Podcasts Education Prison Professors 157. Early Signs of a Government Investigation

157. Early Signs of a Government Investigation

Published: Nov. 26, 2020, 1 p.m.

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What are some of the early signs that a government agency has launched an investigation? Subtle clues may surface. For example, a trusted friend or colleague may start asking questions, or sending emails that detail criminal acts.

Those inquiries may be fishing expeditions, or an effort to get incriminating evidence, like an admission of complicity in wrongdoing. It\u2019s important to understand that, in many cases, informants provide ammunition that investigators use to expand government investigations.

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Investigators want to learn as much as possible, and they want to bring as many people as possible into the investigation. By questioning people as:

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  • witnesses,
  • subjects, or
  • targets,

investigators gather information and build cases. In most instances, investigators do so below the radar, suggesting that witnesses be discrete if they want to advance possibilities for leniency.

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Besides going after witnesses that provide information, investigators may also seek cooperation from financial institutions. Those questions can, and often do, lead to account closures without an explanation. Although a small business owner may be oblivious to the costs of a government investigation, financial institutions have a deep bench of lawyers on staff.

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All corporate leaders want to mitigate risk that can lead to damages against a firm. Executives in a financial institution, therefore, may elect to sever ties with an account holder if they learn of a government investigation. They do not want investigators dragging them into depositions or inquiries.

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Consider, for example, the problems and expense that Deutsche Bank experienced as a result of the endless government investigations into the byzantine finances of President Donald Trump.\xa0 Every member of our team at Compliance Mitigation can describe examples of bank and brokerage accounts being closed prior to criminal charges being filed.

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In anticipation of disruptions to both personal and business accounts, anyone that owns a company or works in a company should develop a best-practice compliance guide to help avoid the disruptions that a government investigation can bring. Executives and employees must also be aware of, and prepared for, the steps to take when they suspect a government investigation might already be underway.

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Watch for Red Flags:

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At Compliance Mitigation, our team members served time alongside many people that suffered the pains of a government investigation; we\u2019ve all gone through investigations ourselves. We can reflect on the red flags we missed along the way. Had we known more we could have taken precautions to minimize exposure.

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For example, investigators approached the former CEO and Chairman of a Nasdaq 100 company for questioning. When the CEO called his general counsel, the lawyer told him that it would be fine to speak with the investigators alone, as the CEO didn\u2019t have anything to hide. Later, through legal proceedings, the CEO learned that the investigators had carved out a special deal for the general counsel; the lawyer served up the CEO as \u201ca bigger fish\u201d to satisfy the government\u2019s lust for a headline-grabbing investigation and prosecution.

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The markets use many metrics to assess the performance of a CEO. Markets may look at revenue growth, profit growth, and market share. Investigative teams, though, work by an entirely different set of metrics. They advance their careers by bringing people and businesses down. Such motivations influence them to go after cases that generate headlines. Later, investigators and government attorneys rely upon such results as evidence of their value when advancing their career in government or as they transition to the private sector.

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Long before an indictment comes down, investigators leave clues. It\u2019s crucial for all parties to keep their eyes wide open. Neither business leaders nor team members should minimize the complexities of a government investigation, including enormous levels of personal stress. The potential for exposure to criminal charges, injunctions, and enormous expenses can lead to total devastation for those that do not have a plan.

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Marathon Levels of Stress:

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Investigations typically play out over many years. The uncertainty disrupts business operations and obliterates personal sanity. The targets of a government investigation may feel powerless and helpless. This provides another strong reason to have an effective compliance program, to protect against such disruptions; that program, moreover, should include an understanding of what steps people can take to protect against the many complications that accompany a government investigation.

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Based on our experience, we recommend that business owners use a solid plan to prepare, at the soonest possible time. For example:

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Step 1:

  • Create documents that clearly show how the organization defines success.

Step 2:

  • Create documents that lay out a step-by-step plan, detailing every aspect of the organization. On a regular basis, preferably quarterly, but at least annually, revisit the plan and make adjustments.

Step 3:

  • Create tools, tactics, and resources to articulate precisely how the organization functions and allocates resources. Show the investment that the corporation makes to train all staff members, and to communicate the message to all vendors and consumers. Build a system to organize how the corporation keeps records, with effective backup plans.

Step 4:

  • Show the steps the corporation takes to measure progress. Make sure that each team member is aware of the documentation, and schedule periodic training to refine best practices.

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Leaders should take defense measures to protect the business, and the leadership team, in advance, knowing that investigations begin in secret and can occur at any time.

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CORPORATE PRE-EMPTIVE MEASURES

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Hire a white-collar criminal defense attorney:

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Entrepreneurs may have transactional and business lawyers to help them draft contracts. Yet as the business grows, leaders should also think about risks in the marketplace. They cannot live like an ostrich.

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What does an ostrich do? Theory has it that an ostrich buries its head in the sand while in the presence of lions and hyenas; foolishly, the ostrich believes that if it cannot see the predator, the predator will not be able to devour the bird because the predator won\u2019t see it either. That strategy doesn\u2019t work out so well for the ostrich. And, it won\u2019t work out so well for business owners or executives that try to ignore the threat of big government.

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The best offense is a great defense, so invest in writing out the corporate story. Create messaging that details every aspect of the corporate strategy. Document how the company processes incoming mail, to how the company attracts customers, to how the company sanitizes the bathroom, to how the company deals with complaints. The writing may seem tedious. Yet a written plan will demonstrate attention to detail, the kind of detail that lets investigators know the company takes compliance seriously. A compliance plan should protect the business, and the leaders of the business against government investigations. \xa0

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To the extent possible, hire an attorney that specializes in white-collar crime. Task the attorney with assessing pertinent parts of the compliance manual. Business leaders protect themselves when they invest resources to show a commitment to comply with laws and regulations. Such an investment may open opportunities for leniency, deferred-prosecution agreements, or non-prosecution agreements in the unfortunate event that a government investigation begins.

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The best chance to negotiate for leniency is before investigators bring charges. If a business gets appropriate counsel, leaders may minimize disruptions that could obliterate the business, and lead team members to prison.

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Conduct an Internal Investigation:

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Despite best efforts, and a strong compliance program, businesses sometimes learn of wrongdoing within the organization. If that happens, the business should take immediate, preventive action. One proven technique that has saved many businesses and business leaders from prosecution stems from internal investigations.

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If a business leader conducts regular compliance training and auditing, those efforts could potentially lead to the discovery of wrongdoing. At that stage, the business executive must make a decision of how to proceed. As an example, we can cite the case of Robert Smith, Chairman and CEO of a private equity group.

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He formed the Excelsior Trust in Belize and Flash Holdings in Nevis. Smith relied upon third parties to conceal his beneficial ownership and control of those companies, but he controlled both offshore structures; Smith used those entities to avoid paying U.S. taxes. To facilitate the venture, he relied upon foreign bank accounts in the British Virgin Islands and Switzerland to hide assets from the IRS and from the U.S. Treasury Department. As a result of his financial structuring, Smith did not report more than $200 million in partnership income.

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Authorities did not know about Smith\u2019s criminal behavior. Yet, Smith understood that he broke laws. When pressured by a Swiss Bank to self-report, he was slow to come to the table. He continued to file false documents.

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At some point, he got the right counsel. His lawyer helped him negotiate a non-prosecution agreement with the Department of Justice. Smith had to forfeit claims of more than $300 million. Had he waited for the government to bring an indictment, he would have also had to litigate his way out of criminal charges that could have led to multiple decades in federal prison.

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For more details, take a look at the following press release and accompanying documents:

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How did Smith persuade the government to issue a non-prosecution agreement? Well, from the documents above, it becomes clear that he served up a bigger fish. As a result of Smith\u2019s cooperation, the government brought criminal charges against the CEO of a computer company.

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The facts of life are that government investigators will always look for a bigger fish. That strategy feeds the ecosystem of mass incarceration. When big government tries to bring more people into the system, everyone becomes vulnerable. For that reason, it\u2019s best to develop a best-practice compliance system, with total awareness that \u201cBig Brother\u201d is always watching, as George Orwell advised.\xa0 To help keep the company and yourself from being that bigger fish.

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Review Your Insurance Policy:

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Many corporate insurance policies include fraud-protection provisions. Those policies may cover both legal costs and fines (up to a certain dollar amount).\xa0 An effective policy would protect officers and directors from the enormous litigation costs that accompany a government investigation.

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Effective business leaders should develop a solid appreciation for the financial costs associated with defending against a government investigation. Consider, for a moment, the process:

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  • Investigators will subpoena corporate documents.
  • They will want to review every email, invoice, sales script, advertisement, receipt, contract, and so forth.
  • They will take notes as they question witnesses.

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That investigation will result in at least tens of thousands of pages, potentially millions of pages. \xa0It may also include hundreds of hours of recorded phone calls.

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A business leader, and team members, should have a realistic understanding of the evidence that investigators will accumulate. On the government\u2019s side, dozens of agents and interns will sift through the evidence, categorizing it in a well-organized manner. They do not have to be sensitive to costs, unlike the target of the investigation. Investigators can deploy enormous resources, without consideration of a cost-benefit analysis. The investigators then deliver all of that information to government attorneys. Those attorneys will use that evidence to bring charges against individuals and potentially, the business.

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Discovery:

When people hire defense attorneys to represent them in a government investigation, those defense attorneys enter into a \u201cdiscovery\u201d phase. While the business owner will consider the mountain of evidence a burdensome nuisance, the defense attorney may see something else: billable hours.

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Indeed, the defense team will insist upon reviewing every piece of evidence the investigators accumulated. They will want to listen to every recording, watch every video, read every note that recorded what a witness revealed. Without insurance, the client ends up paying for those hours, at great expense.

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In big cities like New York, San Francisco, Chicago, or Washington DC, defense attorneys that specialize in government investigations bill at rates that may shock the conscience of a typical business owner. Why? Because those attorneys are in the business of practicing law. In other words, they need to stay current with case law and regulations and defense strategies. To be the best in the world at what they do, they must invest countless hours researching decisions without pay. Clients therefore pay for that expertise at rates that may exceed $2,000 per hour. Multiply that number by the hundreds (or thousands) of hours necessary to read the mountains of evidence that investigators present. For this reason, legal costs associated with defending against a government investigation can easily surpass $10 million.

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Such fees can decimate a company that does not have adequate insurance. For individuals that lack insurance indemnifying them against legal fees, a government investigation can bring enormous personal stress and lead to personal bankruptcy.

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Consider the case of Rod Kazazi, who held the position of Chief Operating Officer for a real estate development company. When the Federal Trade Commission sued his company for violating the Federal Trade Commission Telemarketing Sales Rule and the FTC Act. Rod hired former Assistant U.S. Attorney, David Wiechert, to represent him in the matter. The attorney persuaded Rod to cooperate with the investigation, likely to avoid liability for a potential judgment of more than $140 million.

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In order to settle the case, Rod Kazazi agreed to provide false and unsubstantiated testimony to support the Federal Trade Commission\u2019s case. He also agreed to make a payment of more than $250,000.

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In crafting the settlement agreement, the FTC attorneys slipped in misleading language that would protect them, at the expense of Kazazi\u2019s attorney. Kazazi\u2019s attorney did not catch a single sentence in a settlement agreement spanning several thousand words. As a result, the FTC later filed documents to void Kazazi\u2019s settlement agreement, and also hold the attorney personally liable for more than $250,000.

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Key Takeaway:

Business leaders should get a full understanding of the costs associated with defending against a government investigation. With that understood, each business leader should consider purchasing an insurance policy to cover the potential costs of litigation as soon as it\u2019s practical.

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Organize Records:

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Business leaders invest well when they build effective and well-organized record-keeping systems. In the startup phase of a business, the organizational structure may exist in the founder\u2019s head. All too often it stays there and only there, even after it would benefit the company to have it documented.\xa0 That\u2019s an important reason why it\u2019s best to create exceptional record-keeping systems as soon as possible.\xa0\xa0 \xa0

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As the company grows, leaders of business should take time to document strategies and procedures. To the extent that they tell the company\u2019s story well, they build a protective mechanism in both running the company and in the event of litigation\u2014assuming there\u2019s a solid commitment to building an honest and ethical organization.

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When the company has sufficient resources, the best step would be to build an effective Customer Relationship Management (CRM) system. Some examples of CRM companies include Salesforce, Zoho, and Pipedrive. Those companies charge a per-user fee that may range from $30 a month to more than $200 a month, per seat. Great companies use CRMs for many reasons, including:

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  • They want to track their relationships with every consumer,
  • They want to measure return-on-investment with regard to marketing, sales, and operations,
  • They want to make certain that all team members relay the right corporate message to consumers,
  • They want to create a central repository for all corporate communications, records, and transactions.

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An investment in a CRM can serve as an outstanding resource for any business. It can save a company money, by protecting against government investigations. And, it can also make a company money by helping the business track the customer journey and more effectively communicate the company\u2019s value proposition.

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A CRM becomes especially effective for business leaders that invest the time and energy to document their company\u2019s workflows. Regardless of whether the company invests in a CRM, the company should definitely invest in a system to organize and secure files\u2014especially when it comes to storing data on customers. A data breach of customer information can lead to civil investigations with severe penalties\u2014especially if the company is later determined to have acted recklessly with consumer information.

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Remember that the destruction of company records during a government investigation can lead to criminal charges for obstruction of justice, or other crimes. The more leadership teams understand how much time, energy, and resources that government investigators will invest to build a case, the more they appreciate the need for caution.

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Under the ostensible guise of furthering their agency\u2019s mission, unethical government attorneys may suborn perjury or hide evidence that could prove favorable to an individual or business they want to target. Good leaders will invest in transparency, knowing that at any time, government investigators may be listening or monitoring a business\u2019s activities.

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Communicating with a Government Investigator:

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The Fifth Amendment of the U.S. Constitution protects people from having to speak with a government investigator. No one can be compelled to provide evidence that could, theoretically, be used against a person; and government investigators are skilled at pulling evidence from a witness that they can use against him or her.

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If a government investigator asks questions, remember that the investigator is trying gather evidence to build a case. The investigator may say that he is simply trying to get an understanding of what happened. Getting to the truth, however, doesn\u2019t advance the investigator\u2019s career. Investigators get promotions when they build cases against people and businesses that lead to findings of liability or guilt.

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With that in mind, remember that no one has to talk to a government investigator. But if a person chooses to speak with a government investigator, that person should follow two principles:

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Principle 1:

  • If a person chooses to speak with a government investigator, the person should not lie. Lying to a government official is a federal crime, punishable by up to five years in federal prison\u2014for each lie.

Principle 2:

  • If a person chooses to speak with a government investigator, the person should hire competent counsel. Although the lawyer cannot protect a person from lying, the lawyer can advise the person more on how government investigators may use any statements to build a case to reach the investigator\u2019s agenda. Make no mistake, the investigator aspires to bring charges against people or businesses.

Just as some business leaders will do or so anything to increase profitability, some government investigators will do or say anything to induce people to incriminate others and provide evidence that lead to findings of liability, or guilt.