Conducting an internal investigation in China

Your home office in the US has an important manufacturing facility in China, where it is suspected that bribery of Chinese government officials may have occurred. You have assembled an experienced team to investigate the situation and determine what to do about it. This is a good start.

Building upon the issues addressed in this column last month, we consider here additional matters you and your team should keep in mind during your investigation.

Avoid storming into China

Before lawyers and other members of the investigative team “storm” the facility in China, you should coordinate efforts with local senior management. The involvement of trusted members in China can be critical in discovering what actually happened.

Local management can most effectively convey to employees the need to cooperate fully with the investigation, no matter how uncomfortable the process is. Local management can also assist in your understanding of local business practices and procedures, what documentation might exist and where, which political and cultural issues may pose challenges, and how best to communicate effectively and efficiently with employees.

Where the activities under investigation occurred years ago, your local managers may be your only hope of finding former employees who may have been involved in, or have information about, those activities.

Under certain circumstances, however, local management may have obligations to report misconduct to Chinese law enforcement authorities. You must therefore decide carefully what information to share.

And, of course, if local management is suspected of, or acquiesced in, the misconduct, you will want to limit — or possibly exclude (depending on the facts) — local management’s involvement in the investigation. In those circumstances, home office is likely to want to send someone from its management team to assist in China.

These issues may strike you as rudimentary, but investigations can fail or cause needless damage if basic issues are overlooked. It is far too common that investigative teams needlessly frighten or demoralize employees. Most employees will be entirely unfamiliar with internal investigations; they will worry about job security, they will worry about being unfairly blamed for the misconduct of others, and they may worry that the general health of the company could be imperilled. The tone and nature of the questioning of company employees must be respectful and attuned to cultural sensitivities. Your team must make every effort not to alienate the very people who can help uncover crucial facts.

Careful planning can minimize the disruptive effects of the investigation on the company’s daily business operations. It may be prudent, for example, to conduct witness interviews offsite; not only will this limit disruption of the facility’s daily operations, it will also foster confidentiality and candour.

You may also need to have key personnel available after hours to assist computer forensic experts to gather electronic data. Careful planning will also help your team to complete the investigation quickly, allowing the company to get on once again with its daily business.

Dusting off those roughed up

Sometimes, employees face very uncomfortable and difficult questions during an internal investigation, particularly if they or their friends got a little too close to the fire. Lawyers often forget to “dust off” those who have been on the receiving end of difficult questioning. Mindful that most of those interviewed in an internal investigation are likely to be good and hardworking, the lawyer must be something of an ambassador of the company and extend the company’s understanding and appreciation for their cooperation. Reasonable people will reciprocate that good will, which will benefit the investigation and those involved in it. Always proceed with dignity and grace.

Labour and tax

You need experts on Chinese labour, tax, laws and regulations. You are a visitor in a foreign land and you do not want to fall foul of local labour laws. It can be trickier than it might at first appear to terminate an employee in mainland China (or Hong Kong or Macau). For a host of reasons, including labour law and employee morale, it is sometimes best to negotiate a peaceful departure. You will also want to be careful with whistleblowers and disgruntled employees who may raise issues that could alter the direction and focus of your investigation. And, just as in the US, the investigation may raise tax and regulatory issues. If taxes are owed or there are compliance issues with local regulations, the company may need to take immediate corrective action with appropriate authorities even before the investigation is complete.

To disclose or not to disclose?

Whether voluntarily to disclose the results of an internal investigation with government authorities in China or in the US can be a complicated decision. There are a number of factors to ponder when considering whether to make certain disclosures, including, among other things, the misconduct’s effect on the company’s financial position, the effectiveness of the company’s internal controls, investor relations and public relations, and market integrity issues. Your team, including forensic auditors and data privacy experts, as well as the company’s appropriate oversight committee (such as a special litigation committee), should be involved in these important decisions. To disclose, or not, can have important consequences for the company. It must be considered carefully.

Consider from the very outset of your investigation, and throughout, whether and to what extent to prepare a report of the investigation, and whether witness interviews should be memorialized, and how the results of the investigation are to be communicated to the company. How you answer these questions may have a material impact on the manner in which you conduct the investigation itself.

Keeping these issues in mind can help your investigation to succeed, and, at the same time, minimize disruption to the company’s continuing operations.

Anthony Pacheco is a partner and Keith Butler is a senior associate at Proskauer in Los Angeles.

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E-mail: apacheco@proskauer.com