Outsourcing Investigations to the Suspects

The Washington Post looks at how the SEC lets companies probe themselves

If you’re a watchdog/government regulator and you suspect a company of committing crimes, it’s probably not the best idea to outsource your investigation to the company suspected of committing the crimes.

But that’s what the SEC is doing with suspected violators of the Foreign Corrupt Practices Act, according to a good piece this morning in the Washington Post. It shows how the agency, strapped for resources, relies on companies to investigate themselves when the SEC suspects them of overseas bribes.

Sometimes this may work out okay.. How many times does it not work? We’ll never know:

When government officials have confidence in an internal investigation, they may do little investigating of their own, lawyers involved in such cases say.

What prevents the internal investigators from airbrushing the facts or, say, omitting evidence that might implicate the chief executive?

“You mean other than integrity?” one former federal prosecutor replied. “Very little.”


Nonetheless, some companies are determined to protect themselves from shareholder lawsuits and to shield key executives, and those objectives can influence the internal investigation, at least subtly, lawyers said.

A former government official said he and his colleagues have been asked to help conduct investigations for companies that stated they were looking for someone to exonerate them. The former official, who spoke on the condition of anonymity out of deference to colleagues, said he has turned down those requests.

About all you can say for this phenomenon is that it’s better for the SEC to have these companies investigate themselves than to have no investigation at all. This good piece of context shows and also how outmatched the SEC can be by the scope of wrongdoing (emphasis mine):

And a global bribery probe performed for Siemens cost about $950 million, according to a company accounting. That was almost triple the $324 million annual budget of the SEC’s enforcement division when the case was resolved in December 2008.

I would have liked to have seen a broadening graph noting that the outsourced investigations illustrate how federal regulators are outmatched by the companies they’re supposed to oversee and point to the continuing legacy of Clinton/Bush moves toward deregulation and self-regulation (which are the same thing, of course). And it’s not just the SEC that has resource and/or priorities issues. Just today, Bloomberg News reported that corporate-fraud prosecutions by the Justice Department have plunged 58 percent since 2003.

And the Post says it’s not limited to just overseas bribery:

The strategy is especially common in cases of foreign corruption but also extends to domestic investigations involving issues as varied as health-care fraud and shady accounting.

That should have been fleshed out with a paragraph or two of context on how frequently it outsources domestic investigations.

Or better yet: Here’s hoping that’s part two in a series.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum. Tags: , , , ,