The attorney as fraud investigator

When management suspected a corporate officer of embezzling company funds a few years ago, the board had to quickly scramble to address years of fraudulent activity that could damage the company’s reputation and stock price.

The case was complex. The perpetrator had been handing out lucrative but unnecessary contracts that required very little work. In return, he received substantial kickbacks. Perhaps most damaging of all, the executive’s actions had caused the company to file financial reports containing material misstatements with government regulators for the previous two years. The board quickly determined that those contracts violated company policy and terminated the suspect. But then it had to decide on whether to hire an investigator or an attorney to conduct the internal investigation. The board eventually settled on an investigator who was also an attorney.

Here was the board’s thinking. A corporate attorney or even an investigator without legal training were both capable of completing many of the standard steps in this probe, including collecting and analyzing documentary and electronic evidence, interviewing witnesses and reviewing financial records to establish if the executive’s conduct met the legal elements of embezzlement, theft and fraud, as well as violations of regulations and company policy. But this case also involved numerous legal issues that spread like tentacles into myriad areas of the law. And their nuanced nature required extensive legal expertise.

The attorney the board chose to investigate could identify relevant legal issues and additional violations of financial reporting and corporate governance, plus contract, fiduciary and agency laws. They also had the skills to assess the company’s potential liability from government regulators and other organizations, such as the companies whose contracts had been terminated. Would regulators sanction the company for filing falsified financial reports? Could the company potentially face lawsuits from shareholders or the fraudster’s accomplices for breach of contract? These questions were better addressed by an attorney.

This is a fictional case drawn from some real-life examples, but it illustrates some of the dilemmas faced by management when having to choose an investigator following the sudden discovery of fraud. An investigation, of course, is a vital part of resolving fraud allegations. Ensuring that investigators have the correct skills for specific cases often makes the difference between success or failure — and ultimately the extent of costs from frauds.

Investigators will often work in tandem with companies’ audit, compliance and accounting teams. And more often than not, those investigators are CFEs. According to the ACFE’s In-House Fraud Investigation Teams: 2019 Benchmarking Report, on average, 43% of fraud investigators are CFEs, followed by Certified Public Accountants or Chartered Accountants (20%) and Certified Internal Auditors (16%).

While those credentials are highly valued, sometimes management must decide between selecting an attorney with expertise in investigating fraud or a person without legal training to lead a probe. Both have their merits, but legal skills are often required in complex cases and it sometimes, but not always, helps that an investigator wears multiple hats. For example, establishing intent — especially in contemplating a criminal referral — could hinge on a deep understanding of statutory, regulatory and case law, and an attorney would be better positioned to anticipate and prepare for any affirmative legal defenses that could be raised.

And — much like in the fictitious case above — if a senior employee improperly accepted financial “gifts” from a third-party contractor to overlook irregular and potentially fraudulent activity, the attorney conducting the investigation would be able to identify and address several related legal issues directly affecting the case that a non-attorney would’ve likely missed. These related legal issues concerning violations of contract terms and policies, and breach of duty to the organization, are important as they involve liability risks and could help in uncovering additional findings that might lead to disciplining a perpetrator.

But is an attorney always better suited to conduct an investigation than a well-trained non-attorney investigator in every case? Would assigning an investigation to a trained, experienced investigator make more sense in a particular circumstance? Well, it depends. There are benefits, potential disadvantages and other issues when organizations use attorneys as investigators. (See the sidebar “Wearing two hats” at the end of this article.) Any number of external factors may influence whether an attorney or non-attorney may be a better fit as an investigator, particularly in fraud and related investigations. But you must consider individual professional factors such as education, training and mindset. Here are some reasons why an attorney might be a good choice in a fraud investigation.

Spotting issues

Both attorneys and non-attorney investigators are usually familiar with the elements of the law, rules or policies related to the violations they’re examining, but attorneys are highly trained in “issue spotting,” the process of using the facts to identify problems and understand the broader issues of the case, beyond just the evidence collected.

Issue spotting is an essential skill for passing exams at law school and becoming an attorney. An investigator can’t address certain issues if they go unnoticed. So, finding connections between related ideas is important. And that big picture not only helps in an investigation of a particular case but could help CFEs spot gaps in fraud controls and prevent a repeat performance of a crime. (See “7 Ways to Improve Issue Spotting in Workplace Investigations,” by Joseph Agins, i-Sight, Aug. 28, 2012, and “Issue Spotting Skills,” LawSchoolSecretstoSuccess, reprinted from Study Partner™.)

White-collar fraud is often difficult to prove, and being able to identify more nuanced issues can be a useful skill and help prove intent. Indeed, connecting the dots and having a broader perspective make all the difference in an investigation.

In corporate cross-border investigations, for example, an investigating attorney with international law knowledge and experience, as well as contacts in other countries’ governments and private sectors, could be key. In a politically sensitive investigation I conducted, my legal education and experience were essential in navigating several issues in the case in which numerous congressional committees were pursuing concurrent investigations while separate but related congressional and other agency office of inspector general investigations were also in progress.

Attorney-client privilege

Depending on the circumstances and relevant law, work product surrounding an investigation (i.e., all the written documents, notes of conversations and other materials that are part of the investigation and are used in preparation for a legal case) may be subject to attorney-client privilege. This could provide a significant advantage to an organization investigating fraud and facing litigation as it won’t be obliged to present this information in litigation or reveal it to the other side. However, those privileges can potentially be waived under certain circumstances such as when the attorney discloses the work product to a third party so the legal adversary could gain access to it. And courts have occasionally opined that “fusing the roles of internal investigator and legal advisor,” in some cases at least, partially waives attorney-client privilege. (See “Attorney Work Product Privilege,” Legal Information Institute, Cornell Law School, and “Chivers v. Central Noble Community Schools,” casetext, Aug. 4, 2005.)

Analyzing evidence, sourcing and other skills

An attorney’s routine activities are often similar to tasks common to conducting an investigation. Gathering and analyzing evidence, conducting background research, and performing factual and legal analyses are staples of the provision of legal services, especially for litigation attorneys.

Another investigative skill set that attorneys commonly possess is familiarity with sources of information, such as court records and internet research. Writing skills are also emphasized in law school and in practice; so, many lawyers are proficient at conveying information and effectively organizing their cases. Attorneys, like many investigators, are trained in applying the relevant law to the facts to reach legal opinions or conclusions, in a process known as fact-law integration. This allows lawyers to see things from all sides and different angles, and to intellectually put themselves in the shoes of potential malefactors. Typical attorney traits of thoroughness and meticulousness translate well into conducting detailed investigative work.

The benefits of using attorneys as investigators isn’t limited to technical aspects. In some cases, having an attorney conduct an investigation could be interpreted as sending a message to the subjects and witnesses about the seriousness of the matter. With certain high-profile circumstances, hiring respected, experienced law firms or appointing special counsels to conduct investigations can also send a message to the public about the matter’s importance.

When attorneys make unsuitable investigators

Yet sometimes attorneys and the mindsets they bring can sabotage investigations. Let’s take the real-life case of an attorney leading an investigation into the financial improprieties at a blue-collar union in a small, rural town. The attorney interviewed the union members in a stuffy downtown office, hours away from their homes, and in a formal manner with no attempt to build rapport or make the interviewees feel at ease. The interviewees’ discomfort in the situation was palpable. And while seemingly cooperative, they didn’t expound on their answers. Sometimes they appeared to avoid substantive answers and possibly even tried to deceive. The union members almost seemed to feel they were being cross-examined by a hostile lawyer in a courtroom.

The formal structure of the interview, which the attorney treated more like a deposition, didn’t allow for the type of follow-up questions that may have led to more revealing answers. Had a non-attorney investigator conducted the interviews in a less formal fashion, perhaps at a more neutral location and in a more relaxed atmosphere, the interviewer would arguably have elicited more information to build a stronger case or generate new leads. Ultimately, the interviews by the attorney produced little meaningful additional information for use in the case.

Attorneys can often treat interviews as depositions when less formal approaches would work better. Depositions conducted under rules of procedure governing court proceedings are designed to gather evidence under oath that can be used in a legal action, and they follow strict procedures, including allowing for objections. While depositions are useful, they may not be the best way to gather background information to obtain admissions or confessions, or to get co-conspirators to turn on their partners in crime. Less formal interviews are arguably better suited to extract this type of information. They allow for more conversational exchanges with fewer interruptions like objections that could disrupt the flow of dialogue.

Interviews are a critical component of almost any investigation. Trained, experienced investigators know how to build rapport, look for signs of deception and probe a witness to get to the truth. The soft skills of being able to relate to people, show empathy and gain their trust may be more effective in getting answers than the more formal, facts-driven approach of a deposition, which attorneys feel comfortable using.

The active-listening technique, used often in interviews, could seem out of place in a deposition. Training in interviewing techniques can help attorneys become great investigators. Early in my law enforcement career, I probably missed opportunities to get more information from witnesses and subjects by taking more formal approaches to my interviews. Fortunately, with experience and training, I learned how to build rapport and gain trust, and became a much better interviewer. (See “Interviewing the Fraudster: A Strategic Approach,” by Liza Ayres, ACFE, Fraud Conference News, March 30, 2021.)

Selecting the correct skills

Many attorneys are proficient at writing persuasive memoranda and briefs that put their arguments in the best light, or in drafting legal analyses with recommendations for their clients or organizations. However, investigative report writing is factual and should be unbiased and fully account for exculpatory as well as inculpatory evidence. This is one area where having the mindset of a fact-finder rather than an advocate or advisor is crucial.

Some attorneys also have little experience in other skills, such as investigative interview tactics, physical and electronic surveillance, psychology and criminology, and computer forensics. Typically, non-attorney investigators have more expertise in these areas, including forensic auditing, a valuable asset in fraud investigations. And while attorneys often have training and experience in locating sources of information and using databases, a non-attorney investigator’s training may be broader and more in-depth in this area.

Case-by-case basis

Every case has its own unique characteristics that will affect an organization’s decision in its choice of fraud investigator. In some cases, it may be beneficial to utilize both attorneys and non-attorney investigators, as well as other professionals such as forensic accountants, in investigations. Bringing different but complementary professional perspectives and skill sets into an investigation is advantageous to forming a complete and accurate picture, and having both attorneys and non-attorney investigators on the investigative team may produce the best results.

J. Cameron Thurber, J.D., CFE, is an associate counsel with the Federal Deposit Insurance Corporation’s Office of Inspector General (FDIC OIG). The analysis, conclusions and opinions in this article are those of the author’s alone and don’t necessarily reflect the views of the FDIC OIG. Contact him at jthurber@fdicoig.gov.

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Wearing two hats

Rules, roles and professional standards

Whenever an attorney works as a fraud investigator, roles should be clearly delineated, and they must be cognizant of the professional standards set by the jurisdiction where they’re working. But sometimes those lines are difficult to define.

Several years ago, I wore two hats as both legal counsel and chief investigator at a government agency’s office of inspector general (OIG). Part of my job was to interview complainants reporting fraud against the agency. Contractors as well as employees were encouraged to report wrongdoing. The rules of the state bar association of which I am a member explicitly say that an attorney may not communicate with a “represented party” without permission from that party’s legal counsel. An employee of a company that employed a general counsel is considered a represented party. There are no exceptions for government attorneys conducting investigations.

I thought of what would happen if an employee of a large company contracted to supply services to the agency reported to me that the company was defrauding the agency and was fearful of retaliation. Could I claim that I was wearing my investigator’s hat rather than my attorney’s hat, and therefore wasn’t representing the OIG as a lawyer at the time and, in this instance, wasn’t subject to the bar rules? Or should I err on the side of caution regarding the rules and tell the complainant, “I’m sorry, but I now have to tell your employer’s counsel that you came in to report wrongdoing by your employer. And by the way, I cannot talk to you about it unless their counsel is present”? This obviously would have a profound chilling effect on the willingness of complainants to report fraud. Even the state bar’s ethics director was unsure of the correct response when confronted with the scenario.

Here are some other points to remember when conducting a fraud investigation as an attorney.

Avoid conflicts of interest with current or former clients. Special rules may apply to former government lawyers. Some of the American Bar Association’s (ABA) Model Rules, especially concerning communications with third parties (e.g., witnesses), pertain to conduct “when representing a client.” (See “Model Rules of Professional Conduct,” American Bar Association.)

Always consider whether an attorney-investigator is in an attorney-client relationship with their employer. It often depends on laws and rules of the jurisdiction. Subjects of an investigation, and sometimes witnesses, will often want to have counsel present during an investigative interview. If a subject or witness is represented by counsel in an interview conducted by an attorney, is the investigating attorney acting only as an investigator or also representing the interests of the organization conducting the investigation? Whether the attorney-investigator is working for another attorney, for example, a law firm partner, or a non-lawyer, such as an audit manager of a company, may also be a factor in the applicability of certain professional conduct rules.

An attorney acting as an investigator outside of where they’re a member of the bar must also be aware of the provision of legal services requiring bar admission in that jurisdiction. Purely investigative work may or may not subject the attorney to that jurisdiction’s bar admission requirements, but if the attorney is also providing legal advice or services in addition to fact gathering, either bar admission or a waiver is likely necessary. For example, if an attorney-investigator interviews a witness and simply conveys the person’s statements in a factual report, they may be considered acting in a nonlegal capacity, as with any other non-lawyer investigator. But if they then convey to their client or employer their opinion on legal issues raised in the witness’s statements, they possibly could then be considered acting in the role of an attorney, thus requiring bar admission.

An attorney should never act as an investigator for a matter in which they may represent a party in court, as an investigator may be called as a witness. ABA Model Rule of Professional Conduct 3.7 states, with certain exceptions, a lawyer should never be a witness for a case in which they’re an advocate in court. Many states have adopted some form of this rule. (See “Rule 3.7: Lawyer as Witness,” ABA.)

It may be advisable to separate roles between the person conducting the investigation and the person providing legal advice concerning the investigation — notwithstanding whether a matter may end up in court. Both attorney and non-attorney investigators may become so immersed in the details of a case that they fail to see the bigger picture and risk becoming so wedded to the investigation that it clouds their perspective and judgment. While this isn’t always the case, an independent legal viewpoint may be beneficial in preventing confirmation bias from creeping into the investigation, especially those that are complex and long term.