Regulatory investigations continue to rise as staff get happy with their whistles

The annual Litigation Trends Survey published this week by global law firm Fulbright & Jaworski International is focused on the US and UK and so is not readily applied to the rest of Europe because of the differing legal systems. But, as most experienced risk and insurance managers in Europe will attest, legal and regulatory trends tend to start in the US, spread next to the UK and then ultimately onto the rest of Europe.

According to this year’s survey, the number of UK businesses that face regulatory investigations continues to rise and more than one third (36%) of UK companies stated that they faced a regulatory proceeding in the last year.

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In 2010, 32% reported that they had to deal with a regulatory investigation, up from 9% in 2009. According to the survey, the number of regulatory proceedings instigated also continued to increase globally as some 40% of all respondents reported involvement in at least one investigation over the last year, up from 37% in 2010. Nearly half (49%) of all public companies faced at least one regulatory proceeding in the past 12 months.

The law firm said that dealing with these matters is ‘increasingly disruptive’ to businesses. One quarter (27%) of UK respondents, for example, reported an increase in regulatory inquiries or investigations against their company last year, compared to 18% in 2010 and 19% in 2009.

The law firm said that, as a result, businesses continue to turn to outside counsel for assistance in handling government and regulatory investigations. In 2011, almost half (46%) of all respondents to the survey reported that they had retained outside counsel in connection with regulatory proceedings, up from 37% in 2010.

The conduct of internal investigations by UK businesses remains a common feature according to Fulbright & Jaworski. In the last year, almost half (43%) of UK respondents carried out an internal investigation with the assistance of outside counsel, it said.

The law firm also reported that businesses have also been required to follow up internal investigations by reporting issues to regulators, with one in five (19%) of UK companies and a quarter (24%) of US respondents going on to report the matter to a regulatory agency. One quarter (26%) of the largest companies, with gross revenues in excess of $1bn, reported matters arising out of internal investigations to a regulator, stated Fulbright & Jaworski.

“Businesses are operating in a global climate of enhanced supervision, intense scrutiny, and significant enforcement including increasing penalties. As a result, companies and their advisers in the US, UK and internationally are handling increasing numbers of internal investigations and regulatory proceedings often as a result of whistleblowing allegations, at substantial cost to the business,” said Lista M Cannon, Partner and co-Chair of the firm’s International Investigations practice group.

“Cooperation between regulators on an international basis is now a reality. As a result, businesses and their advisers are increasingly subject to multi-jurisdictional challenges. A cooperative approach to dealing with the regulators, often commenced by self-reporting issues to one or more regulators, is becoming the norm, particularly among larger businesses,” the firm added.

The blowing of whistles is an increasingly important matter in UK companies according to the survey.

It found that one fifth (21%) of UK respondents have been subject to such claims in the last three years, up from 13% in 2010 and a threefold increase on the 2009 survey when only 6% of UK respondents reported that they were on the receiving end of whistleblowing allegations in the previous three years.

“The consequences of these allegations are serious,” said the law firm. “40% of UK respondents stated that whistleblower allegations led to an internal investigation, 20% reported a regulatory investigation and 33% reported that third party proceedings followed. Over half of all respondents (55%) were subjected to third party proceedings as a result of whistleblower allegations—an increase from 46% in 2010,” it stated.

A quarter (25%) of all respondents, and one in eight (12%) UK respondents, expect an increase in claims or lawsuits brought by whistleblowers over the coming year. “The largest companies (those with gross revenues in excess of $1bn) are those most likely to expect an increase in such claims or lawsuits, with nearly a third (30%) expecting an increase. In contrast, 12% of the smallest companies (those with gross revenues of less than $100m) expect an increase in claims or lawsuits brought by whistleblowers,” stated Fulbright & Jaworski.

Interestingly in contrast to what one would believe from reading the popular press, in 2011, the number of UK and US respondents that instructed outside counsel to assist with a bribery or corruption investigation declined towards 2008 levels, following a sharp spike in 2010. Over the past year, only 6% of UK respondents instructed outside counsel to assist with a bribery or corruption investigation, compared to 26% in 2010 (12% in 2009, 5% in 2008), found the survey.

And only 21% of UK respondents expect the recently implemented UK Bribery Act to force changes in their operations, down from 35% in 2010. The law firm said that this may be explained by the fact that 38% of UK respondents reported having already undertaken a review of existing procedures in light of the implementation of the Act in July 2011. US respondents have also recognised the potential jurisdictional reach of the Bribery Act 2010 and continue to believe that it will force changes in their operations, said Fulbright and Jaworski. Some 12% of US respondents expect the Act to have an impact on their companies, compared to 11% last year, added the law firm.

“The implementation of the Bribery Act 2010 has generated much concern for both UK and international businesses. We are seeing the reality that businesses appreciate that they can no longer simply focus on the US regulators and US legislation. Many businesses across a range of sectors, and large businesses in particular, have already conducted reviews of their procedures to limit and detect corruption and to ensure compliance with the Act,” said Antony Corsi, litigation partner and a member of Fulbright’s International Investigations practice group. “The question will be whether those reviews are preventing and detecting corruption sufficiently to keep the regulators at bay and whether those who have not conducted reviews will get caught out,” he added.