Authorities use raids to surprise individuals or companies who they suspect might otherwise destroy or 'lose' documents needed for prosecution.
And, as the rights that regulators, commissions and other authorities have to investigate businesses become more established, so the number of raids on organisations has significantly increased. This trend affects companies large and small, from the risk-taking entrepreneur, to the large professional organisation, which no longer can consider itself above suspicion.
Are you ready?
Because they are now more commonplace, every organisation needs to be ready for a raid. Failure to respond appropriately may result in imprisonment or significant court fines.
Agencies in the UK and Europe are increasingly taking a more aggressive approach in rooting out fraud. My own company carries out a thorough due diligence exercise before taking on this kind of risk, assessing the business, the quality of management, the application of accounting standards and principles and loss trends for the sector.
Directors' and officers' liability policies, which provide cover against wrongful acts, negligence and loss, state that directors must act in concert with the insurer and therefore not destroy or shred evidence which might be used to protect officers against prosecution. Typically, the policy will cover investigation and defence costs up to the point that fraud is discovered, provided the insurers are informed as soon as written notice is received of the allegations.
What can raiders ask for?
Every raid will be supported by documentation - a search warrant, authorisation, decision or order - which will state the subject and purpose of the raid.
Typically, the documentation will give the right to enter any premises, land or vehicles belonging to the company and to examine the books and records, including e-mails and mobile phone calls. In some cases the agency will ask for copies of hard drives and servers - which upon forensic investigation will yield documents, e-mail or even voice correspondence - both current and deleted.
Such raids also offer the opportunity to check out key individuals and assess the target organisation's attitude towards cooperation, so companies should not obstruct the authorities. Instead, target organisations should appear cooperative. The test of whether the company responds in a responsible and cooperative manner is important, as it can set the tone for all future relations with the regulator.
Managing the process
In the interests of appearing cooperative, senior executives should meet the investigation team, provide organisation charts, allow access to the requested documents, provide brief explanations and request lawyers to observe and where appropriate question the actions of the investigators.
When staff are being interviewed, they need to be careful not to provide incorrect or misleading information to the authorities. It is important that staff know they may object to answering a question if they cannot remember the precise details of a situation. If a question cannot be answered without research or checking it is perfectly acceptable to provide a considered response in writing. If lawyers are on hand, they will be able to object to questioning which is considered hypothetical, leading, or which contains a presumption of guilt.
Investigators are also not allowed access to privileged information - correspondence with external European lawyers - or to information which the target believes is commercially sensitive and could claim is confidential.
Though this many not prevent a request for documents, it may delay implementation.
Investigators should also not ask for materials outside the scope of the search.
In the course of the investigation, companies may ask to see the search warrant, monitor the investigators' enquiries, see what they copy and take the opportunity to question the team and find out what they are looking for. It is a good idea to keep copies of any material which has been provided to the investigators since it is difficult to mount a defence if the company is unclear what information the investigators have.
How to limit your exposure
There are some steps which companies can take to limit their exposure to the dangers posed by dawn raids, or the increasingly popular requests, usually from the FSA, for documents at short notice.
Most recent problems stem from individual e-mails, which may be less guarded than formal business correspondence. Staff should be encouraged to conduct sensitive business in meetings and avoid analysis of potential issues by e-mail. Internal investigations by in-house lawyers can prove a happy hunting ground for dawn raiders, so if there is a problem, using external legal advice may solve it more quickly and will also offer 'professional privilege' over discussions of sensitive issues.
IT policies need to be clearly set out in terms of what kind of information can be transmitted and stored electronically. Many companies have now instituted a document retention policy which defines what information needs to be kept, for example in respect of accounting information, and what information can legitimately be disposed of after a period of time.
Staff need to be made aware of their responsibilities and be given instruction or at least a checklist on what action they should take in the event of a raid. Once a company knows that documents will be requested or that a dawn raid is imminent, it must comply with the investigation.
Every company needs to be aware of the possibility of a raid, and to have a clear process in place for handling it. Lack of appropriate preparation or mismanagement of the process can be extremely costly, both in financial and reputational terms.
Hartmut Mai is vice president management liability, financial lines division, AIG Europe (UK) Ltd, Tel: 020 7954 7000
A LAWYER'S VIEW ON RAIDS
"Dawn raids are no longer the preserve of the silver screen," warns Anil Rajani. High profile scandals such as WorldCom and Enron, and the increase in regulatory offences created by statute, now mean that any business faces the real prospect of a dawn raid by government regulators such as the Office of Fair Trading or the Financial Services Authority.
The Enterprise Act 2002 has given the Office of Fair Trading (OFT) new investigative and intrusive surveillance powers. The OFT has the authority to enter and search premises, including vehicles, without notice. The definition of premises under this Act includes residential premises used for business purposes.
While prevention is better than cure, and anti-competitive practices should be avoided at all costs, if the investigators do come knocking, what is the best course of action to limit your exposure to the potentially damaging business consequences of a dawn raid?
HAVE YOU GOT A WARRANT?
If an investigating officer of the OFT appears without a warrant, there is no obligation to permit entry. If entry is refused, the investigation officer can return at a later date with a warrant.
The officer must always produce identification and written authorisation for the inspection/raid. Rajani advises, "Upon entry by an investigator, it is essential that you encourage employees not to attempt to hide or destroy any documents since they may be committing a criminal offence."
I WANT MY LAWYER
There are a number of practices which the investigating officer may follow during a dawn raid. These include attending the premises during business hours and providing reasonable time for the arrival of legal representation during the investigation. On entry to the premises the investigating officer will provide written authorisation for the inspection, which will include an explanation as to the purpose, subject matter of their investigation and offences which may be committed for non-compliance.
The investigating officer has the right to take copies of documents which are relevant to the investigation. Furthermore, the officer can ask any person on the premises to disclose the location of relevant documents, or for information which is stored in electronic form to be converted to a format that can be taken away. A request can also be made for information not in recorded form to be compiled, for example market share information or a sales manager's description of a market.
Following the raid, Rajani advises employees who accompanied the inspectors to make a report and consider whether there was valid reason for the investigation. The OFT may make a request for further documents and information. It may decide that an infringement has occurred, but prior to its decision, written notice is given to those concerned to allow representations to be made. Directions may be given to end the infringement before the completion of the investigation. Such practice is to prevent serious, irreparable damage. However, a penalty will be imposed if an infringement was committed intentionally or negligently.
FINANCIAL SERVICES AND MARKETS ACT 2000
Similarly, the Financial Services and Markets Act has granted regulatory powers to the Financial Services Authority (FSA) to waive the requirement to provide written notice to a person subject to investigation. This exception applies where 'the FSA believes the investigation might be frustrated or the investigator is appointed to investigate matters under Section 168(2) for criminal offences, market abuse, financial promotion infringements and breaches of the general prohibition'.
In such circumstances the FSA is permitted to execute dawn raids in the conduct of its investigations. It has powers to apply for a search warrant and may be granted a warrant if there are reasonable grounds to believe that a person failed to comply with requests for the production of documents or information on the premises, which are specified in the warrant under Section 176(2).
Rajani concludes: "The sanctions that can now be enforced are draconian. A company found guilty of a regulatory offence may be fined up to 10% of its annual turnover. Directors can also be imprisoned if found guilty of bending the rules. The new rules apply to small and medium sized enterprises and multinational companies alike."
Anil Rajani is a partner in IBB Solicitors' business investigations and governance unit (BIG) and a supervisor on the Serious Fraud Panel, Tel: 01895 207 832, E-mail: firstname.lastname@example.org