Last month, we discussed the whistle-blower provisions of the
Sarbanes-Oxley Act, signed into law last summer to address
corporate misconduct. Here's another provision business owners
should be aware of: It's now a federal crime to intentionally
destroy documents that might be evidence in a federal
investigation.
If your business is the subject of a federal investigation,
destroying documents that make the company look bad can get you in
worse trouble than the original investigation. But the new law
reaches beyond that provision to include companies that may have
nothing to do with the suspected misconduct.
Suppose your business is a supplier for a company with a big
government contract. If a government agency starts investigating
that company for fraud, you might have documents that could be
evidence in the investigation or an ensuing trial. If you
intentionally destroy these documents-perhaps as a favor to your
biggest customer-you could be subject to steep fines and
imprisonment for up to 20 years.
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"I think people [misunderstand] the scope and nature of
this law," says Michael Nolan, an attorney with Lowenstein Sandler
in Roseland, New Jersey. Nolan explains that many people assume it
applies only to huge corporations, when it actually applies to
every company-public or private.
The good news is that the crime requires "intent to impede,
obstruct or influence" the investigation. "I think
it'll be hard for the feds to prove intent if they can't
prove you knew about the investigation," Nolan says. But if
the investigation has been on the evening news, it may be difficult
to prove that you didn't know. So be on the safe side. "If
you know an entity you deal with is under investigation, freeze the
documents," he advises.
While large companies typically have document retention policies
spelling out what to keep and for how long, small ones are more
likely to have an ad-hoc arrangement. When the filing cabinets get
full, you toss out some papers.
As a rule of thumb, Nolan advises keeping equipment leases, real
estate leases, customer lists, contracts and financial documents
(anything you'd use to prepare your tax returns). "You
can't hold on to everything, but hold on to underlying
documents that define the relationship," Nolan says.
There's a seven-year statute of limitations on federal
crimes, so after seven years, it's safe to dispose of it. Until
then, it's better to pay for document storage than to risk jail
time. "Before you throw anything away, make sure there's
no one out there being investigated," Nolan says.
"It's better to have the document than to explain why you
don't have it."
Steven C. Bahls, dean of Capital University Law School in
Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane
Easter Bahls specializes in business and legal topics.