The Increasing Risk That Civil And Administrative Matters Will Become Criminal Investigations

Wednesday, August 5, 2009 - 00:00


There have never before been more demands on executives and in-house counsel at successful small to medium sized companies. Navigating the increasingly stringent regulatory environment is just one more added pressure. Increasingly, normal, run-of-the-mill civil and administrative matters - including everything from routine tax audits and securities inquiries to administrative, labor, and environmental matters - are turning into criminal investigations and charges, at both the state and federal levels.

This article outlines basic strategies for minimizing the possibility that routine civil and administrative matters will turn into criminal investigations.

These concerns and advice do not exist in a vacuum. Compliance programs and risk management can be expensive. So too are monitoring and settling administrative matters, both in terms of costs of counsel and investigation, and company employee time diverted from the company's business. And the expense of compliance programs may seem to far outweigh the benefits for a company with a spotless record and not so much as a single civil audit penalty. Frighteningly, however, companies that have never had serious problems are finding themselves enmeshed in investigations that lead to criminal charges against both those corporations and the individuals running them. Sometimes this can even lead to jail time for someone with an otherwise unblemished record.

Ultimately, the costs of becoming proactive to prevent routine matters from leading to a criminal investigation in the first place are far less than the costs associated with being subject to a criminal investigation. As the adage goes, an ounce of prevention is worth a pound of cure.

The Increasing Threat

It is not a new development that civil and administrative investigations spawn criminal investigations and charges. For federal white collar crime not tied to embezzlement, many criminal investigations have traditionally begun as administrative matters in the various federal agencies. While corporate counsel and their outside attorneys are accustomed to working through these administrative processes to obtain a positive civil resolution or termination of the civil investigation, three developments make handling administrative investigation trickier.

First, administrative investigations are leading to criminal investigations with what appears to be an increasing frequency.

Second, in many cases, state programs are being structured to specifically poach civil investigations for criminal investigation where indicia of criminality may be present. A prime example is the Special Investigations Unit of the New York State Department of Taxation and Finance - a unit designed to handle audits as a criminal investigation, either by commencing a criminal audit or taking over a regular income or sales tax audit already in progress. The investigators and attorneys working for the SIU have, as their mission, to conduct these investigations to make criminal cases.

Third, the numbers of companies and persons that get caught up in criminal investigations - unexpectedly and without actually having done anything wrong - is growing and will continue to grow. The standard for initiating an investigation at either the federal or state level is low, but strained law enforcement and regulatory resources, and the comparative costs of investigating white collar crime, has consistently left enforcement resources spread thin. With the expected increased emphasis on white collar offenses, regulators and law enforcement will not only seek to make criminal cases that were not made in the past, but will sweep up innocent companies in investigations. It will be little comfort to those companies when, at great expense, the investigations are terminated many months or years down the road. Simply put, the need to take steps to protect against the possibility of an investigation in the first instance is manifest.

No matter what the reason for the change, it is not unexpected. Years of emphasis, through four prior administrations, on drugs, firearms, street crime and, increasingly over the last decade, terrorism and child pornography, have continually hampered the government's capacity to undertake white collar investigations. And local prosecutors regularly complain about not having the resources to pursue significant white collar cases beyond garden variety embezzlements. The government has at least stated a desire to change that calculus. Even the best performing, most well-run companies could find themselves with multiple administrative matters or even a criminal investigation. Again, it will be of little comfort that such matters were traditionally handled civilly, that the matter is very minor, or that a company is targeted almost at random (where greater wrongdoers are either not investigated or are able to settle matters with civil non-prosecution agreements).

Companies Should Invest In Risk-Mitigating Corporate Practices

Companies should invest in corporate practices that will mitigate the risk of and allow the discovery of any criminal conduct, while assisting in obtaining a civil (as opposed to criminal) resolution if an investigation is commenced.

Articles in this magazine have comprehensively discussed risk management, compliance plans, self-auditing, outside auditing, environmental reviews, and other steps that can and should be utilized by corporate counsel to minimize the risk of criminal conduct by anyone acting on behalf of the company, while demonstrating a commitment to following the law and being a good corporate citizen. No program is perfect, and the costs of some of these steps - such as a basic compliance plan - can be prohibitive. But a company that finds itself in an administrative or civil investigation will be well served by its affirmative, pre-investigation steps.

This is not to say that after a potential civil or administrative issue is discovered by a company without a compliance program or self-auditing in place, that the company cannot take action to lessen the risk of significant penalties or the matter developing into a criminal case.Discovery of a problem - even by happenstance - can be voluntarily disclosed to the government and may fit within a disclosure program designed to lessen the likelihood of prosecution if its requirements are met. In short, companies should be as proactive as possible to avoid problems later.

Active Monitoring Of Administrative And Civil Investigations Is Essential

Active involvement by corporate counsel - and, in most instances, outside counsel - is essential to steering civil investigations to a successful conclusion. This involvement takes many forms.

First, companies should undertake appropriate internal investigations - beyond just providing documents or responding to an administrative subpoena or inquiry -where warranted.

Second, active interaction with the investigator/agency, in a cooperative mode - to the extent possible and required by the regulatory scheme -is essential. It is important to educate the investigator about the company's historical steps regarding compliance and potential issues. If there is a history of administrative settlements, a proactive approach to demonstrating actual change and getting a compliance program in place is key. Such cooperation and efforts may be frustrating to the company, especially where the cooperation does not immediately result in the matter being dropped. But the opposite approach - noncooperation and confrontation - is a sure invitation to escalate an administrative investigation to a criminal matter.

Third, counsel should be consulted regarding, and present at, the provision of information or documents to the investigator/agency. It is imperative that counsel is present whenever employees are interviewed. This allows the company to obtain the best information possible about the direction of, and issues in, the investigation.

Fourth - and this may be a change - the old mentality of "no news is good news" does not necessarily apply to audits and administrative investigations these days. "No news" may be because the investigator is waiting for information to be provided, and the company's failure to do so - even if the product of a misunderstanding - could escalate the matter to a criminal investigation.

One practical consideration is who the company hires as outside counsel. With ultimate costs in mind, resolving things civilly often makes sense. However, corporate counsel should look at hiring an attorney, or firm, that has the capacity to handle both the administrative investigation and any criminal investigation/charges that may result. Among other benefits, this allows a view of the agency's evidence and strength of a potential criminal case to help assess and structure an appropriate civil resolution. Furthermore, it prevents having to hire a second set of lawyers once the matter goes criminal, with duplicative costs and attorneys fees. Perhaps most importantly, it is crucial to obtain the "criminal" perspective from outside counsel because seemingly innocent choices - such as un-counseled interviews of company employees - can lead to unforeseen and unexpected problems.


The new regulatory environment means more administrative investigations will turn into criminal ones. Corporate counsel should be proactive and have policies in place to lessen the chance of both wrongdoing and subsequent civil violations, and should be proactive to make sure that civil and administrative investigations do not, because of company neglect or otherwise, turn into criminal investigations.

Timothy W. Hoover is an Attorney in Phillips Lytle's litigation practice and handles cases involving white collar criminal defense and government investigations. He can be reached directly at (716) 504-5754.

Please email the author at with questions about this article.