Internal Investigations – Process gaps and integrity issues

Prashant Mara and Devina Deshpande

Workplace investigations into financial wrongdoings are typically precipitated by either gaps in the system or by integrity issues. That is to say, defaults can likely be attributed either to a process gap that results in or allows errors (and consequently value leakages) or to personnel who exploit these gaps in the system through acts of malfeasance. This is the case for investigation circumstances around the world. However, in addition to these precipitating factors, each jurisdiction will have its own set of investigation challenges and vulnerabilities – procedural, organizational and cultural, which the investigation team must account for.

Our experience has shown that, in India, the prevalent management structures and lack of process-orientation contribute significantly to allowing process gaps being overlooked and systemic vulnerabilities exploited. Take, for instance, the hierarchical and top-down management structure which is widely prevalent across traditionally-run companies in India. In such cases, the reporting structure is often so rigid, and the sense of loyalty (whether misplaced or otherwise) is so strong, that employees are reluctant (or fearful) to deviate from orders coming down the chain (often executing instructions with mechanical precision and with no independent analysis or judgment) or to report grievances or gaps that they have come across in the course of their work to anyone other than their direct reporting manager (who may have a vested interest in keeping the gaps under cover).

In fact, junior employees may not question any instructions at all, even if the instructions would ordinarily appear unreasonable or not in the normal course of business – to the extent that, they may also comply (at times, unwittingly) if directed to go along with or cover up a wrongdoing. Where a default has come to light and an investigation is underway, these deeply ingrained hierarchies could also compromise confidentiality and the success of the investigation. For instance, where the automatic reaction for a junior employee is to report his knowledge of the investigation, or the fact that he was interviewed, to his supervisor, even though the supervisor may be an investigation suspect himself.

Besides loyalty, a culture of silence may also perpetrated by a fear of retaliation at work or of being fired, particularly where one person within the team controls hiring and firing decisions. In this respect, we have seen a number of whistleblowers specifically request that investigations are conducted by outside counsel or the company’s overseas headquarters. Whistleblowers are also often reluctant to disclose their identity, or even provide information beyond their initial report. This is both due to the absence of a legislation in India that protects whistleblowers and due to the fear (perceived or actual) that whistleblowing and investigation processes will not be kept confidential if handled completely at the local level. On the other hand, where the investigation team has been made up of outside counsel and/or HQ personnel, we have noticed a gradual increase in the quantity and quality of disclosures from both whistleblowers and interviewees.

Another contributing factor to unchecked process gaps is the lack of integration within the company and the operation of teams in silos. Certain teams within an organisation to operate independently, instead of being fully integrated into the processes of the company as a whole (often run as a ‘personal fiefdom’ of the manager at the top of that particular team). In cases where the team undertakes complicated, highly technical processes (involving convoluted manufacturing, technology systems etc.), it is likely that the rest of the company may not be familiar with or fully understand these processes, and the team is left to run on its own – thus reducing visibility into their operations and allowing them to escape accountability to the rest of the company and to evade controls.

Poor documentation and failure to regularly update data systems also provide scope for wrongdoing. Company records may be maintained offline on an ongoing basis (or not maintained at all), rather than on the official ERP etc. systems. Only final ‘cleaned up’ figures and supporting documents are input at month-end into the company system. This provides scope for manipulation of costs, sales, production etc. figures. There is no external or impartial oversight over ongoing production, accounting etc. metrics and the errant employees can work ‘backwards’ to justify the final numbers and leave off any details that raise flags.

Another aspect to be mindful of when undertaking investigations in India is the exploitation of personal relationships to commit the wrongdoing. It is not uncommon for employees to involve their relatives and personal contacts as team members, suppliers, service providers etc. to manipulate the process gap. Engagement of such connected or related persons is done without disclosure to, or sanction of, the company and without following company-approved on-boarding processes or arm’s length terms. Apart from the issue of conflict of interest itself, we have seen instances where the connected party has issued falsified/incorrect documentation, charged the company for services that were not actually rendered, paid kickbacks to the employees, amongst other illegal and unethical practices.

The points listed above should give you a sense of the some of the investigation challenges unique to the Indian context. As in the case of investigation circumstances around the world, there is no perfectly tailored solution to conducting an internal investigation in India. The success of the internal investigation will depend in large part on the investigation team being able to understand and appreciate these, and other, ‘India-specific’ process gaps and the ways in which they can be manipulated.

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