So…When Does Compliance and Ethics No Longer Matter?

In a post yesterday on TheAtlantic.com, Daniel Indiviglio posed the question “Does Hurd’s New Oracle Gig Prove Business Ethics Don’t Matter?” Indiviglio noted that while Mark Hurd’s missteps at H-P may have been “incredibly dumb”; the decisions he made which led to his ouster did not relate to his business acumen. Indiviglio quoted Bloomberg to explain the value that Oracle must have seen in hiring Hurd:

At H-P, Hurd more than tripled profit by cutting costs and expanding beyond the company’s core business of computers and printers. He oversaw an acquisition spree of more than $20 billion, letting the company branch out into services, networking equipment and smart phones. Oracle, which also has bulked up through takeovers, would draw on Hurd’s background blending software and hardware as it expands into server sales.

Indiviglio noted that it would appear that Oracle “thinks Hurd’s talent for business-making trumps his poor [ethical] decision-making elsewhere.” While recognizing that in certain professional service businesses, such as auditing, integrity is everything; conversely in other types of businesses where profit motives may not be connected to good ethics, an emphasis on integrity may not jeopardize business as much and as “long as poor decisions don’t compromise profit, they [business ethics] will eventually be forgotten.”

We have previously discussed the importance of “Tone at the Top” and our colleague Lindsay Walker has guest blogged on the subject in “Integrating Ethics and Compliance into the Entire Organization”. We both believe that a Company’s ethics and compliance culture are set by the very top levels of management. The reason is that this is the very ‘tone’ which company employees pick up on and use as the basis of their de facto guidance about what one can and cannot do; instead of following a written Code of Ethics. In most industries there is [almost] always an apocryphal ethics story along the lines of ‘In some unknown country an un-named Regional Manager is alleged to have said the following: “If I violate the Code of Ethics, I may or may not get caught. If I violate the Code of Ethics and get caught, I may or may not be disciplined. But if I miss my numbers for two consecutive quarters I will be terminated.” ‘

In the Foreign Corrupt Practices Act (FCPA) compliance world, we wonder what the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) would think about a company which had such an attitude regarding compliance. Both the DOJ and SEC also appear to believe that a Company’s ethics and compliance culture are set by the very top levels of management as the US Sentencing Guidelines read, in part, “High-level personnel and substantial authority personnel of the organization shall … promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” The DOJ has also cited to the Organization for Economic Co-operation and Development (OECD) Good Practice Guidance on Internal Controls, Ethics, and Compliance as a guide to best practices in the compliance arena. The OECD lists 12 specific guidelines for companies to utilize as a basis to construct an effective compliance program. The list includes at least two points that seem to bear weight on this issue. They are:

1. A culture of compliance with the appropriate “tone at the top”.

* * *

3. It must be the duty of every employee to observe a company’s compliance program.

So take some time to think about the message you believe Oracle is sending to its employees by hiring Mark Hurd?

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

Is Your Compliance Department Real and Alive?

Speaking at the IQPC 2010 Internal and Regulatory Investigations in Oil and Gas Conference, Nick Lumley, General Counsel of Centrica Storage, discussed how Centrica is using compliance policies and procedures as a business enabler. As a relatively new corporate entity, Centrica was able to create its own Code of Conduct and compliance culture within the past decade. Lumley emphasized that neither he nor the Company wanted a checklist culture of compliance but one that was vibrant within the Company. 

One of the key items stressed by Lumley to make compliance vibrant was not only that a culture of compliance had to be real and alive within a company, but that the Compliance Department itself must also be real and alive. By this he meant that the Compliance Department had to be not only flesh and blood people that the rest of the company could relate to but the department had to be an active part of the company’s business. 

Lumley used several examples of techniques used by Centrica to drive home the former point. At Centrica compliance begins when a new employee comes on board; the employee is given a Compliance orientation from a Compliance Department representative just as they would a HR orientation and this is the practice for a couple of reasons. Initially, it prevents an employee from simply ticking a box that “yes, I reviewed the Code of Conduct”; it allows a new employee to receive real in-person training on the Code, learn what is expected of them as a Centrica employee and to allow for interaction on this aspect of Centrica’s philosophy of compliance. Equally important is that it puts a human face on Centrica’s Compliance Department from the beginning. As a result of this orientation the new employee knows both the Company’s commitment to compliance and a Compliance Professional that he or she may contact if the need arises. 

The last point leads into what Lumley termed a key component of the overall compliance strategy; that the Compliance department must be ‘real and alive’. The Compliance department must be available to assist all employees on compliance related matters; each employee must know that they can go to the Compliance Department and that their concerns will be addressed and responded to in a reasonable time. While Lumley did not list any metrics on response times, he believed that the Compliance Department was able to timely address the vast majority of questions and issues quickly and efficiently for the Company’s workforce. 

In a recent article published in the Society of Corporate Compliance and Ethics Magazine (SCCE) (Vol. 7 / No. 3), Russ Berland discussed the Organization for Economic Co-operation and Development OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance. One of the factors listed speaks directly to this real and alive component of a compliance program, which states the following: 

Companies should consider, inter alia, the following good practices for ensuring effective internal controls, ethics, and compliance programmes or measures for the purpose of preventing and detecting foreign bribery: 

                                                *          *          *

11. effective measures for: 

i) providing guidance and advice to directors, officers, employees, and, where appropriate, business partners, on complying with the company’s ethics and compliance programme or measures, including when they need urgent advice on difficult situations in foreign jurisdictions;

ii) internal and where possible confidential reporting by, and protection of, directors, officers, employees, and, where appropriate, business partners, not willing to violate professional standards or ethics under instructions or pressure from hierarchical superiors, as well as for directors, officers, employees, and, where appropriate, business partners, willing to report breaches of the law or professional standards or ethics occurring within the company, in good faith and on reasonable grounds; and

iii) undertaking appropriate action in response to such reports. 

Centrica has taken a forward step to make its Compliance Department an integral part of the company’s overall business strategy. Therefore enabling its business units to better assess their compliance risks and thereby move forward conducting business in a compliant manner. The emphasis on real and alive helps make it accessible to all employees and this accessibility will hopefully lead to, not only, doing more and better business for the Company but may also help to prevent any compliance questions or issues from becoming compliance violations. 

So ask yourself is your Compliance Department real and alive to the employees? 

To see a video of Mr. Lumley’s presentation, click here.

 This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

 

© Thomas R. Fox, 2010

What Steps Can Lead to a Reduction in a FCPA Fine?

Earlier this month, in the FCPA Blog, Bruce Hinchey discussed his upcoming publication, “Punishing the Penitent: Disproportionate Fines in Recent FCPA Enforcements and Suggested Improvements ” which analyzes differences between bribes paid and penalties levied against companies that do and do not self-disclose under the Foreign Corrupt Practices Act (FCPA). Using a regression analysis, Hinchey concluded that those companies which did voluntarily self-disclose paid higher fines than companies which did not self disclosure their FCPA violations to the DOJ. He concluded his post by noting that this evidence was contrary to the conventional wisdom that a company receives a benefit from self-disclosure and such evidence would ”raise questions about whether current FCPA enforcement is fundamentally fair”.

We were intrigued by this paper, as were many other commentators. However, as Hinchey’s analysis was limited to reviewing the issue of self-disclosure or not and the fine-to-bribe ratio companies pay for FCPA violations, we wondered if there were other factors which the Department of Justice (DOJ) might take into account when assessing a fine and if so, what some of these factors might be?

On Wednesday of this week, the FCPA Professor answered this question, in part, in his post on the FCPA enforcement actions against two US companies – Alliance One International, Inc. and Universal Corporation, discussing the factors the DOJ took into account when calculating the fines and penalties for both companies. We are thankful to the FCPA Professor for not only reading the near 300 pages released by the DOJ and Securities and Exchange Commission (SEC) but synthesizing them down to a manageable and coherent length for his post. As reported by the FCPA Professor, within the documents, were the specific steps taken by both companies during the pendency of their respective investigation. The steps listed helped to yield significant reductions of the fines for the FCPA violations. We will review the steps taken by these two companies and hope to further condense some key lessons learned from these enforcement actions.
I. THE COMPANIES AND THEIR FCPA VIOLATIONS
The companies involved in the investigations were the US companies, Alliance One and Universal Corporation. They are both in the tobacco merchant business. Alliance One’s liability was predicated on successor liability for the FCPA transgressions of an entity it purchased. Both companies made improper cash payments, gifts and bribes in Central Asia and the Far East. The companies signed Non Prosecution Agreements and there were criminal pleas by individuals involved in the criminal activity. It is significant to note that both companies self-reported to the DOJ.
II. CREDIT RECEIVED FOR COOPERATION
Both companies received substantial reductions in fines assessed for their conduct. The penalty box score is as follows:

Company	Range Fine Suggested Per US Sentencing Guidelines	Final Agreed Fine
Alliance One	$4.2 to $8.4MM	$5.25MM
Universal Corp	$6.3 to $12.6MM	$4.4MM

III. WHAT STEPS DID THE COMPANIES TAKE?

1. Alliance

A. With the DOJ
1. The Company’s cooperation was both timely and thorough.
2. During the course of the government’s investigation, Alliance and its outside counsel fully cooperated in good faith with the Department, and produced thousands of pages of documents and financial records.
3. Alliance terminated or sought resignations from all employees who were found to have knowledge of or participated in the improper payments.
4. Alliance voluntarily produced memoranda of employee interviews conducted by counsel. Alliance and their counsel have been available to meet with Department attorneys to brief them on the progress and findings of their internal investigation.

B. Remedial Steps Taken
1. Alliance took remedial actions including enhancement of its corporate compliance program.
2. Replacement of responsible management.
3. Discipline or termination of wrongdoers.

C. Audit Committee
1. Directed management to deliver a “clear and proactive message” that:
a. Illegal acts will not be tolerated.
b. Any potentially illegal act should be brought to the attention of the General Counsel prior to execution of the transaction.
c. Any individual that believes that an illegal act may have occurred should contact the General Counsel immediately.
d. Implemented a new policy requiring Chief Financial Officer or Controller pre-approval of any material payment in cash.

D. Management
1. Issued a directive to regional executives and all accounting personnel that any questionable expenses or payments and expenses without adequate explanation or documentation must be reported to the Corporate Compliance Officer.
2. Issued a direction to employees that no payments to public officials or political parties are to be made in any form without the express advance approval of the Corporate Compliance Officer.
3. Responsible personnel, including senior management in Europe and Kyrgyzstan were terminated or left company voluntarily. Other employees were reprimanded.

E. Chief Compliance Officer
1. Required all personnel to re-take an online training course covering the FCPA provided by Integrity Interactive.

F. Corporate Accounting
1. Required supporting information for all payments made in cash from any entity where such payments exceed $2500 annually.
2. Issued a directive to minimize cash payments for anything other than incidental expenses.
3. Required that all cash accounts must be maintained in the company’s name.
4. Required that all cash transactions be documented by receipts and signed by the recipient and they established a periodic review and approval process for all.
5. Required that all non-incidental types of expenses paid in cash to ensure payments would comply with Company policy and the law.

2. Universal

A. With the DOJ
1. Universal’s cooperation was both timely and thorough.
2. Universal retained outside counsel to conduct an extensive internal investigation.
3. Universal and their counsel were consistently available to meet with Department attorneys to brief them on the progress and findings of their internal investigation.
4. Universal and its outside counsel fully cooperated in good faith with the Department and produced thousands of pages of documents and financial records and made employees available for interviews.
5. The Company terminated or reprimanded employees who were determined to have authorized and facilitated the improper payments.

B. Remedial Steps Taken
1. Universal took remedial actions including enhancement of its corporate compliance program.
2. It strengthened internal controls.
3. It implemented a rigorous compliance program.
4. The Company engaged an independent corporate monitor to conduct a comprehensive review of the Company’s compliance standards and procedures and its internal controls.
5. Independent corporate monitor to prepare an initial report and two follow-up reports of the findings and make recommendations for improvements in the company’s compliance programs over the three-year term.
6. The Company replaced the responsible management.

C. Management
1. Management established a Compliance Committee comprised of the Chief Financial Officer; General Counsel; Head of Internal Audit; Treasurer; Controller and the Principle Sales Director, which meets on a monthly basis to review and evaluate Universal’s compliance programs and training.
2. Management established a Chief Compliance Officer who is responsible for the day-to-day operations of Universal’s compliance program and Chairs the Compliance Committee.
3. Management issued a revised and updated Code of Conduct and translated the Code into fourteen (14) languages.
4. Management required sales, finance, and executive-level personnel to attend a day long in-person training session devoted to FCPA and local anti-bribery laws.
5. Management revised and enhanced its payment approval policy which now requires an ‘approving officer’ to review all supporting documentation for a payment and to understand the purpose of the payment prior to approval. The ‘approving officer’ must certify that he or she has reviewed the existing documentation and obtained an understanding of the legitimate business purpose of the payment. The policy also requires that employees investigate any questionable payments and determine that they are legal, legitimate, and appropriate prior to approving the payment.
6. Management revised and enhanced its due diligence process for agents. Initially, the Company suspended all commission payments to agents worldwide subject to legal department confirmation that each requested payment was adequately supported. Thereafter, it instituted a formal and standardized process for the assessment and approval of existing and proposed sales agents, which is coordinated by the Legal Department. As part of this policy, an officer, known as a ‘Relationship Officer,’ is required to complete a ‘Sales Agent Due Diligence Checklist’ for each prospective sales agent. This detailed checklist includes disclosure of relationships with foreign governments by owners, officers, directors and employees of the third-party agent or their family members, reference checks, and a list of potential red flags.
7. Management conducted, and has pledged to continue to conduct, compliance and/or FCPA training at every global conference held for Company employees.
8. Management terminated and reprimanded certain employees involved in the improper conduct.

D. Pre-Existing Compliance
One additional factor noted by the DOJ was that FCPA violations came to the attention of the Company pursuant to its internal compliance program, The Company was given some unspecified credit for this portion of the Company’s pre-existing compliance program.

IV. KEY TAKE-AWAYS
These two matters provide to companies in the midst of FCPA enforcement actions specific steps that should be implemented during the pendency of an investigation to present to the DOJ. Initially it should be noted that full cooperation with the DOJ at all times during the investigation is absolutely mandatory. Thereafter from the Alliance One matter, the focus was on accounting procedures and control of cash payments. From the Universal case, a key driver appears to be the due diligence on each pending international transaction, and subsequent full due diligence on each international business partner. Next is the management of any international business partner after due diligence is completed and a contract executed. Lastly is the focus on the Chief Compliance Officer position, emphasizing this new position throughout the organization and training, training and more training on FCPA compliance.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

Promotional Expenses Defense under the FCPA

I.       The Problem

So what is the problem with a US company paying for travel, room and board for foreign governmental officials to travel to the United States? The problem is that payment for such travel, lodging and expenses may run afoul of the prohibition against corrupt payments (or promises of them) made to obtain or retain business. The Foreign Corrupt Practices Act (FCPA) allows payments to foreign officials for expenses related directly to “the promotion, demonstration, or explanation of products or services” that are “reasonable and bona fide” 15 U.S.C. §§ 78dd-1(c)(2)(A) and 78dd-2(c)(2)(A). This affirmative defense, however, is notoriously hard to use (and easy to abuse), mainly because no one is quite sure what reasonable and bona fide really mean.

In his recent post on the FCPA Blog, UCLA student Kyle Sheahen, explored this issue in his discussion of his upcoming publication, entitled “I’m Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act”. In his paper, he sets forth his proposition that FCPA enforcement actions provide “uneven indicators or what conduct the government considers covered by the defense. Consequently, in the absence of authoritative judicial interpretation or clear regulatory guidance, corporate managers are required to make educated guesses as to whether contemplated payments will qualify as “bona fide” promotional expenses.”;   he cites the following cases:

PROMOTIONAL EXPENSE ENFORCEMENT BOX SCORE

Company	Trip Locations	Trip Costs & Perks	Company Facilities Present
Lucent Technologies	Disneyworld, Hawaii, Las Vegas, Grand Canyon, Niagara Falls, Universal Studios, NYC	-$10 million in trips for 1000 Chinese governmental officials, including $34,000 for five days of sightseeing	None of the travel destinations
Ingersoll-Rand	Trip to Florence after trip to company facility in Vignate, Italy	$1000 ‘pocket  money’ per attendee	Facilities in Vignate but not in Florence
Metcaf & Eddy	First trip-Boston, Washington, D.C., Chicago and Orlando. Second trip-travel to Paris, Boston and San Diego.	First Class Travel and trip expenses for Egyptian governmental official and his family. Cash payments prior to trips of 150% of estimated daily expenses.	Wakefield Mass not in Washington DC, Chicago, Paris or Disney World (Orlando)
Titan Corporation		Reference in company books and records of $20,000 for promotional travel expenses. Not clear if ever funded (Remember a promise to pay=making a payment under the FCPA)
Not cited in Sheahen Paper
UTStarcom	Hawaii, Las Vegas and New York City	Up to $7 million on gifts and all expense paid trips to US	None of the travel destinations

 While the Department of Justice (DOJ) and/or the Securities and Exchange Commission (SEC) brought enforcement actions against the above companies, this author believes that the facts of each enforcement action demonstrate that the expenses incurred by the companies were neither reasonable nor bona fide as required under the FCPA. These cases do not require a FCPA compliance professional to guess, educated or otherwise, as to whether the travel, lodging and expense payments listed above violated the FCPA. The payment amounts noted above in the Box Score are so beyond the pale of reasonableness to be prima facie evidence of corrupt intent. Of course, it really does not help your case with the DOJ if you do not have company facilities in Disney World.

1. II.    Opinion Releases  

In addition to detailing the above enforcement actions, Mr. Sheahen also discusses guidance that may be gleaned from DOJ Opinion Releases on the Promotional Expenses defense. Here he points to substantive guidance for the FCPA practitioner. In 2007, the DOJ issued two FCPA Opinion Releases which offered guidance to companies considering whether to and, if so how to, incur travel, lodging and expenses for government officials. In Opinion Release 07-01, the Requestor Company desired to cover the domestic expenses for a trip to the United States by a six-person delegation of the government of an Asian country for an educational and promotional tour of one of the requestor’s US operations sites.

Opinion Release 07-01 laid out the specific representations made to the DOJ which led to the DOJ approving the travel to the US by the foreign governmental officials. These facts can provide good guidance to any company which seeks to bring such officials to the US for a legitimate business purpose. In Opinion Release 07-01, the representations made to the DOJ were as follows:

• A legal opinion from an established US law firm, with offices in the foreign country, stating that the payment of expenses by the US Company for the travel of the foreign governmental representatives did not violate the laws of the country involved;
• The US Company did not select the foreign governmental officials who would come to the US for the training program.
• The delegates who came to the US did not have direct authority over the decisions relating to the US Company’s products or services.
• The US Company would not pay the expenses of anyone other than the selected official.
• The officials would not receive any entertainment, other than room and board from the US Company.
• All expenses incurred by the US Company would be accurately reflected in this Company’s books and records.  

For  these representations, the DOJ noted, “Based upon all of the facts and circumstances, as represented by the requestor, the Department does not presently intend to take any enforcement action with respect to the proposal described in this request. This is because, based on the requestor’s representations, consistent with the FCPA’s promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the requestor's] products or services.”

In Opinion Release 07-02 the Requestor Company desired to pay certain domestic expenses for a trip within the United States by approximately six junior to mid-level officials of a foreign government for an educational program at the Requestor’s US headquarters prior to the delegates attendance at an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners (“NAIC”).

In Opinion Release 07-02 the representations made to the DOJ were as follows:

• The US Company would not pay the travel expenses or fees for participation in the NAIC program.
• The US Company had no “non-routine” business in front of the foreign governmental agency.
• The routine business it did have before the foreign governmental agency was guided by administrative rules with identified standards.
• The US Company would not select the delegates for the training program.
• The US Company would only host the delegates and not their families.
• The US Company would pay all costs incurred directly to the US service providers and only a modest daily minimum to the foreign governmental officials based upon a properly presented receipt.
• Any souvenirs presented would be of modest value, with the US Company’s logo.
• There would be one four-hour sightseeing trip in the city where the US Company is located.
• The total expenses of the trip are reasonable for such a trip and the training which would be provided at the home offices of the US Company.  

As with Opinion Release 07-01, the DOJ ended this Opinion Release by stating, “Based upon all of the facts and circumstances, as represented by the Requestor, the Department does not presently intend to take any enforcement action with respect to the planned educational program and proposed payments described in this request. This is because, based on the Requestor’s representations, consistent with the FCPA’s  promotional expenses affirmative defense, the expenses contemplated are reasonable under the circumstances and directly relate to “the promotion, demonstration, or explanation of [the Requestor's] products or services.” 15 U.S.C. § 78dd-2(c)(2)(A). 

III. Travel, Lodging and Expenses for Governmental Officials 

What can one glean from these two Opinion Releases? In light of the facts it  would seem that a US Company should be able to bring foreign officials into the United States for legitimate business purposes. A key component is that the guidelines are clearly articulated in a Compliance Policy. Based upon Releases Opinions 07-01 and 07-02, the following should be incorporated into a Compliance Policy regarding travel and lodging:

• Any reimbursement for air fare will be for economy class.
• Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
• Only host the designated officials and not their spouses or family members.
• Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
• Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
• Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
• The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company. 

Incorporation of these concepts into a Compliance Policy is a good first step towards preventing any FCPA violations from arising, but it must be emphasized that they are only a first step. These guidelines must be coupled with active training of all personnel, not only on the Compliance Policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and entertainment. Lastly, it is imperative that all such gifts and entertainment are properly recorded, as required by the books and records component of the FCPA. One of the FCPA violations alleged against UTStarcom was that it falsely recorded these trips as ‘training’ expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts. All business gifts, entertainment and expenses must be properly recorded.

We commend Mr. Sheahen for his upcoming publication, in which he thoroughly discusses the “Local Law” defense under the FCPA in addition to the “Promotional Expenses” defense. His work will add to the discussion of these two affirmative defenses and assist companies in crafting their FCPA compliance program.

This article originally appeared in American Conference Institute Blog Site.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

Board Members and Prudent Discharge of Duties under the FCPA

Monday’s FCPA Blog post wrote about what it called a “compliance donnybrook” inside the company China Northeast Petroleum. The facts of this melee are straight-forward, in July, the head of the Board of Director’s Audit Committee Robert Bruce, communicated to his fellow directors that he believed the company needed an investigation to make sure it had not violated the Foreign Corrupt Practices Act’s (FCPA) anti-bribery provisions and did so in a letter detailing his reasons for making this request. As reported by the FCPA Blog, Mr. Bruce stated, in part “I strongly believe that substantial additional investigation is required in order for the Company and/or the members of the board to be confident that . . . the Company has not made payments to government officials as proscribed by the U.S. Foreign Corrupt Practices Act.”

The Chairman of the Board of Directors of China Northeast Petroleum, Mr. Edward Rule, responded declining this request for a FCPA investigation, which Mr. Bruce had suggested be led by an outside law firm with a strong FCPA background. Mr. Rule noted that such an investigation “could last as long as a full year and cost the Company as much as several millions of dollars“ and could even lead to the delisting the company from the NYSE AMEX. Mr. Rule ended his letter by noting “the course of action you recommend that the Board pursue seems at odds with the prudent discharge of duties to the shareholders”.

This final sentence caught the attention of the FCPA Compliance and Ethics Blog. What are the obligations of a Board member regarding the FCPA? Are the obligations of the Audit Committee under the FCPA at odds with a director’s “prudent discharge of duties to shareholders”? Do the words prudent discharge even appear anywhere in the FCPA? My search into answers for the first two questions began with a recent ethics•point webinar, entitled “Reporting to the Board on Your Compliance Program: New Guidance and Good Practices”, where attorneys Rebecca Walker and Jeffery Kaplan, of the law firm of Kaplan and Walker, explored these and other issues.

Ms. Walker pointed to the US Sentencing Guidelines and Department of Justice (DOJ) Prosecution Standards for guidance as to the obligations of a company’s Board regarding FCPA compliance. Under the US Sentencing Guidelines, Ms. Walker said that the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. Ms. Walker said that the DOJ Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment?

As to the specific role of ‘Best Practices’ in the area of general compliance and ethics, Ms. Walker looked to Delaware corporate law for guidance. She cited to the case of Stone v. Ritter for the proposition that “a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate exists.” From the case of In re Walt Disney Company Derivative Litigation, she drew the principle that directors should follow the best practices in the area of ethics and compliance.

In a recent Compliance Week article, Melissa Aguilar examined the duties of Board members regarding FCPA compliance. The conclusions of several of the FCPA experts that Ms. Aguilar interviewed for the article were that companies which have not yet had any FCPA issues rise up to the Board level are usually the ones which are the most at risk. Albert Vondra, a partner with PricewaterhouseCoopers stated that such companies “don’t have the incentive to spend the resources or take the rigorous approach to their anti-compliance programs. Their attitude is, ‘We’ve got it covered,’ but they don’t”. Richard Cassin, managing partner of Cassin Law, stated that there must be written records demonstrating that the audit committee and that the board members asked questions and received answers regarding FCPA compliance issues. Such documentation demonstrates the Board members have “fulfilled their fiduciary obligations,” Cassin says.

Board failure to head this warning can lead to serious consequences. David Stuart, a senior attorney with Cravath Swaine & Moore, noted that FCPA compliance issues can lead to personal liability for directors, as both the Securities and Exchange Commission (SEC) and DOJ have been “very vocal about their interest in identifying the highest-level individuals within the organization who are responsible for the tone, culture, or weak internal controls that may contribute to, or at least fail to prevent, bribery and corruption”. He added that based upon the SEC’s enforcement action against two senior executives at Nature’s Sunshine, “Under certain circumstances, I could see the SEC invoking the same provisions against audit committee members—for instance, for failing to oversee implementation of a compliance program to mitigate risk of bribery”.

What does all of this mean for Messers Bruce, Rule and the rest of the Board members of China Northeast Petroleum? It should mean quite a bit. The DOJ has made it clear that it expects ‘best practices’ when it comes to FCPA compliance. In the case of China Northeast Petroleum, the head of the Board’s Audit Committee has requested an independent FCPA compliance investigation, to be effected by an outside firm. The Chairman of the Board of Directors has rejected this request because (1) it might take up to a year and (2) it might cost too much money AND fulfilling its FCPA obligation “seems at odds with the prudent discharge of duties to the shareholders”. The head of the Audit Committee resigned over this rejection.

Alas, there is no reference to prudent discharge in the FCPA itself. However, if I were a remaining member of the Board of China Northeast Petroleum, I might well think more than twice about my prudent discharge of duties to the shareholders as both the DOJ and SEC now might well wish to look into this matter under a Board’s prudent discharge of duties under the FCPA.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

FCPA TRAINING: HOW TO “RESIST” A SOLICIATION FOR A BRIBE

At most Foreign Corrupt Practices Act (FCPA) compliance and ethics training sessions there is usually one or more archetypal story about “someone I know” who was solicited to pay a bribe or “I heard about someone” from whom a bribe was solicited. Sometimes this solicitation story can be better described as extortion. One question for the FCPA compliance trainer is how to handle such questions and is there an authoritative source to fall back upon for answering such questions?

The answer to the both questions is that there is now a readily accessible tool to use as an authoritative source in responding to such hypothetical questions.  In June, during a meeting of the United Nations 10th Principle Working Group in New York, the expanded edition of Resisting Extortion and Solicitation in International Transactions (RESIST) was released. It is a practical tool to help companies train employees to respond appropriately to a variety of solicitations. This training tool was jointly developed and released by the International Chamber of Commerce, Transparency International, the United Nations and the World Economic Forum. It was developed with the assistance of international companies which participated in the project.

Iohann Le Frapper, who chaired phase two of the RESIST initiative, stated that “RESIST is the only anti-bribery training toolkit developed by companies for companies and sponsored by the four global anti-corruption initiatives working on the supply side of the issue of fighting corruption,” and it “helps businesses avoid solicitation from the onset” and also provides practical advice on how best to confront demands for bribes when they do arise.

RESIST presents 22 scenarios, the initial seven examples deal with solicitation in the procurement process and were first published in 2009. The 2010 RESIST edition adds another 15 scenarios which discuss solicitation of bribes in the context of project implementation and in day-to-day project operations.

Each scenario presented is designed to respond to two basic questions with real world facts and responses:

• Demand Prevention – How can the company prevent the demand from being made in the first place?
• Demand Response – How should the company react if such a demand is made?

The paper also presents a general list of suggestions which companies can implement to assist in their overall FCPA compliance effort. Embedded within are specific procedures to put these general suggestions into practice, for example the suggestions on Demand Prevention  include (1) general company anti-corruption polices; (2) policies on facilitation payments; (3) policies for company representatives who may be exposed to solicitation of bribes; (4) techniques for dealing with specific risks; (5) due diligence of agents and intermediaries; (6) management of agents and intermediaries; (7) implementation of additional control procedures; (8) transparency in the procurement process; (9) initiation of collective action to improve overall business integrity; and (10) implementation of legal and financial precautions. The suggestions on Demand Response include: (1) the immediate response; (2) internal company reporting; (3) company investigation, including discussion with the relevant persons; (4) disclose to the appropriate external source, if appropriate and ultimately (5) withdrawal from the situation, whether it is the project or the entire country.

The RESIST paper is a very useful tool and one that we recommend for the FCPA compliance specialist. It provides a list of common scenarios, which companies have faced in the past, how to handle them and proposes controls to implement to try and ameliorate the solicitation of bribes and outright extortion.

The full document may be downloaded here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com. 

  

© Thomas R. Fox, 2010

The FCPA – Tone at the Top and in the Middle

Just how important is “Tone at the Top”? Conversely, what does it say to middle management when upper management practices the age old parental line of “Don’t do as I act; Do as I say”?  We wondered about this age old question as we read the Saturday’s edition of the New York Times and its piece entitled “H.P. Ousts Chief for Hiding Payments to Friend” It the story, the Times reported that (now former) Hewlett-Packard Chairman and Chief Executive Mark Hurd was “ousted by the Company’s Board of Directors for the lowliest of corporate offenses — fudging his expenses.”

The saga apparently began when a contractor who was assisting with Hewlett-Packard’s marketing contacted the Company in June and through her lawyer charged sexual harassment against Hurd. The Times reported that while the Board was investigating the sexual harassement charge, they found inaccurate expense reports that covered payments made to the woman. These payments were “said to range from $1,000 to $20,000.” After being confronted with the information, Hurd offered to pay back these monies but the Board refused and demanded his resignation, which he tendered. Hurd received $12,224,693 in severance, according to a Hewlett-Packard filing with the Securities and Exchange Commission (SEC) on Friday. The Company also “extended the deadline for Hurd to purchase up to 775,000 shares of H.P. common stock, which were vested as of Friday, and 330,117 performance-based stock units that will also vest.”

We have previously discussed the importance of “Tone at the Top” and our colleague Lindsay Walker has guest blogged on the subject of “Integrating Ethics and Compliance into the Entire Organization”. We both believe that a Company’s ethics and compliance culture are set by the very top levels of management. The US government would also appear to believe that a Company’s ethics and compliance culture are set by the very top levels of management because the US Sentencing Guidelines read, in part, “High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program … and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”

However if top management is not fully committed to such an ethical and compliance culture, such lack of commitment will be clearly understood by middle managers of a company. This is particularly true of the Foreign Corrupt Practices Act (FCPA). As noted above, the US Sentencing Guidelines mandate that the highest levels of management promote and encourage not only ethical conduct but a commitment to comply with the FCPA itself. In his article entitled, Ethics and the Middle Manager: Creating “Tone in The Middle” Kirk Hanson, listed eight specific actions that top executives could engage in which demonstrate a company’s and their personal commitment to ethics and compliance. The actions he listed were:

1. Top executives must themselves exhibit all the “tone at the top” behaviors, including acting ethically, talking frequently about the organization’s values and ethics, and supporting the organization’s and individual employee’s adherence to the values.
2. Top executives must explicitly ask middle managers what dilemmas arise in implementing the ethical commitments of the organization in the work of that group.
3. Top executives must give general guidance about how values apply to those specific dilemmas.
4. Top executives must explicitly delegate resolution of those dilemmas to the middle managers.
5. Top executives must make it clear to middle managers that their ethical performance is being watched as closely as their financial performance.
6. Top executives must make ethical competence and commitment of middle managers a part of their performance evaluation.
7. The organization must provide opportunities for middle managers to work with peers on resolving the hard cases.
8. Top executives must be available to the middle managers to discuss/coach/resolve the hardest cases.

We have previously noted that Hewlett-Packard is under investigation for allegations of paying bribes to obtain commercial sales contracts in Russia. (See here and here) Given the current situation with the former Chairman and Chief Executive and the ongoing bribery investigation by not only German and Russian governmental authorities but also the SEC and Department of Justice for possible FCPA violations, it might be a propitious time for Hewlett-Packard’s top management to implement some or all of Hanson suggestions regarding the communication of Hewlett-Packard’s commitment to FCPA compliance and ethics to its middle management and indeed throughout its organization.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

HOTLINES AS A FCPA COMPLIANCE TOOL

Employees are a company’s best source of information about what is going on in the company. It is certainly a best practice for a company to listen to its own employees, particularly to help improve its processes and procedures. But more than listening to its employees, a company should provide a safe and secure route for employees to escalate their concerns. This is the underlying rationale behind an anonymous reporting system within any organization. This concept is one key components of a Foreign Corrupt Practices Act (FCPA) compliance and ethics ‘best practices’ program. Both the Principles of Federal Prosecution of Business Organization (US Sentencing Guidelines) and the OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance (“OCED Good Practices”) list, as one of their components, an anonymous reporting mechanism by which employees can report compliance and ethics violations. This concept, in the FCPA world, is usually referred to as a “Hotline”. This article will discuss how the use of a Hotline can assist a company with its overall FCPA compliance and ethics efforts.

The US Sentencing Guidelines state:

(C) to have and publicize a system, which may include mechanisms that allow for anonymity or confidentiality, whereby the organization’s employees and agents may report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.

The OECD Good Practices states:

v) companies to provide channels for communication by, and protection of, persons not willing to violate professional standards or ethics under instructions or pressure from hierarchical superiors, as well as for persons willing to report breaches of the law or professional standards or ethics occurring within the company in good faith and on reasonable grounds, and should encourage companies to take appropriate action based on such reporting;

Confidential reporting is critical to any organization, not only from the legal requirements which specify that such a mechanism be available for employees, but also to allow escalation of compliance and ethics issues in a manner which is safe for employees and can lead the discovery of significant FCPA compliance issues. Two recent examples of employees reporting issues include the Daimler and, the ongoing, Avon matters. A company’s commitment to a hotline provides a means by which employees can elevate compliance and ethics concerns before they become full blown FCPA enforcements actions.

While there is no generally accepted industry standard regarding the implementation and employment of Hotline, Ethicspoint, in a White Paper, entitled “It’s Not Your Father’s Hotline”, suggested the following as the ‘best practices’ for internal Hotlines:

1. Availability-a Hotline should be available 24 hours a day/7 days a week and toll-free. It should be available in the native tongue of the person utilizing it so if your work force uses more than one language for inter-company communications, your Hotline should reflect this as well.
2. Escalation-after a report is received through the Hotline it should be distributed to the appropriate person or department for action and oversight. This would also include resolution of the information presented, if warranted and consistent application of the investigation process throughout the pendency of the matter.
3. Follow-Up-there should be a mechanism for follow-up with the Hotline reporter, even if the report is made anonymously. This allows the appropriate person within your organization to substantiate the report or obtain additional information at an early stage, if appropriate.
4. Oversight-the information communicated through the Hotline should be available to the appropriate Board Committee or Management Committee in the form of statistical summaries and that an audit trail be available to the appropriate oversight group of actions taken and resolution of any information reported through the Hotline.

The Hotline can be a key company tool in an effective FCPA compliance program. Properly advertised and then utilized, it can assist a company to learn about issues and take appropriate actions before these issues erupt into more serious problems. Lastly the proper maintenance of a Hotline can not only allow a company to track compliance issues as they come into the system and document its response but also use this information as an ongoing audit of its FCPA compliance system.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

Compelled Giving and the FCPA

The recent post on charitable donations under the Foreign Corrupt Practices Act (FCPA) and Opinion Release 10-02 brought an interesting dialogue with fellow blogger, the FCPA Professor. The FCPA Professor raised the issue of “compelled giving” disguised as a requirement that a US company doing business overseas makes a charitable donation with the implicit understanding that such a requirement is mandated to obtain or retain business by a foreign governmental official and how such payments would be viewed under the FCPA. We believe that the underlying facts of the Opinion Release referenced demonstrate that the Department of Justice (DOJ) has recognized that compelled giving is a situation that is faced by US companies doing business overseas, if not on a regular basis, but certainly one that is not unknown.

In Venezuela energy service contracts with the national oil company, PDVSA requires that the foreign company must agree to invest an established percentage of the profits from each contract into the community in which it operates. This is negotiated with the Venezuelan government and can include cash or in-kind contributions of computers, equipment or appliances to schools, communities or organizations. This requirement may also be present in contracts for infrastructure opportunities including communications and transportation.

Although it is legal and a practice required by law in Venezuela, these payments have generated some questions with regards to compliance with the FCPA and similar laws of other countries. While not a payment to a governmental official, it is still a payment to a governmental entity for the purpose of securing a contract. It may also be that a governmental official sits on the Board of the local charity in question. Such issues require careful consideration.

There appears to be only one FCPA enforcement action based entirely upon charitable giving. It is the case of Schering-Plough Poland which paid a $500,000 civil penalty assessed by the Securities and Exchange Commission (SEC) in 2008. As reported in the FCPA Blog, the Company’s Polish subsidiary made improper payments to a charitable organization named the Chudow Castle Foundation, which was headed by an individual who was the Director of the Silesian Health Fund during the time period in question. Schering-Plough is a pharmaceutical company and the Director of the Health Fund provided money for the purchase of products manufactured by Schering-Plough as well as influencing medical institutions, such as hospitals, in their purchase of pharmaceutical products through the allocation of health fund resources. In addition to the above, the SEC found that Schering-Plough did not accurately record these charitable donations on the company’s books and records.

The FCPA Blog further reported that when asked about the guidelines regarding requests for charitable giving and the FCPA then Deputy Chief of the Criminal Division’s Fraud Section at the DOJ Mark Mendelsohn, said that any such request must be evaluated on its own merits. He advocated a “common sense” approach in identifying and clearing Red Flags. This would include determining if a governmental decision maker held a position of authority at the charity to which the donation would be made, whether the donation was consistent with a company’s overall pattern of charitable giving, who made the request for the donation and how was it made.

The series of Red Flags raised and cleared by the US company which was the subject of Opinion Release 10-02. After initially listing the 3 levels of due diligence in which the company had engaged prior to finalizing its choice of local entity to receive the donation in question; the DOJ noted that the donation ‘requested’ of the US company would be subject to the following controls:

1. Payments of the donations would be staggered over a period of eight quarters rather than in one lump sum.
2. Ongoing monitoring and auditing of the funds use for a period of five years.
3. The donations would be specifically utilized for the building of infrastructure.
4. The funds would not be paid to the parent of the organization receiving the grant and there was an absolute prohibition on compensating Board Members.
5. The proposed grant agreement under which the funds would be donated had significant anti-corruption provisions which included a requirement that the local organization receiving the funds adopt an anti-corruption policy and that US company making the donation receive full access to the local organization’s books and records.

Both the underlying due diligence and the controls noted above led the DOJ to state “The Department is satisfied, however, that the Requestor has done appropriate due diligence and that the controls that it plans to institute are sufficient to prevent FCPA violations.”

In addition to the specific factors presented by the requesting US company in Opinion Release 10-02, the DOJ also listed several of the due diligence and/or controls that it had previously set forth in prior Opinion Releases relating to charitable donations. These included:

• certifications by the recipient that it will comply with the requirements of the FCPA;

• due diligence to confirm that none of the recipient’s officers or directors are affiliated with the foreign government at issue;

• a requirement that the recipient provide audited financial statements;

• a written agreement with the recipient restricting the use of funds to humanitarian or charitable purposes only;

• steps to ensure that the funds were transferred to a valid bank account;

• confirmation that contemplated activities had occurred before funds were disbursed; and

• ongoing auditing and monitoring of the efficacy of the program.

We believe that Opinion Release 10-02 addresses some of the concerns of US companies in the area of compelled giving; particularly in view of the enforcement action involving Schering-Plough. The DOJ, once again, has indicated that extensive due diligence, coupled with the best practices in compliance management going forward after the contract is executed, appear to be critical in its analysis. We also wish to thank our blog colleague the FCPA Professor for his timely and pointed questions which raised further interest in this area.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

 

© Thomas R. Fox, 2010

Integrating Ethics and Compliance Into the Entire Organization

Ed. Note-today we are please to have our initial guest post for the blog. Our guest author-Lindsay Walker is Content Developer at Customer Expressions Corp. Thomas Fox

There’s no point investing in and implementing an ethics and compliance program unless the time is spent integrating the program into every aspect of an organization. The need for companies to develop effective ethics and compliance programs has been acknowledged by several government agencies- examples are the SEC in the US and the government in the United Kingdom. Both groups have recently passed legislation or made amendments to existing guidelines, focusing heavily on the importance of ethics and compliance at all levels of an organization- especially at the top. Employees at each level contribute to the success of a company’s ethics and compliance program. Integrating ethics and compliance at each level helps ensure the message from the top makes it all the way down to the lower levels of the organization. Training, messages and other ethics and compliance initiatives must be developed to evolve with employees as they move through the company. That being said, employees at various levels need to be prepared to address different ethical issues they may encounter based on the role they play in the organization.

Integrating Ethics at the Top

The tone of the organization is set at the top, therefore, a strong commitment and understanding of ethics and compliance must be instilled in top level executives and managers. Ethics and compliance must be built into a company’s corporate culture, as culture determines “the way things are done” within an organization. Top level executives serve as examples for fellow employees. Those at the top must frequently communicate and demonstrate to their staff the company’s commitment to ethics and compliance, as well as ensure ethics and compliance are built into all company projects. Top level managers must adopt and act on the values and messages they communicate to be considered credible in committing to ethics.

If your company hasn’t done so already, establish the role of a Chief Ethics/Compliance Officer (CECO). This person will be responsible for maintaining and executing ethics and compliance related activities (policy development, training, policy enforcement, program monitoring) to ensure company compliance with laws and regulations. One of the areas many companies must improve on is providing the CECO with appropriate resources and authority to effectively carry out their mission. In many organizations, the ethics and compliance department is relatively small in comparison to the total number of employees at a company. With the recent economic downturn, a number of companies were forced to reassess budgets, cutting ethics and compliance spending at a time when it was needed most. Don’t create positions or policy documents for the sake of looking good in the eyes of the public- the public can tell if a company is faking it.

Integrating Ethics in the Middle 
In many companies, employees report that the middle level is where ethics and compliance commitments break down. Since many of the lower level employees report directly to those in the middle, a commitment to ethics and compliance from middle managers is equally as important as it is at the top. Top level managers can use a number of techniques to assist mid-level managers in understanding the role they play in creating an ethical workplace. In the article “Ethics and the Middle Manager: Creating Tone in The Middle,” by Kirk O. Hanson, the author lists 8 ways top management can motivate middle level employees to reinforce an organization’s ethical culture:

1. “Top executives must themselves exhibit all the ‘tone at the top’ behaviors, including acting ethically, talking frequently about the organization’s values and ethics, and supporting the organization’s and individual employee’s adherence to the values.
2. Top executives must explicitly ask middle managers what dilemmas arise in implementing the ethical commitments of the organization in the work of that group
3. Top executives must give general guidance about how values apply to those specific dilemmas.
4. Top executives must explicitly delegate resolution of those dilemmas to the middle managers.
5. Top executives must make it clear to middle managers that their ethical performance is being watched as closely as their financial performance.
6. Top executives must make ethical competence and commitment of middle managers a part of their performance evaluation.
7. The organization must provide opportunities for middle managers to work with peers on resolving the hard cases.
8. Top executives must be available to the middle managers to discuss/coach/resolve the hardest cases.”

Integrating Ethics at Lower Levels

Lower level employees are usually the ones on the frontlines acting as ambassadors for a company/brand. Ensuring the commitment to ethics and compliance is as strong at the bottom as it is at the top is critical to the success of a fully integrated ethics and compliance program. One of the easiest ways to begin implementing ethics and compliance within lower levels is to provide new hires with extensive training on company expectations and ethics and compliance. During the interview process, ask questions related to ethical situations and decision making. This can be used as a way to ensure new hires are a proper fit with the existing corporate culture. It’s important to remember that ethics training and implementation doesn’t stop here- this is just the beginning.

An Ethisphere article, “If Ethics Isn’t Everywhere, It’s Nowhere,” reviews some of the tactics deployed at Jones Lang LaSalle to ensure ethics is integrated into every level of their organization:

“We begin the process by mentioning ethics in our offer letters. We continue by having new hires read and agree to our Code of Business Ethics, which has been translated into 14 languages. And employees see ethics posters displayed in lunchrooms and receive wallet-sized reminders at meetings. To further entrench our ideals in the minds of employees, our Ethics Officers attend business meetings and lead discussions with employees about ethical dilemmas. These sessions require active participation because we don’t just want a ‘talking heads’ presentation with a forgettable PowerPoint. To receive a bonus, everyone, including me, is required to re-certify to his or her commitment to the Code of Ethics. The norm, as you can well imagine, is 100% compliance. When employees leave the firm, we send them a reminder about their on-going obligations regarding confidential client and employee information they received while employed by Jones Lang LaSalle.”

© Lindsay Walker

About the Author

Lindsay Walker is a writer for the i-Sight Investigation Software blog at Customer Expressions. The i-Sight blog focuses on ethics and compliance news, policy development and amendments, industry best practices and investigation tips and techniques. i-Sight provides customized case management solutions for HR, employee relations, corporate security, privacy and ethics and compliance investigations. She can be reached at LWalker@customerexpressions.com.

 This publication contains general information only and is based on the experiences and research of the author. Neither the author nor this blog site is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. Neither the author nor this blog site, its affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. Thomas R. Fox, 2010