What to Do if Your Civil Court Case Turns Criminal

If you provide forensic accounting services in the context of civil litigation, you may have come across the age-old problem: What do you do when you determine or are told that there may be illegal activity going on such as unreported income, fraud or embezzlement? What are your responsibilities to report the findings to the parties, the courts, law enforcement and tax authorities?

As a result of the current economic conditions, more and more cases are popping up involving accusations of unreported cash, improper disbursements, fictitious vendors, illegal rebate or kickback schemes, fraud and embezzlement. They arise in many civil matters such as dissenting shareholder actions, damage actions, commercial fraud claims and matrimonial actions. Sometimes the results of your analysis and findings are used to support criminal referrals. They may even be used as a trial exhibit, and you may be called to testify before a grand jury or even at the criminal trial.

While the use of cash as a form of payment for goods and services has declined greatly over the past 15 years, it is still commonly used. Therefore, it is an important issue to consider in an analysis of a business in a litigated matter. The uncovering of unreported cash can have a significant effect on a business’s value, a damage claim and related business cashflows. Furthermore, the fact that the parties hid cash may be plain-and-simple tax evasion, which could subject the parties to state and federal criminal prosecution.

Some people are very good at hiding their illegal activity and do so for years. Then a dispute arises between the parties and a civil action if filed. You are hired to investigate, and your forensic financial analysis may uncover what someone previously suspected but was unable to prove. Furthermore, the activity may rise to the level of criminal activity. Where do you turn?

Your client will often be an attorney who engages you on behalf of their client, (a party to the matter), and the attorney’s client will be responsible for paying your fees. This is to protect the attorney-client privilege. Your obligation first and foremost is to your client, and you must report your findings to your client/counsel. If, during your investigation, you uncover what you suspect to be criminal activity, such as a fraud or embezzlement scheme, inform your client/counsel immediately. While you may feel compelled to report the suspected illegal activity, that is not your call. It is the decision and responsibility of engaging counsel or your client as to whether or not to refer your findings to the appropriate authority. There is no requirement for you to report your findings to any legal or tax authority, but you should make your client aware that they should consult their own counsel. Also note that while your findings may be used to facilitate a civil settlement they cannot be used as a veiled threat for criminal prosecution. In my experience, it is a crime to threaten criminal prosecution to facilitate a civil settlement. If, at any point, you become uncomfortable that the attorney or client is trying to hide the illegal activity or not complying with law enforcement’s investigation, you may consider withdrawing from the engagement. Include language in your engagement letter that allows withdrawal from an engagement.

If law enforcement becomes involved and subpoenas you to provide documents, grand jury and/or trial testimony, you will likely have to comply in the criminal proceeding.

It is best to discuss the possible uses of your forensic analysis early in the engagement. If your client intends to have a suspected illegal matter referred to the proper authorities, you can employ procedures to help preserve and document evidence. If a civil case turns into a criminal case, you may be asked to assist prosecuting authorities in their investigation. In some instances, you could be called to provide grand jury and/or criminal trial testimony. If you become aware that the results of your work product are going to be used in a criminal matter, consult with your own counsel immediately to determine your obligations to both the client and the appropriate authorities.

Generally, if you are not a court-appointed expert, you are not obligated to report your findings to the court. However, as a court-appointed expert, you must report your findings to the court. In many states, when you are court appointed your obligation to report to the court is unclear. In general, you should report your findings to the court but, in reality, the court many not listen. I have experienced matters where practitioners had asked to conference with a judge in chambers to discuss the case status. Upon learning that there may be some questionable business practices, the practitioner is instructed by the court to work with the parties to facilitate a settlement to the civil matter. This is commonly done to avoid hearing the forensic findings on the record in open court. Of course, if heard on the record, a judge would be obligated to recommend a referral to the appropriate authority. While this may be difficult for some people to accept from an ethical standpoint, it is a reality of the system. With many courts backlogged and pressure to move cases along, there tends to be a strong desire to clear a civil case docket.

If you are working for the party who is committing the suspected illegal act, in addition to reporting your findings to your client and their counsel, contact your own counsel immediately. While you are working on one side of the case, someone is working for the other party and has uncovered the same things, and a criminal proceeding may be in the works. You may lose the coveted attorney-client privilege that you enjoyed during the civil litigation and even wind up becoming a witness for the prosecution. If you suspect or become aware that a criminal referral is pending, realize that a criminal case is much different than a civil matter.

In a civil case, the parties generally control the pace and tactics of the case. In a criminal case, the government—by way of a prosecutor—controls the case. They seek to punish the defendant for the alleged illegal act. That act may be documented in your forensic analysis and work papers. The authorities can raid your office to secure records and evidence. Therefore, you need to know your rights and protections under the law. Generally, you must cooperate in a criminal investigation. Failure to do so could subject you to obstruction of justice and other criminal charges. Remember, never destroy or dispose of records if asked to do so by a client. Interfering, providing improper advice or aiding in a coverup of the suspected illegal activity could make you a defendant to the matter.

While civil cases move at a slow pace in most jurisdictions, with judges preferring the parties settle than try cases, criminal cases generally move more quickly. In a criminal case, you are dealing with federal, state or local agents who are very skilled and determined to win. They also have a vast pool of resources that can be expended on prosecutorial efforts. Therefore, prosecutors are looking for a conviction and not motivated to settle cases to minimize fees as is commonly done in civil matters. Unlike civil cases, where one side can tie up discovery, prosecuting agencies have broad subpoena powers to secure evidence.

During a civil litigation, your role in the case may change and can be expanded or contracted at your client’s and their counsels’ direction based on your findings. When this happens, be mindful of your original engagement letter. If you are asked to perform additional services, make sure you revise your engagement letter accordingly. You need to ensure that you get compensated for additional services that were not covered in your original engagement letter.

I have seen this scenario many times in civil matters. You perform an analysis covered by the engagement letter and discover something else that you report to the client. You are then asked to further investigate and incur more fees. You do as requested by the client and subsequently issue a bill for services, which your client does not want to pay. The client then points to your engagement letter. If the matter in which you are involved morphs into a criminal case, know your rights and responsibilities. Establish an understanding early in the case with your client and their counsel on how they intend to use the findings of your work and related report. If in doubt as to your client obligations, their counsel and various authorities, consult your own legal counsel immediately to determine what your obligations are and to protect yourself and your firm.