Managing internal investigations in India

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Companies in India have faced heightened enforcement in recent times. Regulators are scrutinizing acts and omissions of management more closely than ever, across a range of regulations that criminalize certain patterns of corporate behavior.

Most often than not, a whistleblower alert that triggers an investigation under a particular regulation has a domino effect, with other regulators also taking notice of the issue. This could have far-reaching regulatory, financial and reputational implications for the company, if not mitigated and controlled at an early stage.

What does an internal investigation achieve?

The most obvious reason to conduct an investigation pursuant to a credible whistleblowing report is to ensure that the alleged misconduct is appropriately dealt with and to prevent economic, reputational and employee harm. However, and unique to India, there are two additional reasons why alerts of misconduct should not be ignored: (i) to potentially prevent the wrongdoing from snowballing into a reportable or reported regulatory incident, and (ii) to be able to demonstrate to the regulator (if and when a regulatory investigation is conducted) that management acted promptly, once it received actual knowledge.

These are important steps, which assume additional significance in India because of the way the criminal justice system deals with economic offences. While there are numerous law enforcement agencies which deal with economic offences (Enforcement Directorate, Revenue Intelligence, Cyber Police Department, Economic Offences Wing, Anti-Corruption Branch, Vigilance Department to name a few), almost all of them trace their origins to the traditional police departments. In other words, most of the officers are deputed to these specialized departments from the mainstream police service, with little specialized training – particularly at junior levels. While some of these specialized departments have additional powers under special statutes, most investigation procedures that are followed are from the traditional Criminal Procedure Code.

As such, investigation procedures and investigators for specialized economic offences are largely the same as those that handle core offences such as trespass, bodily harm, robbery etc. Very often, the process is not very friendly to the complainants or witnesses (in this case, to the detriment of management). In addition, once an offence is reported to the authorities, investigation and prosecution is taken over completely by the concerned agencies. The complainant, witness and accused do not retain any degree of control over the process or outcome of the investigation. It is important to note that plea bargains, deferred prosecutions and fine-based settlements are not recognized as valid closures in India.

If the offence is reported to the authorities (either by the whistleblower or the management), an internal investigation that has led to such reporting is useful in several ways. For the management to be completely in the clear, it is important to be able to demonstrate (if flagged by a regulator) that it acted promptly and took the right steps to investigate and mitigate any misconduct. Failure to do so can become grounds for the investigators to dig deeper to verify whether there was management collusion rather than wrongdoing by a rogue operator. It is critical to achieve this status (of being in the clear) in two stages – (i)  at the stage of filing of the First Information Report (i.e. criminal complaint), which leads to an investigation; and (ii) at the stage of charge sheet (filed by the law enforcement agency, setting in motion the criminal case) which leads to prosecution. The investigation report (especially from an independent third party) will have immense persuasive value in achieving this status. This will also be the case in any prosecution before a court of law, where the report will be testament to the prompt and thorough action taken by the management.

When is an internal investigation warranted?

In most cases, there is a small window where management is able react, verify and address misconduct allegations. A carefully planned and properly conducted internal investigation can play a vital role in establishing if there is substance to allegations of wrongdoing, whether this constitutes a threat to the business and how best to resolve any risks. This is especially significant in a growing economy such as India where employees, regulators and civil society are becoming increasingly sensitive to corporate behavior. Recent incidents (including labor unrest in Wistron Corporation’s plant in Karnataka for non-payment of wages and LG Polymers gas leak that killed 11 people in Telangana due to failure to follow safety protocols) are testament to the fact that corporate misconduct has to be identified and rectified via an effective whistleblowing and investigation process before it snowballs into incidents that can have catastrophic effects.

On the flip side, it is also true that whistleblowing processes in India are still nascent (and even immature) and some mechanisms may be overwhelmed with the number of complaints – most of them HR related. The fact that there is no statute which deals with and protects whistleblowers is testament to this statement. Further, and partly due to the absence of statutory protection, whistleblowers are likely to be reluctant to disclose their identity and provide too many details which may help management to identify them. This means that the whistleblower report itself may have sketchy details to start with.

Management should therefore be acutely aware of these uniquely ‘Indian’ aspects while deciding whether investigations are required (other than the most obvious ones – privilege, absence of bias and evidentiary value). Undertake a thorough check of each report before deciding that no action is required. If there is even minimum actionable information in the report, it is useful to verify and conduct a few preliminary enquiries to identify further information.

Integrity of investigations

In a hierarchical and top-down management structure which is prevalent in most Asian countries, the composition of the investigation team determines how the various stakeholders gain confidence and perceive the integrity of the investigation even before the report is submitted.

In our experience advising clients, we have seen a number of whistleblowers specifically request for investigations to be conducted by outside counsel or headquarters (if the company is a subsidiary of non-Indian parent). Additionally, whistleblowers who were previously reluctant to provide information beyond the initial report, do so, if the investigation team is formed of outside counsel and/or HQ personnel. This is largely due to the notion (perceived or actual) that any whistleblowing and investigation process will not be confidential if handled completely at the local level, which may eventually lead to retaliation.

The same fears (perceived or actual) are true when investigations are being conducted by internal teams vs. outside counsel. If investigation teams are made up of outside counsel, we have seen a gradual increase in the quantity and quality of disclosures from whistleblowers as well as interviewees. The same is also true (though to a lesser degree) in instances with internal management are also part of the team – provided they are not from any department, division or entity connected (even remotely) to the whistleblower. Therefore, management has to invest effort and resources to build confidence that their whistleblower protection and non-retaliation mechanisms work.

No one size fits all

The points listed above should give you a sense of the significance and management of internal investigations in India. However keep in mind that, as in the case of investigation circumstances around the world, there is no perfectly tailored solution to conducting an internal investigation in India. Each fact scenario will have its own unique challenges – procedural, cultural and organizational, and these will need to be assessed and tackled when initiating and conducting an investigation on a case to case basis.

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