Mitigating risk in dawn raids – advice for IROs

A brush with the law will cause serious reputational damage. Antony Dunkels explains why more companies are being investigated.

Recent changes in law, including the UK Bribery Act and the market abuse regulations, and an increased focus on corporate responsibility for criminal wrongdoing in both regulated and unregulated markets, ensure a dawn raid remains a real prospect for UK business. 

Failure to have a plan in place can have a catastrophic impact on a business – lack of information, understanding, media attention and misreporting all create uncertainty in the market. All businesses should know how to handle a dawn raid and have procedures in place that balance strategic stakeholder communications with market and legal obligations. Preparation is crucial, along with a seamless approach between lawyers, the IR function, communications advisors, accountants and management. 

Why should all businesses contemplate a dawn raid in their IR plan? 
Reputation harm is inflicted the moment ‘the foot hits the door’ and remains regardless of the ultimate outcome.  

The number of dawn raids carried out by HMRC has increased 34% in the last five years, from 499 in 2011-2012 to 669 in 2016-2017. In 2015 HMRC was given a target to triple to 100 by 2020 the number of criminal investigations into “serious and complex” tax crimes, not only those relating to wealthy individuals but also corporations. 

It is not just HMRC that has the power to carry out a dawn raid – the Police/NCA, Serious Fraud Office, Financial Conduct Authority, Competition and Markets Authority, Information Commissioner and Health and Safety Executive can all demand access without notice. 

All dawn raids have the capacity to inflict serious reputation harm on a business, its value, share-price, ability to raise funds or attract customers. Dawn raids will also be exploited by competitors for years to come. 

Why can dawn raids inflict so much reputation harm? 
Key to fair market value is the perception of the value of the company in the future. The fixed costs of a raid include legal costs, insurance and financial penalty. The intangible costs include uncertainty, perception of corporate governance, brand image, reputation harm, customer/client churn, etc. Together these costs will impact on fair market valuation. 

Crucially, the intangible cost of a dawn raid can be many times higher than the fixed costs and is much harder to predict. 

How should a business manage the crisis and reputation fallout from a dawn raid? 
The most important aspect of dawn raid crisis management is preparation and a pre-existing understanding and plan that extends from the CEO, management and general counsel, the external legal advisors, the internal and external communications advisors and of course through the Investor Relations team. A ‘core team’ of representatives across the business and external advisors will ensure that all areas of the business can be properly mobilised and represented in the decision making process. 

The team will likely also include client managers, division heads, regional and country heads, etc. but this will depend on the exact shape of the business. 

Most of the key decisions, and interactions with the regulators or authorities will fall to management, General Counsel and external legal advisors. However, it is essential to ensure that all the functions of the business operate together to communicate with the market, media, external stakeholders and employees. This will ensure calm, consistent messaging. This will reflect well on corporate governance, protecting the reputation and value of the business, in addition to offering proper legal protection.

There can be a three-way tension between protecting the reputation of the business, reporting obligations and the duty of confidentiality owed to a regulator or investigator. Legal advisors and the IR-function must work together, and with the authorities, to ensure that delicate balance is properly navigated. 

The Importance of legal understanding
The IR and communications functions must be well-informed of the law of dawn raids and the reasons behind the raid itself. It will be the responsibility of these investor, media and public facing functions of the business to take complex legal issues and reduce them into a form of words suitable for any audience and in a manner that does not offend the competing legal obligations of confidentiality and legal privilege. 

A seamless approach
A precise IR dawn raid strategy will of course depend on many external factors – the spread of investors, type of business, raiding authority, grounds for search and allegations made, media interest, public visibility of the business and regulatory and listing obligations. 

However, regardless of these factors (1) preparation and (2) seamless integration of the IR function, lawyers, communications advisors and management are key. Those businesses that take the view they will not be the subject of a raid, and don’t need to prepare, risk unnecessarily exposing their shareholders to financial loss. 

Antony Dunkels is director in Edelman’s Litigation and Legal Affairs practice.

Published 25 July, 2018

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