant to an allegation in order to enable the contracting office to take necessary actions and seek for relevant remedies, including termination of the contract, initiation of legal proceedings and recovery of loss of money or profit.

• With respect to both employees and contractors, the investigative process also gathers evidence relevant to a decision on whether referral of cases to national law enforcement authorities for criminal investigation and prosecution is appropriate.

Process and Procedures

There are certain procedural steps that need to be adhered to by the legal investigative auditors in order to ensure the investigative process are conducted thoroughly, objectively and effectively, in accordance with professional standards and best international practice.

The investigative process revolves around three (3) main steps, as follows:

1. assessment;
2. investigation; and
3. reporting.

Firstly, assessment means the process of collecting, preserving and securing basic evidence, and the evaluation of available information and evidence to determine whether an investigation is warranted. It is the step preceding the opening of an investigation. At this stage, the legal investigative auditors will ascertain whether there is any wrongdoing or breach of law committed by the investigation subject and identify the appropriate areas of law, legal headings and causes of action for such wrongful act.

Secondly, investigation refers to the process of planning and conducting appropriate lines of inquiry to obtain the evidence required to objectively determining the factual basis of allegations.

This includes interviewing people with relevant information and recording their testimony, obtaining documents and other evidence, conducting financial and IT analysis, evaluating information and evidence and reporting and making recommendations.

Thirdly, reporting involves either closure report or investigation report. For closure report, it means that the investigation does not result in a recommendation for consideration of disciplinary, administrative or other action whereas for investigation report, the investigation reveals adequate evidence to reasonably conclude that wrongdoing has occurred.

Subsequently, the legal investigative auditor will prepare an investigation report setting out the allegations, the investigation methodology and the facts established in the investigation. At this stage, the legal investigative auditors will furnish to the client a detailed and sophisticated opinion and assessment in relation to the outcomes of the investigative process, including but not limited to, on the issues involved, options available to the client as well as the best option to be undertaken, ways moving forward and remedies or recoveries accorded to the client under the law.

Consequences of Legal Investigative Audit

Good legal investigative audit services mainly aim to achieve the following purposes:

1. Identification of the nature and gravity of the wrongful acts or offences in detailed manners.
2. Determination of the exact areas of laws, regulations or rules and breach or non-compliance including common law breach.
3. Analysis of the options available to the aggrieved organizations vis-à-vis the wrongful acts of the perpetrator and any other parties who may serve as accomplices and formulation of strategic plan and actions.
4. Establishment of enough evidences in terms of adequacy and corroborative nature.

Conclusion

As the proverb goes, ‘Prevention is better than cure’. In order to safeguard from and prevent the occurrence of the white-collar crimes, organizations should formulate and adopt strict internal policies, rules and guidelines particularly in respect of the use of technology, the storage of data, the recruitment of personnel, protection of whistleblowing, as well as the corporate culture itself.

These include the set-up of a crisis management plan in order to enable the organizations to react equitably and accordingly in the event any of the white-collar crimes occurs.

In this sense, prevention of white-collar crimes could be improved which would be more effective than seeking to recover money lost due to occurrence of the white-collar crimes.

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References:

1. Investigation Guidelines, United Nations Development Programme, Office of Audit and Investigations, October 2012.
2. The Need for Lawyers in Forensic Investigations, Forensics ENSight, ENSafrica, 30 April 2014. (Retrieved from: https://www.ensafrica.com/news/the-need-for-lawyer-in-forensic-investigations?Id=1415&STitle=forensics%20ENSight)
3. IMLC 2018 | Investigating International Financial Fraud, Louis Liaw, Member of the Bar. (Retrieved from: http://www.malaysianbar.org.my/international_malaysia_law_conference_2018/imlc_2018_%7C_investigating_international_financial_fraud.html)

Prepared By:

Lee Kin Hing (Partner) leekinhing@azmilaw.com

Mohammad Ashraf Mohamed Sopiee (Partner) ashraf.sopiee@azmilaw.com