One of the key purposes of conducting an internal investigation is fact-finding, collecting information and materials to enable the company to know what has happened and to defend its position in case a regulator knocks at its door. Therefore, it is important that at the beginning of the process the relevant employees are reminded to preserve relevant documents.
During an internal investigation, the company will obtain materials relating to the matter concerned and will inevitably create communications and new documents (eg, interview notes). Documents that relate to the matter under investigation and exist prior to the investigation are generally not privileged. However, communications between the company and its lawyers (whether in-house counsel or external lawyers), documents evidencing such communications and documents intended to be such communications (eg, draft e-mails to lawyers) will generally be protected by legal advice privilege provided that they are created with the sole or dominant purpose of obtaining legal advice. This is a reason why it is always advisable to involve lawyers as early as possible in an internal investigation, including any interview conducted with relevant employees. Companies should ensure that privilege is preserved and not waived accidentally during the internal investigation, in particular if a regulatory investigation is imminent.
The law on legal advice privilege in the common law jurisdictions has been in a state of flux for the past decade as a result of the decision of the English Court of Appeal in Three Rivers District Council v Governor and Company of the Bank of England (No. 5)  QB 1556 (Three Rivers (No. 5)). In that case, the Court of Appeal held that legal advice privilege only applies to communications between a limited group of employees within a company (ie, the ‘client’) that is entrusted to handle a particular investigation, for example the company’s legal department and the company’s external lawyers. Accordingly, employees of the Bank of England outside the Bingham Inquiry Unit (which was set up in respect of the Bingham Inquiry into the collapse of Bank of Credit and Commerce International) were not regarded as ‘clients’ and hence their communications with the company’s external legal advisers were not privileged even though they were created for the sole or dominant purpose of obtaining legal advice.
The Hong Kong Court of Appeal has recently revisited the issue of legal advice privilege in the case of Citic Pacific Ltd v Secretary for Justice and another  HKCA 293. The Court of Appeal declined the restrictive approach adopted in Three Rivers (No. 5) in identifying the ‘client’ and held that for the purpose of considering whether legal advice privilege applies to a particular document, one should apply the dominant purpose test, (ie, whether the document was created with the sole or dominant purpose of obtaining legal advice) rather than focusing too much on whether or not the particular employee of the client company creating or sending the document should be considered a ‘client’.
Based on this decision, clients can now take some comfort in the fact that documents and communications created by its employees with the sole or dominant purpose of obtaining legal advice will be covered by privilege.
It is advisable that, when reviewing documents and communications during internal investigations, an exercise be conducted to segregate privileged documents and communications from those that are not so protected. This will prove helpful in the event that a regulator conducts a dawn raid at the company’s premises, trying to seize documents. One would then have less difficulty in identifying which documents are privileged and which are not.
Employees who are implicated in the alleged misconduct and employees who are not but may have information relevant to the investigation should be interviewed.
The interviews should be conducted in the presence of the company’s in-house counsel or external lawyers. The company should carry out a thorough review of all relevant materials prior to arranging the interviews to avoid multiple interviews of multiple employees, which is likely to be disruptive to employees’ work and affect employee morale. The in-house counsel or external lawyer should also explain in clear and unequivocal terms to the employee that he or she represents the company and not the employee, that legal advice privilege applies and that only the company has the authority to waive that privilege. This is to avoid the risk of employees having a mistaken belief that the external lawyers or in-house counsel are acting for them, or that the privilege belongs to them. In fact, many companies will allow or even encourage employees to retain separate independent lawyers and reimburse the employees for the legal costs arising from their engagement in the internal investigation to ensure fairness in the process.
In Hong Kong, there is no statutory requirement obliging an employee to assist his or her employer in an internal investigation. However, an employee will likely find himself or herself having no choice but to assist. If the employment contract expressly stipulates that the employee is required, among other things, to promote the business and interests of the company (such provision usually exists in employment contracts with people of a senior rank in the organisation), one could take the view that he is required to disclose any misconduct concerning his colleague or any irregularity concerning the company, and attend interviews by the company to ensure that the best interests of the company are protected. Even if the employment contract concerned does not contain the above-mentioned provision, it would still be in the employee’s interests to assist in the internal investigation at the request of their employer, as failure to obey a lawful and reasonable order by an employer could constitute a ground for summary dismissal under the Employment Ordinance and the common law.
Where an employee is suspected of misconduct, an employer has a right under section 11 of the Employment Ordinance to suspend his or her employment for up to 14 days without notice or payment in lieu: (i) as a disciplinary measure for any reason for which the employer could have summarily dismissed the employee; (ii) pending a decision by the employer as to whether or not to summarily dismiss the employee; or (iii) pending the outcome of any criminal proceedings against the employee arising out of or connected with his or her employment. If the criminal proceedings are not concluded within the period of 14 days, the suspension may be extended until the conclusion of the criminal proceedings. It is not clear from the Employment Ordinance whether any suspension after the initial period of 14 days should be paid or unpaid. However, bearing in mind that an employee who is suspended from employment has a right to claim constructive dismissal by the employer at any time during the period of suspension, it is suggested that the employer ask the employee to take paid leave of absence if a suspension of more than 14 days is required.
If at the conclusion of an internal investigation, an employee is found to have committed misconduct or non-compliance, the company should take legal advice as to whether the conduct on the part of the employee justifies summary dismissal. Indeed, leaving aside the legal issues, the company should consider whether the employee should be laid off right away or whether he or she should be kept in the organisation so that he or she could assist in any future regulatory investigation. Having said that, an employer may have no choice but to dismiss the offending employee if the employee is a licensed person under the SFO given the company’s overall fitness and properness may be adversely affected if the employee is retained.
If an internal investigation is prompted by a regulatory investigation, the company would need to take into account any relevant secrecy obligations. For example, a notice issued under section 183 of the SFO imposes certain statutory obligations, including the secrecy obligation imposed by section 378 of the SFO on the persons who were in receipt of the section 183 notice. The secrecy obligation is subject to limited exceptions, such as disclosure to employers, insurers and legal advisers. Therefore, during the interviews conducted in the course of the internal investigation, the company should not divulge to the interviewees the existence of an SFC investigation or disclose any relevant allegations, unless they are designated persons for handling the regulatory investigation. Also, the company should not ask the employee interviewees who have attended interviews with the regulators what they have been asked during the interviews.