Cymbeline – Doing Virtue and FCPA Compliance

Commentators still level the hue and cry that it is somehow the fault of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) that companies continue to violate the Foreign Corrupt Practices Act (FCPA). Things would improve if only the DOJ and SEC would (1) prosecute companies more aggressively; (2) prosecute companies less aggressively; (3) make an example of ‘rogue’ employees who violate their corporate overseers pronouncements not to violate the law; (4) prosecute more corporate executives to ‘send a message’; (5) amend and clarify the FCPA because the concept of do not pay bribes is somehow too complicated for mere mortals to understand; (6) implement a compliance defense because apparently the DOJ does not consider that enough in any decision to prosecute; and/or (7) as The Donald desires, simply do away with the FCPA to restore the ability to pay a fair price for fair corruption.

I thought about all of these varied and contradictory reasons when considering one of Shakespeare’s most enigmatic plays, Cymbeline. In an article in the Wall Street Journal (WSJ) entitled “The Long, Painful Drama of Self-Knowledge”, Stephen Smith considered the character Posthumus who was thought of as virtuous yet, through the crush of the plot, has his virtuous image shattered. Smith poses the question of “Why is Posthumus such a poor leader of himself, and a danger to others?” He answers his own question by saying, “The play suggests that his lack of self-knowledge, along with the flattery of his culture, make him overconfident.” In other words, he was human.

I thought about this analysis in the context of the recent accounting and financial scandal that engulfed the Toshiba Corporation in Japan. For those who did not follow the news, Toshiba announced last month that it had overstated its profits from 2008-2014 by over $1 billion dollars. This was in the face of the company having been publicly recognized for its good governance standards and practices. In an article in the Financial Times (FT), entitled “Japan Inc left shaken by Toshiba scandal”, Kana Inagaki reported, “On paper, it had a structure that gave its external directors the authority to many top executives and an auditing committee to monitor the behaviour of the company’s leaders. It was lauded for its efforts. In 2013, the group was ranked ninth out of 120 publicly traded Japanese companies with good governance practices in a list compiled by the “Japan Corporate Governance Network.””

But it was all a sham as it turned out that chairman of the audit committee was in on the fraud in addition to a plethora of top executives. Kota Ezawa, an analyst at Citigroup was quoted in the piece that “Toshiba was lauded as the frontrunner in governance efforts but that was a misunderstanding. Its governance structure looked good but the execution was not.” Ezawa further stated, “We need to make sure that companies understand that having structures is not enough.” So even a company with $52bn in annual sales must have more than a paper program.

For those who want to point to some defect in the Japanese corporate character, reminding us of the Olympus scandal from 2011, where successive corporate executives covered up long running accounting fraud, Andrew Hill, also writing for the FT in an article entitled “The universal dangers shown by Toshiba’s failings”, says not to point that self-righteous finger quite so quickly. He reminds readers of WorldCom from earlier this century. Being from Houston, I would remind readers of Enron and its accounting fraud as well. Hill cites to the work of Professor Michael Jones to identify four main types of accounting fraud, (1) increasing income, (2) decreasing expenses, (3) increasing assets, and (4) decreasing liabilities. Hill further notes that one common failing in all of these examples is the failure of internal controls. A second key failing is the “Unwillingness to challenge authority, a trait attributed to employees at Toshiba and Olympus — and often given an “only in Japan” spin — is a recurring problem everywhere, from Royal Bank of Scotland under Fred Goodwin to Fifa under Sepp Blatter.”

Hill’s explanation of the how and why of these accounting scandals is as age old as the time of Cymbaline. He wrote, “The most important lesson from Toshiba is about the malign impact of top-down pressure to meet unrealistic targets. Toshiba’s ex-chief executive denies having given direct instructions to staff to inflate profits. But the investigating panel said he told executives to “use every possible measure to achieve profitability” and added that Toshiba’s corporate culture did “not allow employees to go against the will of their superiors”.”

The lessons that Hill finds in the Toshiba accounting scandal are equally applicable to FCPA compliance and enforcement. It is not the DOJ or SEC’s “fault” when companies do not comply with the FCPA. It is up to the companies to which the law applies to comply with it. Make no mistake; it is quite simple not to pay bribes. One only has to wake up and say “I am not paying a bribe today, no matter what the economic benefit is to me”. Yet for a company, it is not easy because you have to not only put the appropriate controls in place, but you have to do compliance by ensuring these controls are executed upon. That was the failing of Toshiba, it had the controls in place but it did not execute on them.

I think this speaks directly as to why FCPA violations continue to occur and be prosecuted. Hill ended his piece by noting, “When aggressive targets, irresistible management pressure and weak controls coincide, misconduct can spread quickly. Rival companies see the inflated numbers and strain to match them. To suggest such weaknesses are confined to one corporate or national culture is a first step into dangerous complacency.” As long as humans are involved with corporations and there are incentives in place for more and greater sales, you will always have the motivation to cut corners and pay bribes. That impulse can be brought on by a bump in salary, a nice bonus, a promotion or sometimes simply keeping your job. That is why a compliance program must be put in place and those controls must be effective.

In Cymbeline the protagonist Posthumus learns that one key component of virtue is prudence. Near the end of his article on Shakespeare’s play Smith writes, “In his story, we glimpse one goal of Shakespearean drama: to help forge just such a character – an integrated human person capable of leading himself and others to peace, with the help of virtue.” For FCPA compliance, as long as there are incentives in place to make money, there will be people who cut corners by paying bribes. Yet companies can temper this by putting an effective compliance program in place and actually doing compliance. Much like Posthumus learns in Cymbeline it is one’s actions which lead to being virtuous; for a company, it is doing compliance that leads to it being called ethical.

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, 2015

Social Media Week Part VI – Social Media and CCO 3.0

I conclude this exploration of the uses of social media in doing compliance by exploring why the compliance function is uniquely suited to using social media tools. Long gone are the days when Chief Compliance Officers (CCO) or compliance practitioners were lawyers housed in the Legal Department or the General Counsel’s (GC’s) office writing policies and procedures and then putting on eight hour training programs on same. Donna Boehme has written passionately about CCO 2.0 and the structural change to separate the CCO role from that of the GC because of the differences in focus of a CCO and GC. Simply put, a GC and legal department is there to protect the company while the CCO and compliance function exists to solve problems before the company needs protections from them.

Freed of the constraints to write policies and procedures by lawyers for lawyers, the profession has moved to integrating compliance directly into the fabric of the company. I often say that a Foreign Corrupt Practices (FCPA) compliance program is a business solution to a legal problem. The problem is how to comply with the FCPA and other anti-corruption regimes. The solution is to burn compliance into the DNA of your company so that it is not only owned by the business unit but also acted on by the business unit in its day-to-day operations.

I think this means that we are now moving to CCO 3.0 where a CCO or compliance practitioner is putting compliance into the forefront of how a company does business. The example of safety comes to mind when every corporation I ever worked at made clear that safety was everyone’s responsibility, literally from the shop floor to top of the company. I once heard of a Executive Vice President (EVP) of a major oil and gas operating company, while touring a contractor’s facility, stop the tour to point out that a contractor carry two bags of trash down a set of stairs was an unsafe practice and required the employee to carry one bag at a time so she could hold the handrail while descending the stairs. That is the level of the awareness of safety now.

The evolution of compliance is just as dramatic. Moreover, the compliance function should be on the cutting edge of moving it forward within your company. The important thing to remember about social media tools is precisely that; they are tools that a CCO, compliance practitioner or any company can use to communicate with their employee base. Put another way, social media is but one part of the communication ecosystem which can be used to market the message of compliance.

Last week I wrote that there are still many companies who do not allow their employees access to the most popular and useful social media tools at work or even on company computers. While these companies always claim it is due to security issues, the reality is that they simply do not trust or even respect their employees. In such a company, management is much more concerned about what employees might say about an organization than trusting that they not only want to do the right thing but will execute such a strategy when provided the opportunity to do so, through the mechanism of social media. This means that companies which trust and respect their employees do not have to worry about employees releasing confidential data through social media channels because there are plenty of other ways that employees can release confidential information if they were so inclined. Indeed think of the Dodd-Frank Whistleblower provision and how many employees who report to the Securities and Exchange Commission (SEC) reported or tried to report internally before going to the SEC. Simply put if a company does not trust and respect its employee base, communicating the message of compliance throughout an organization will be more difficult but that is clearly not the signal senior management is sending to its employees.

The compliance function must engage with its customer base, AKA the employees in a company. Charlene Li, in her recent work “The Engaged Leader”, said in the introduction “In order to be truly effective today, leaders in business and society must change how they engage, and in particular how they establish and maintain relationships with their followers via digital channels.” The same is true for the compliance function. She believes that technology has changed the dynamic between leaders and their followers. In The Engaged Leader she explains:

• Why leaders need to master a new way of developing relationships, which begins by stepping out of traditional hierarchies
• How to listen at scale, share to shape, and engage to transform
• The art of making this transformative mind shift
• The science of applying the right tools to meet your strategic goals

Li believes that “This transformation is not optional. Those who choose not to make this change will be abandoned for those who inspire people to follow them.” In an interview for the podcast HBR Ideacast, entitled ““Social Media Savvy CEO” is no Oxymoron”, Li further expounded on these views. She asked why a leader would be afraid to engage with those in his or her corporation? But more than simply engagement, she asked why would a leader want to cut themself off from the best source of information for them and available to them; their employee base, through social media. After all, every company strives to have an active engagement with their customer base so why not have it with employees.

Now change out Li’s language from ‘leaders’ and insert ‘CCOs or compliance practitioners’. I think it is even more critical for the CCO or compliance practitioner because doing compliance is something that should occur in the business units. Yes a CCO can put those policies and procedures in place but it is the folks in the field who must implement them going forward. If social media can be a tool to help facilitate doing compliance why not embrace it for communications, training, input, problem identification or resolution?

Yet there is another reason for the compliance function to embrace social media going forward. One of my favorite thought leaders around innovation in the legal arena is Professor David Orozco. In a blog post, entitled “Innovation in the Legal Sector”, he said, “Innovation is a big deal. It’s been a big deal ever since customers rewarded differentiation and punished companies that failed to maintain their creative edge.” The same is equally, if not more so, applicable to the compliance arena. The Department of Justice (DOJ) has consistently made clear that FCPA compliance programs should be evolving and using the newest and best tools available. That sounds suspiciously like social media to me. So if these tools are available to you and at a very reasonable cost (i.e. free) why not consider using them. If you are afraid of information getting out of your company, why not consider using the social media concepts behind your firewall in your company intranet system?

Finally, even if you cannot use some of the publicly available tools discussed earlier, there is no reason that you cannot incorporate the concepts into your compliance program. By that I mean you can use the communication ideas inside of your company for your compliance program. You can create the equivalent of a Tweet-Up where the CCO or others answer questions that employees submit. Similarly, you can live stream a Q&A session using the concepts articulated by Meerkat and Periscope for social media live streaming. Pinning compliance reminders or other information in some type of internal company bulletin board is using the basic concept of Pinterest. I am sure that you can accomplish the same by using SharePoint. Why not create an internal compliance reminder video series using the same tools that a millennial would use to create a Facebook post?

Think all of this sounds far-fetched? Think again. In this month’s issue of the Compliance Week magazine, Guest Columnist Raphael Richmond, the CCO at Ford Motor Company, in an article entitled “Compliance? There Should Be an App for That!”, detailed how the company has created an app for iPhone and Android devices that “allows users to access compliance information quickly, including brief, easy-to-understand policy summaries and answers to frequently asked questions (FAQs). The app also has a “Can I … ?” tab that acts as a quick decision tree for finding specific answers to commonly asked questions. Topics in our app address a range of compliance issues, from anti-bribery guidance to Ford’s approach to gifts and favors, meals, travel, and social events. Individuals can also report a suspected violation directly from the app to the Corporate Compliance Office.” It will certainly be exciting to see how Ford develops this tool going forward.

I often say that as a CCO or compliance practitioner you are only limited by your imagination. The use of social media in your compliance function is one that is crying out for imaginative usages. As we move to CCO 3.0, the compliance function will need to avail itself of all the tools it can to communicate the message of compliance. The DOJ currently requires companies that enter into Deferred Prosecution Agreements (DPAs) to keep abreast of technological innovations in compliance. How long do you think it will take for the DOJ to start asking how much compliance communication you have both up and down the chain? If you are not using a social media tool or even a social media technique you may already be behind the 8-ball and you certainly will be left behind in the marketplace of ideas going forward.

I hope that you have enjoyed this six-part series on the use of social media in your compliance program as much as I have enjoyed researching it, writing and posting it. If you are currently using social media tools, concepts or techniques in your compliance program please contact me, as I would appreciate the opportunity to learn more about what your organization is up to in that realm. Also, please remember that I am compiling a list of questions that you would like to be explored or answered on the use of social media in your compliance program. So if you have any questions email them to me, at tfox@tfoxlaw.com, and I will answer them within the next couple of weeks in my next Mailbag Episode on my podcast, the FCPA Compliance and Ethics Report.

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, 2015

Great Structures Week II – Structures from Ancient Egypt and Greece

I continue my Great Structures Week with a focus on great structures from the earliest times, ancient Egypt and Greece. I am drawing these posts from The Teaching Company course, entitled “Understanding the World’s Greatest Structures: Science and Innovation from Antiquity to Modernity”, taught by Professor Stephen Ressler. From Egypt there are of course the Pyramids, of which Ressler says, “They’re important, not just because they’re great structures, but also because they represent some of the earliest human achievements that can legitimately be called engineering. The Great Pyramid of Giza stands today as a testament to the strength and durability of Egyptian structural engineering skills.”

From Greece we derive what Vitruvius called the “Empirical Rules for Temple Design” which define a “single dimensional module equal to the radius of a column in the temple portico, then specify all other dimensions of the building in terms of that module.” These rules are best seen in Greek temples, largely consisting of columns, which are defined as “a structural element that carries load primarily in compression” and beams, which are “structural elements subject to transverse loading and carry load in bending.” My favorite example of the use of columns is seen in the Parthenon; the most famous of all Greek temples still standing.

In many ways these two very different structures stand as the basis of all structural engineering and Great Structures that come later throughout history. For any anti-corruption compliance regime based on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-bribery statutes, the same is true for a Code of Conduct and written policies and procedures. They are both the building blocks of everything that comes thereafter.

In an article in the Society for Corporate Compliance and Ethics (SCCE) Complete Compliance and Ethics Manual, 2^nd Ed., entitled “Essential Elements of an Effective Ethics and Compliance Program”, authors Debbie Troklus, Greg Warner and Emma Wollschlager Schwartz, state that your company’s Code of Conduct “should demonstrate a complete ethical attitude and your organization’s “system-wide” emphasis on compliance and ethics with all applicable laws and regulations.” Your Code of Conduct must be aimed at all employees and all representatives of the organization, not just those most actively involved in known compliance and ethics issues. From the board of directors to volunteers, the authors believe that “everyone must receive, read, understand, and agree to abide by the standards of the Code of Conduct.” This would also include all “management, vendors, suppliers, and independent contractors, which are frequently overlooked groups.”

There are several purposes identified by the authors that should be communicated in your Code of Conduct. Of course the overriding goal is for all employees to follow what is required of them under the Code of Conduct. You can do this by communicating what is required of them, to provide a process for proper decision-making and then to require that all persons subject to the Code of Conduct put these standards into everyday business practice. Such actions are some of your best evidence that your company “upholds and supports proper compliance conduct.”

The substance of your Code of Conduct should be tailored to the company’s culture, and to its industry and corporate identity. It should provide a mechanism by which employees who are trying to do the right thing in the compliance and business ethics arena can do so. The Code of Conduct can be used as a basis for employee review and evaluation. It should certainly be invoked if there is a violation. To that end, I suggest that your company’s disciplinary procedures be stated in the Code of Conduct. These would include all forms of disciplines, up to and including dismissal, for serious violations of the Code of Conduct. Further, your company’s Code of Conduct should emphasize it will comply with all applicable laws and regulations, wherever it does business. The Code needs to be written in plain English and translated into other languages as necessary so that all applicable persons can understand it.

The written policies and procedures required for a best practices compliance program are well known and long established. As stated in the FCPA Guidance, “Among the risks that a company may need to address include the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.” Policies help form the basis of expectation and conduct in your company and Procedures are the documents that implement these standards of conduct.

Another way to think of policies, procedures and controls was stated by Aaron Murphy, now a partner at Foley & Lardner, in his book “Foreign Corrupt Practices Act”, when he said that you should think of all three as “an interrelated set of compliance mechanisms.” Murphy went on to say that, “Internal controls are policies, procedures, monitoring and training that are designed to ensure that company assets are used properly, with proper approval and that transactions are properly recorded in the books and records. While it is theoretically possible to have good controls but bad books and records (and vice versa), the two generally go hand in hand – where there are record-keeping violations, an internal controls failure is almost presumed because the records would have been accurate had the controls been adequate.”

Borrowing from an article in the Houston Business Journal (HBJ) by John Allen, entitled “Company policies are source and structure of stability”, I found some interesting and important insights into the role of policies in any anti-corruption compliance program. Allen says that the role of policies is “to protect companies, their employees and consumers, and despite an occasional opposite outcome, that is typically what they do. A company’s policies provide a basic set of guidelines for their employees to follow. They can include general dos and don’ts or more specific safety procedures, work process flows, communication guidelines or dress codes. By establishing what is and isn’t acceptable workplace behavior, a company helps mitigate the risks posed by employees who, if left unchecked, might behave badly or make foolhardy decisions.”

Allen notes that policies “are not a surefire guarantee that things won’t go wrong, they are the first line of defense if things do.” The effective implementation and enforcement of policies demonstrate to regulators and the government that a “company is operating professionally and proactively for the benefit of its stakeholders, its employees and the community it serves.” If it is a company subject to the FCPA, by definition it is an international company so that can be quite a wide community.

Allen believes that there are five key elements to any “well-constructed policy”. They are:

• identify to whom the policy applies;
• establish the objective of the policy;
• explain why the policy is necessary;
• outline examples of acceptable and unacceptable behavior under the policy; and
• warn of the consequences if an employee fails to comply with the policy.

Allen notes that for polices to be effective there must be communication. He believes that training is only one type of communication. I think that this is a key element for compliance practitioners because if you have a 30,000+ worldwide work force, the logistics alone of such training can appear daunting. Consider gathering small groups of employees, where detailed questions about policies can be raised and discussed, as a powerful teaching tool. Allen even suggests posting Frequently Asked Questions (FAQ’s) in common areas as another technique. And do not forget that one of the reasons Morgan Stanley received a declination to prosecute by the Department of Justice (DOJ) was that it sent out bi-monthly compliance reminder emails to its employee Garth Peterson for the seven years he was employed by the company.

The FCPA Guidance ends its section on policies with the following, “Regardless of the specific policies and procedures implemented, these standards should apply to personnel at all levels of the company.” Allen puts a bit differently in that “it is important that policies are applied fairly and consistently across the organization.” He notes that the issue can be that “If policies are applied inconsistently, there is a greater chance that an employee dismissed for breaching a policy could successfully claim he or she was unfairly terminated.” This last point cannot be over-emphasized. If an employee is going to be terminated for fudging their expense accounts in Brazil, you had best make sure that same conduct lands your top producer in the US with the same quality of discipline.

For a review of what goes into the base structures of a best practices compliance program, I would suggest you check my book Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program, which is available through Compliance Week. You can review the book and obtain a copy by clicking 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, 2015

Economic Downturn Week, Part II – The Golden Gate Bridge and Employment Separation – Hotlines and Whistleblowers During Layoffs

Today, we celebrate one of the greatest engineering achievements of the century. On this date in 1937, the Golden Gate Bridge opened. At 4200 feet long, it was at the time the world’s longest suspension bridge. But not only was it an engineering and architectural milestone, its aesthetic form was instantly recognized as classical and to this day is one of the most iconic structures in the US if not the world. With just a few years until its 80^th birthday, it demonstrates that a lasting structure is more than simply form following function but contains many elements that inform its use and beauty.

I use the Golden Gate Bridge as an entrée to my continued discussion on the series on steps that you can use in your compliance program if you find yourself, your company or your industry in an economic downturn. Whether you are a Chief Compliance Officer (CCO) or compliance practitioner, these steps are designed to be achieved when you face reduced economic resources or lessened personnel resources going forward due to a downturn your economic sector. Yesterday, I discussed mapping your current and existing internal controls to the Ten Hallmarks of an Effective Compliance Program so that you can demonstrate your compliance with the Foreign Corrupt Practices Act’s (FCPA) internal control prong to the accounting procedures. Today I want to discuss the issues surrounding the inevitable layoffs your company will have to endure in a downturn.

In Houston, we have experienced energy companies laying off upwards of 30% of their workforce, both in the US and abroad. Employment separations can be one of the trickiest maneuvers to manage in the spectrum of the employment relationship. Even when an employee is aware layoffs are coming it can still be quite a shock when Human Resources (HR) shows up at their door and says, “Come with me.” However, layoffs, massive or otherwise, can present some unique challenges for the FCPA compliance practitioner. Employees can use layoffs to claim that they were retaliated against for a wide variety of complaints, including those for concerns that impact the compliance practitioner. Yet there are several actions you can take to protect your company as much as possible.

Before you begin your actual layoffs, the compliance practitioner should work with your legal department and HR function to make certain your employment separation documents are in compliance with the recent SEC v. KBR Cease and Desist Order regarding Confidentiality Agreement (CA) language which purports to prevent employees from bringing potential violations to appropriate law or regulatory enforcement officials. If your company requires employees to be presented with some type of CA to receive company approved employment severance package, it must not have language preventing an employee taking such action. But this means more than having appropriate or even approved language in your CA, as you must counsel those who will be talking to the employee being laid off, not to even hint at retaliation if they go to authorities with a good faith belief of illegal conduct. You might even suggest, adding the SEC/KBR language to your script so the person leading the conversation at the layoff can get it right and you have a documented record of what was communicated to the employee being separated.

When it comes to interacting with employees first thing any company needs to do, is to treat employees with as much respect and dignity as is possible in the situation. While every company says they care (usually the same companies which say they are very ethical), the reality is that many simply want terminated employees out the door and off the premises as quickly as possibly. At times this will include an ‘escort’ off the premises and the clear message is that not only do we not trust you but do not let the door hit you on the way out. This attitude can go a long way to starting an employee down the road of filing a claim for retaliation or, in the case of FCPA enforcement, becoming a whistleblower to the Securities and Exchange Commission (SEC), identifying bribery and corruption.

Treating employees with respect means listening to them and not showing them the door as quickly as possible with an escort. From the FCPA compliance perspective this could also mean some type of conversation to ask the soon-to-be parting employee if they are aware of any FCPA violations, violations of your Code of Conduct or any other conduct which might raise ethical or conflict of interest concerns. You might even get them to sign some type of document that attests they are not aware of any such conduct. I recognize that this may not protect your company in all instances but at least it is some evidence that you can use later if the SEC (or Department of Justice (DOJ)) comes calling after that ex-employee has blown the whistle on your organization.

I would suggest that you work with your HR department to have an understanding of any high-risk employees who might be subject to layoffs. While you could consider having HR conduct this portion of the exit interview, it might be better if a compliance practitioner was involved. Obviously a compliance practitioner would be better able to ask detailed questions if some issue arose but it would also emphasize just how important the issue of FCPA compliance, Code of Conduct compliance or simply ethical conduct compliance was and remains to your business.

Finally are issues around hotlines, whistleblower and retaliation claims. The starting point for layoffs should be whatever your company plan is going forward. The retaliation cases turn on whether actions taken by the company were in retaliation for the hotline or whistleblower report. This means you will need to mine your hotline more closely for those employees who are scheduled or in line to be laid off. If there are such persons who have reported a FCPA, Code of Conduct or other ethical violation, you should move to triage and investigate, if appropriate, the allegation sooner rather than later. This may mean you move up research of an allegation to come to a faster resolution ahead of other claims. It may also mean you put some additional short-term resources on your hotline triage and investigations if you know layoffs are coming.

The reason for these actions are to allow you to demonstrate that any laid off employee was not separated because of a hotline or whistleblower allegation but due to your overall layoff scheme. However it could be that you may need this person to provide your compliance department additional information, to be a resource to you going forward, or even a witness that you can reasonably anticipate the government may want to interview. If any of these situations exist, if you do not plan for their eventuality before you layoff the employee, said (now) ex-employee may not be inclined to cooperate with you going forward. Also if you do demonstrate that you are sincerely interested in a meritorious hotline complaint, it may keep this person from becoming a SEC whistleblower.

Just as the Golden Gate Bridge provides more to the human condition than simply a structure to get from San Francisco to Marin County, layoffs in an economic downturn provide many opportunities to companies. If they treat the situation appropriately, it can be one where you manage your FCPA compliance risk going forward.

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, 2015

 

 

 

Doing Compliance – Released in Amazon Kindle and Apple iBook Formats

I am extraordinarily pleased to announce that Compliance Week has released my most recent hardbound book, Doing Compliance: How to Design, Create, and Implement an Effective Anti-Corruption Compliance Program, in both Amazon Kindle and Apple iBook formats. Of course you can also purchase a hard copy to keep on your reference shelf as well. It is the book that a compliance practitioner should use as a one-volume reference for the everyday ‘Nuts and Bolts’ work of anti-corruption compliance.

Just as the world becomes more flat for business and commercial operations, it is also becoming so for anti-corruption and anti-bribery enforcement. Any company that does business internationally must be ready to deal with a business environment with these new realities. Doing Compliance is designed to be a one-volume work that will give to you some of the basics of creating and maintaining an anti-corruption and anti-bribery compliance program that will meet any business climate you face across the globe. The book format is an easy reference to assist you with your compliance program and I have based my discussion of a best practices compliance program on what the Criminal Division of the US Department of Justice (DOJ) and Enforcement Division of the Securities and Exchange Commission (SEC) set out in their jointly produced “A Resource Guide to the U.S. Foreign Corrupt Practices Act” (the FCPA Guidance) and the “Ten Hallmarks of an Effective Compliance Program”.

The FCPA Guidance wisely made clear that there is no ‘one-size-fits-all’ approach when it stated, “Individual companies may have different compliance needs depending on their size and the particular risks associated with their businesses, among other factors.” Thus, the book is written to provide insight into the aspects of compliance programs that the DOJ and SEC assess, recognizing that companies may consider a variety of factors when making their own determination of what is appropriate for their specific business needs.

The book has struck a cord with other well-known figures in the compliance community. Professor Andy Spalding, writing in the FCPA Blog, in a post entitled “Book Review: Tom Fox’s Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program”, said, “Compliance must be thorough, systematic, and highly attentive to detail. But no one ever said it had to be boring. And Tom Fox has proven this yet again. His Doing Compliance provides the most sophisticated and comprehensive compliance guidance available, with a delivery that is witty, lively, and even entertaining.”

The FCPA Professor, in a post entitled “Doing Compliance” – An FCPA Compliance Toolbox”, said, “Fox approaches the FCPA and related topics with a singular goal in mind: analyzing and articulating the vast body of literature on FCPA best practices in a digestible, practical, and workable way to be of value to compliance professionals in the field. In short, Fox is the “nuts and bolts” guy of FCPA compliance who not only offers his own insight and perspective on best practices, but also effectively aggregates the insights and perspectives of others. Fox’s latest book is “Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program” and in it he provides, in his words, “the basics of how to create and maintain an anti-corruption and anti-bribery compliance program to suit any business climate across the globe.” The nine chapters of the book are grouped around topics such as senior management commitment to compliance; written policies and procedures; conducting a risk assessment; training; hiring and other human resources issues; reporting and investigation; and merger and acquisition due diligence. “Doing Compliance” is peppered with many helpful checklists and factors that compliance professionals can use on a daily basis to implement, assess and improve FCPA compliance policies and procedures.”

This book does not discuss the underlying basis of the FCPA, the UK Bribery Act or any other anti-corruption or anti-bribery legislation. The book is about doing business in compliance with these laws. As with all Americans, I appreciate any list that is deca-based, so the format of 10 hallmarks resonates with me. I have used this basic ten-part organization in laying out what I think you should consider in your anti-corruption and anti-bribery compliance program. In addition to presenting my own views in these areas, I also set out the views of both FCPA practitioners and commentators from other areas of business study and review, including Mike Volkov, the FCPA Professor, David Lawler, Stephen Martin, Marjorie Doyle, Russ Berland and Scott Moritz, and many others.

If there is one book on the ‘Nuts and Bolts’ of how to design, create and implement a best practices compliance program, I submit to you this is the one. I hope that you will check it out in one of the new formats now available. Finally, the price is set at a very reasonable $69.95 so if you are a Chief Compliance Officer (CCO) or General Counsel (GC), you can purchase an entire set for your compliance team. You can even buy them for your friends and family if you want them to have a better understanding of what you do at work!

To purchase a copy of Doing Compliance: How to Design, Create, and Implement an Effective Anti-Corruption Compliance Program click on one of the links below:

 Hard copy

Amazon Kindle

 Apple iBook

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, 2015

King Arthur Week – the Pentecostal Oath and Code of Conduct – Part II

One thing for which King Arthur is remembered are his chivalric knights. He helped create this legend, in large part, by establishing a Code of Conduct for the Knights of the Round Table. The King required each one of them to swear an oath, called the Pentecostal Oath, which was Arthur’s ideal for a chivalric knight. The Oath stated, “The king established all his knights, and gave them that were of lands not rich, he gave them lands, and charged them never to do outrageousity nor murder, and always to flee treason; also, by no mean to be cruel, but to give mercy unto him that asketh mercy, upon pain of forfeiture of their worship and lordship of King Arthur for evermore; and always to do ladies, damosels, and gentlewomen succor upon pain of death. Also, that no man take no battles in a wrongful quarrel for no law, ne for no world’s goods. Unto this were all the knights sworn of the Table Round, both old and young. And every year were they sworn at the high feast of Pentecost.” (Le Morte d’Arthur, pp 115-116)

Interestingly, the Oath first appeared in Sir Thomas Malory’s Le Morte d’Arthur and in none of the prior incarnations of the legend. In Malory’s telling, after the Knights swore the Oath, they were provided titles and lands by the King. The Oath specifies both positive and negative conduct; that is, what a Knight might do but also what conduct he should not engage in. The Pentecostal Oath formed the basis for the Knight’s conduct at Camelot and beyond. It was clearly a forerunner of today’s corporate Code of Conduct.

The foundational document of any Foreign Corrupt Practices Act (FCPA) compliance program is its Code of Conduct. This requirement has long been memorialized in the US Sentencing Guidelines, which contain seven basic compliance elements that can be tailored to fit the needs and financial realities of any given organization. From these seven compliance elements the Department of Justice (DOJ) has crafted its minimum best practices compliance program, which is now attached to every Deferred Prosecution Agreement (DPA) and Non-Prosecution Agreement (NPA). These requirements were incorporated into the 2012 FCPA Guidance. The US Sentencing Guidelines assume that every effective compliance and ethics program begins with a written standard of conduct; i.e. a Code of Conduct. What should be in this “written standard of conduct”.

Element 1

Standards of Conduct, Policies and Procedures (a Code of Conduct)

An organization should have an established set of compliance standards and procedures. These standards should not be a “paper only” document, but a living document that promotes organizational culture that encourages “ethical conduct” and a commitment to compliance with applicable regulations and laws.

In the FCPA Guidance, the DOJ and Securities and Exchange Commission (SEC) state, “A company’s code of conduct is often the foundation upon which an effective compliance program is built. As DOJ has repeatedly noted in its charging documents, the most effective codes are clear, concise, and accessible to all employees and to those conducting business on the company’s behalf.” Indeed, it would be difficult to effectively implement a compliance program if it was not available in the local language so that employees in foreign subsidiaries can access and understand it. When assessing a compliance program the DOJ and SEC will review whether the company chapter has taken steps to make certain that the code of conduct remains current and effective and whether a company has periodically reviewed and updated its code.

In each DPA and NPA over the past 36 months the DOJ has stated the following as item No. 1 for a minimum best practices compliance program.

1. Code of Conduct. A Company should develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA, including its anti-bribery, books and records, and internal controls provisions, and other applicable foreign law counterparts (collectively, the “anti-corruption laws”), which policy shall be memorialized in a written compliance code.

In an article in the Society for Corporate Compliance and Ethics (SCCE) Complete Compliance and Ethics Manual, 2nd Ed., entitled “Essential Elements of an Effective Ethics and Compliance Program”, authors Debbie Troklus, Greg Warner and Emma Wollschlager Schwartz, state that your company’s Code of Conduct “should demonstrate a complete ethical attitude and your organization’s “system-wide” emphasis on compliance and ethics with all applicable laws and regulations.” Your Code of Conduct must be aimed at all employees and all representatives of the organization, not just those most actively involved in known compliance and ethics issues. From the board of directors to volunteers, the authors believe that “everyone must receive, read, understand, and agree to abide by the standards of the Code of Conduct.” This would also include all “management, vendors, suppliers, and independent contractors, which are frequently overlooked groups.”

There are several purposes identified by the authors that should be communicated in your Code of Conduct. Of course the overriding goal is for all employees to follow what is required of them under the Code of Conduct. You can do this by communicating what is required of them, to provide a process for proper decision-making and then to require that all persons subject to the Code of Conduct put these standards into everyday business practice. Such actions are some of your best evidence that your company “upholds and supports proper compliance conduct.”

The substance of your Code of Conduct should be tailored to the company’s culture, and to its industry and corporate identity. It should provide a mechanism by which employees who are trying to do the right thing in the compliance and business ethics arena can do so. The Code of Conduct can be used as a basis for employee review and evaluation. It should certainly be invoked if there is a violation. To that end, I suggest that your company’s disciplinary procedures be stated in the Code of Conduct. These would include all forms of disciplines, up to and including dismissal, for serious violations of the Code of Conduct. Further, your company’s Code of Conduct should emphasize it will comply with all applicable laws and regulations, wherever it does business. The Code needs to be written in plain English and translated into other languages as necessary so that all applicable persons can understand it.

As I often say, the three most important things about your FCPA compliance program are ‘Document, Document and Document’. The same is true of communicating your company’s Code of Conduct. You need to do more than simply put it on your website and tell folks it is there, available and that they should read it. You need to document that all employees, or anyone else that your Code of Conduct is applicable to, has received, read, and understands the Code. For employees, it is important that a representative of the Compliance Department, or other qualified trainer, explains the standards set forth in your Code of Conduct and answers any questions that an employee may have. Your company’s employees need to attest in writing that they have received, read, and understood the Code of Conduct and this attestation must be retained and updated as appropriate.

The DOJ expects each company to begin its compliance program with a very public and very robust Code of Conduct. If your company does not have one, you need to implement one forthwith. If your company has not reviewed or assessed their Code of Conduct for five years, I would suggest that you do in short order as much has changed in the compliance world.

What is the value of having a Code of Conduct? I have heard many business folks ask that question over the years. In its early days, a Code of Conduct tended to be lawyer-written and lawyer-driven to “wave in a defense situation” by claiming that “see we have one”. But is such a legalistic code effective? Is a Code of Conduct more than simply, your company’s law? What is it that makes a Code of Conduct effective? What should be the goal in the creation of your company’s Code of Conduct?

Just as the Pentecostal Oath was required to be sworn out each year, you should have your employees recertify their adherence to your Code of Conduct. Moreover, just as King Arthur set his expectations for behavior your company should do so as well.

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, 2015

Why Tone at the Top Matters and Join the FCPA Professor in Houston

Over this week I have looked at some issues related to compensation and methods from other disciplines that a compliance practitioner might use to test and then improve a company’s third party management regime. Today, I want to go back to the starting point for any compliance program; that is the Tone at the Top. I was reminded of the absolute necessity of having a management not only committed to following the law but the actual doing of compliance when I read about the guilty verdicts in the Atlanta schools cheating scandal.

In an article in the New York Times (NYT), entitled “Atlanta Educators Are Convicted of Racketeering”, reporter Alan Blinder detailed the guilty verdicts handed down in an Atlanta state Superior Court this week where 11 of 12 defendants were convicted in a lengthy trial. Blinder wrote, “On their eighth day of deliberations, the jurors convicted 11 of the 12 defendants of racketeering, a felony that carries up to 20 years in prison. Many of the defendants — a mixture of Atlanta public school teachers, testing coordinators and administrators — were also convicted of other charges, such as making false statements, that could add years to their sentences.” Most stunningly, the trial judge “ordered most of the educators jailed immediately, and they were led from the courtroom in handcuffs.”

The school district’s top administrator Dr. Beverly Hall, channeling her inner Ken Lay, had the temerity to pass away during the trial so there was no finding as to her conduct. Unrepentant to end she said “she had done nothing wrong and that her approach to education, which emphasized data, was not to blame.” When interviewed back in 2011, Dr. Hall had said, “I can’t accept that there’s a culture of cheating. What these 178 are accused of is horrific, but we have over 3,000 teachers.”

Think about those two statements for a moment. They mimic the same tired excuses used by apologizers in the anti-corruption world. First it was only a small subset of those involved who actually broke the law. In other words, the oldie but goodie rogue employee(s) defense. It did have the notable exception that there were 178 roguies out there lying and cheating. But more than the rogue employee defense, she emphasized that she obtained results, the scores on the State of Georgia’s standardized tests for public schools improved dramatically under her watch. In the Foreign Corrupt Practices Act (FCPA) anti-corruption world that is the same as “we had to do it to compete” argument. It is equally as inane as the rogue employee defense.

Moreover, a State of Georgia investigation “completed in 2011, led to findings that were startling and unsparing: Investigators concluded that cheating had occurred in at least 44 schools and that the district had been troubled by “organized and systemic misconduct.” Nearly 180 employees, including 38 principals, were accused of wrongdoing as part of an effort to inflate test scores and misrepresent the achievement of Atlanta’s students and schools. Investigators wrote in the report that Dr. Hall and her aides had “created a culture of fear, intimidation and retaliation” that had permitted “cheating — at all levels — to go unchecked for years.” How is that for tone from the very top?

I bring you another example from a company I once worked at whose management locked themselves behind bolted doors on a floor in the building not accessible by any employees. And just in case someone did make onto this executive floor, there was an armed police presence as a last ditch security measure. The locked down top floor was after the following security measures were already in place: (1) you had to badge in to get into the parking garage, (2) building access was by card entry, (3) elevator access was by card entry, and (4) floor access was by card entry.

Why would senior executives barricade themselves behind such massive physical protection? Did they do this because crazed competitors were sending in assassins, because the company was so profitable and hence unassailable as a competitor? How about something more nefarious such as international hit squads roaming through international businesses in Houston, picking off key executives? Alas the explanation was not anything so exotic. With all of these security measures in place the reason was to keep mere mortal employees away from senior management. What type of message that does send to employee? Much like the one I had growing up, speak only when spoken to.

The point of all this is that tone does matter. Senior management must be committed and communicate its commitment to not only obeying laws but also complying with laws. In the FCPA world, that means you must have a compliance program in place that meets the Ten Hallmarks of an Effective Compliance Program as set out in the FCPA Guidance.

On a completely different note as a compliance practitioner, if you want to have a shot at some serious professional growth and you are in the Houston area, somewhere else in Texas or anywhere else in the South, I suggest you consider attending the FCPA Professor’s FCPA Institute, which will be held in Houston on Monday, May 4 and Tuesday, May 5. The Professor’s goal in leading this first Texas FCPA Institute is “to develop and enhance fundamental skills relevant to the FCPA and FCPA compliance in a stimulating and professional environment with a focus on learning. Information at the FCPA Institute is presented in an integrated and cohesive way by an expert instructor with FCPA practice and teaching experience.” Some of the topics, which will be covered, include the following:

• An informed understanding of why the FCPA became a law and what it seeks to accomplish;
• A comprehensive understanding of the FCPA’s anti-bribery and books and records and internal controls provisions and related enforcement theories;
• Various realties of the global marketplace which often give rise to FCPA scrutiny;
• The typical origins of FCPA enforcement actions including the prominence of corporate voluntary disclosures;
• The “three buckets” of FCPA financial exposure and how settlement amounts in an actual FCPA enforcement action are typically not the most expensive aspect of FCPA scrutiny and enforcement;
• Facts and figures relevant to corporate and individual FCPA enforcement actions including how corporate settlement amounts are calculated;
• How FCPA scrutiny and enforcement can result in related foreign law enforcement investigations as well as other negative business effects from market capitalization issues, to merger and acquisition activity, to FCPA related civil suits; and
• Practical and provocative reasons for the general increase in FCPA enforcement.

In other words, it is what you have come to expect from the FCPA Professor; well-thought out reasoned analysis, practical knowledge and learning, and provocative thinking and assessment. But this is also your chance to attend a two-day Institute with one of the most original thinkers in the FCPA space. The FCPA Institute will provide insights into the topics more near and dear to my heart as a ‘nuts and bolts guy’. In addition to the above substantive knowledge, FCPA Institute participants will gain in-demand, practical skills to best manage and minimize FCPA risk by:

• Practicing FCPA issue-spotting through video exercises;
• Conducting a FCPA risk assessment;
• Learning FCPA compliance best practices, including as to third parties;
• Learning how to effectively communicate FCPA compliance expectations; and
• Grading a FCPA code of conduct.

In addition, attorneys who complete the FCPA Institute may be eligible to receive those all-important Continuing Legal Education (CLE) credits. The sponsors, King & Spalding, will be seeking CLE credit in CA, GA, NY, TX and if needed in NC and VA. Actual CLE credit will be determined at the end of the program based on actual program time. Attorneys may be eligible to receive CLE credit through reciprocity or attorney self-submission in other states as well.

I hope that you can join the FCPA Professor for this FCPA Institute. I have previously said, “if the FCPA Professor writes about it you need to read it. While you may disagree with him, your FCPA perspective and experience will be enriched by the exercise.” I would now add to this statement that if the FCPA Professor puts on his FCPA Institute you should attend. Not only will you garner a better understanding of the theoretical underpinnings of the law and the plain words of its text; you will also be able to articulate many of the issues which befall companies caught up in a FCPA investigation to your senior management in a way that will help them understand the need for a robust compliance program.

To register for the FCPA Institute, or for more information, 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, 2015

Protections for CCOs from Wrongful Termination

This week the Houston Texans unceremoniously cut the franchise’s greatest player in its short history, receiver Andre Johnson. This was after his being hauled into the office of the head coach and being told that he would only need to work half as hard next year. As reported by Jerome Solomon in the Houston Chronicle article entitled “Move inevitable, but team bungles its handling”, Head Coach Bill O’Brien told Johnson that his catch total would drop from the 84 he has averaged in his 12 year career with the Texans down to “around 40 passes next season.” But O’Brien went on to add the team’s certain Hall of Fame receiver “wasn’t likely to be a starter next season, definitely not for all of the games.” So much for playing your best player at his position on a full-time basis, but hey, at least the information was made public.

Now imagine you are a Chief Compliance Officer (CCO) and have been one of your company’s senior management for the better part of the past 12 years. While you may not have been the most important member of the management team you certainly have helped navigate the company through rough compliance waters. Now imagine the company Chief Executive Officer (CEO) who tells you that although he has no one in mind to replace you (other than a less experienced and a smaller-salaried compliance specialist) your services will only be needed half the time in the coming year. What if this is in response to advice the head of the company did not like? What should the response be?

You can consider the departure from MF Global of its Chief Risk Officer, the financial services equivalent of a CCO. As reported in a New York Times (NYT) article entitled “MF Global’s Risk Officer Said to Lack Authority” Ben Protess and Azam Ahmed reported that the company replaced its Chief Risk Officer, Michael Roseman, after he “repeatedly clashed with Mr. Corzine [the CEO] over the firm’s purchase of European sovereign debt.” He was given a large severance package and left the company. When he left, there was no public reason given. His replacement was brought into the position with reduced authority.

If you are a public company, you may well need to heed the advice of fraud and compliance expert Jonathan Marks, a partner at Crowe Horwath LLP, who advocates that any time a CCO, a key executive, is dismissed it should be an 8K reporting event because the departure may be a signal of a change in the company’s attitude towards compliance or an alleged ethical breach had taken place. A similar view was expressed by Michael W. Peregrine in a NYT article entitled “Another View: MF Global’s Corporate Governance Lesson”, where he wrote that a “compliance officer is the equivalent of a “protected class” for governance purposes, and the sooner leadership gets that, the better.” Particularly in the post Sarbanes-Oxley world, a company’s CCO is a “linchpin in organizational efforts to comply with applicable law.” When a company fires (or asks him/her to resign), it is a significance decision for all involved in corporate governance and should not be solely done at the discretion of the CEO alone.

In its Code of Ethics for Compliance and Ethics Professionals, the Society for Corporate Compliance and Ethics (SCCE) has postulated Rule 1.4, which reads, “If, in the course of their work, CEPs become aware of any decision by their employing organization which, if implemented, would constitute misconduct, the professional shall: (a) refuse to consent to the decision; (b) escalate the matter, including to the highest governing body, as appropriate; (c) if serious issues remain unresolved after exercising “a” and “b”, consider resignation; and (d) report the decision to public officials when required by law.” As commentary to this rule, the SCCE said, “The duty of a compliance and ethics professional goes beyond a duty to the employing organization, inasmuch as his/her duty to the public and to the profession includes prevention of organizational misconduct. The CEP should exhaust all internal means available to deter his/her employing organization, its employees and agents from engaging in misconduct. The CEP should escalate matters to the highest governing body as appropriate, including whenever: a) directed to do so by that body, e.g., by a board resolution; b) escalation to management has proved ineffective; or c) the CEP believes escalation to management would be futile. CEPs should consider resignation only as a last resort, since CEPs may be the only remaining barrier to misconduct. A letter of resignation should set forth to senior management and the highest governing body of the employing organization in full detail and with complete candor all of the conditions that necessitate his/her action. In complex organizations, the highest governing body may be the highest governing body of a parent corporation.”

What about compensation? The Department of Justice (DOJ) has made clear that it expects a CCO to resign if the company refuses advice and violates the Foreign Corrupt Practices Act (FCPA). The former head of the DOJ-FCPA unit Chuck Duross went so far as to compare CCOs and compliance practitioners to the Texans at the Alamo. To be fair to Duross, I think he was focusing more on the line in the sand part of the story, while I took that to mean they were all slaughtered for what they believed in. But whichever interpretation you may choose to put on it, the DOJ clearly expects a CCO to stand up and if a CEO does not like what they say, he or she must resign. This puts CCOs and compliance practitioners in a very difficult position, particularly if there is no exit compensation for doing the right thing by standing up.

I think the next step should be for the DOJ and Securities and Exchange Commission (SEC) to begin to discuss the need for contractual protection of CCOs and other compliance practitioners against retaliation for standing up against corruption and bribery. The standard could simply be one that protects a CCO and other compliance practitioners against termination without cause. Just as the SEC is investigating whether companies are trying to muzzle whistleblowers through post-employment Confidentiality Agreements, I think they should consider whether CCOs and other compliance practitioners need more employment protection. I think the SEC should also consider the proposals of Marks regarding the required 8K or other public reporting of the dismissal or resignation of any CCO. Finally, I would expand on Peregrine’s suggestion and require that a company Board of Directors approve any dismissal of a CCO. With these protections in place, a CCO or compliance practitioner would have the ability to confront management who might take business decisions that violate 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, 2015

 

 

Gulliver’s Travels, Truth or Fiction?

There was once a man named Gulliver who traveled widely and wrote a book about his adventures called Gulliver’s Tales. During his first voyage, Gulliver is washed ashore after a shipwreck and finds himself a prisoner of a race of little people, who live in the country of Lilliput. After giving assurances of his good behavior, Gulliver becomes a resident in Lilliput and becomes a favorite of the court. From there, the book follows Gulliver’s observations on the Court of Lilliput. He is also given the permission to roam around the city on a condition that he must not harm their subjects and otherwise engage in illegal, immoral or unethical conduct.

I am continually amazed at how life imitates art because if I told you the following tale you might accuse me of simply making up things to write about. Imagine there is a corporate banking Chief Executive Officer (CEO), whose company signed one of the largest Deferred Prosecution Agreements (DPA) ever a little over two years ago giving assurances of good behavior going forward. Now imagine I tell you that the same CEO has been hiding money for years in a Swiss bank account through a shell corporation for ‘his privacy’ (IE., Hiding money from the Lilliputians of this world). Unfortunately for the real Stuart Gulliver, the CEO at the banking giant HSBC, these facts are true. While his company is in yet another scandal involving its illegal conduct, while under a DPA for its past sins, it turns out the CEO was hiding approximately $7.7MM in a Swiss bank account. To compound this effort to conceal his monies, he did so through a shell Panamanian company.

Yet, just like the fictional Gulliver, the real Gulliver has a very simply explanation for this practice. According to Jenny Anderson, in an article in the New York Times (NYT) entitled “HSBC Chief Defends Swiss Bank Account Worth $7.7 Million”, Gulliver said “This has an everyday explanation to it” and said the explanation was that he was trying to hide the money so his co-workers would not know he much money he made. Or as Anderson wrote, “In an effort to protect his privacy — he was the bank’s top earner — he put the money in Switzerland to hide it from the prying eyes of his Hong Kong colleagues. But he then had to hide it from his curious Swiss colleagues, so he created an anonymous Panamanian company.”

So it turns out that Gulliver was not only trying to hide his money from his co-workers but also from the Swiss by creating a shell corporation to launder the money into before depositing it in Switzerland. Similar to those pesky Lilliputians, who might want to find out something about him that he did not want them to know, as when the fictional Gulliver agreed to not violate the law or engage in otherwise unethical conduct. Of course the real Gulliver has protested that such arrangements were not illegal at the time he engaged in them, side-stepping the question of whether his conduct was unethical (Ethical bankers, does that topic belong in the fiction section?).

Gulliver also went on a charm offensive essentially claiming that not only him but the entire banking industry in general was being picked on. Channeling his inner Mother Theresa, Gulliver was quoted in an article in the Financial Times (FT), entitled “Standards for bankers higher than for bishops, claims HSBC chief Gulliver” by Martin Arnold and George Parker, as saying “It seems to me that we are holding large corporations to higher standards than the military, the church or civil service.” While I am not quite certain as to the pay scale of UK church leaders, I am relatively certain that those in the civil service and military do not have an extra $7.7MM laying around that they need to launder through a Panamanian corporation to hide in a Swiss bank account.

The real Gulliver should have just channeled his fictional Gulliver and said that when in the land of Lilliput, you do not have to tell the Lilliputians the truth, even if you have sworn in a pesky DPA to do so. From the real Gulliver’s statement about bankers being held to higher standards, he obviously thinks that the church, military and civil service (and probably the rest of us mere mortals) have Lilliputian ethical obligations compared to him.

What does all this mean for prosecuting HSBC in the newly erupted money laundering through its Swiss subsidiary scandal? Well it is great to know your CEO has first hand knowledge of the mechanics of such activities. The appropriate UK authorities or even the US Department of Justice (DOJ) could interview the real Gulliver as a subject matter expert (SME) on not only how to hide money from your fellow employees, but also from the Swiss and even gain insight into such machinations to hide money from your own national tax authorities. The real Gulliver may be a real find for the DOJ as an expert witness, at the trial of his company for breach its DPA.

Further, just think of the credibility the real Gulliver would have in negotiations with the DOJ on whether HSBC broke its promises to do business in compliance with US anti-money laundering (AML) laws when it signed its DPA back in 2012. He could go right into the meeting and say, “Lads, let me dispel any misconceptions you might have about Swiss bank accounts. They exist to hide money. At least that is how I use them personally.” He could then walk the lowly civil servants who work in the DOJ Fraud Section and who have lower standards than the whiter-than-white bankers through how the real world of money laundering works, or at least the real world of multi-millionaires who, for some reason, want to protect their own privacy.

The real Gulliver could answer yet another rhetorical question that he posed, and was reported in the FT article, when he asked, “Can I know what every one of 257,000 people is doing? Clearly, I can’t. If you want to ask the question could it ever happen again – that is not reasonable.” The real Gulliver could then go on to respond to this rhetorical flourish along the lines of the following, But I can tell you what is reasonable, to ask me if I know what I am doing and how I am doing it. I am hiding money in my Swiss bank account through a shell Panamanian company. He might even add, How brilliant is that?

Since the fictional Gulliver lived and traveled over 300 years ago, he may be distantly related to the real Gulliver of HSBC today. Nevertheless for a bank CEO to have laundered his own money through a shell corporation into a Swiss bank account ‘for privacy’ is one of those convergences where truth surely is stranger than fiction.

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, 2015

Economic Downturns and Increased Compliance Risk

Oil is hovering around $50 per barrel. For most of the US economy this drop in oil price has provided a much-needed economic boost. One piece on the NPR website, entitled “Oil Price Dip, Global Slowdown Create Crosscurrents For U.S.”, said “economists have suggested the big drop in oil prices is a gift to consumers that will propel the economy.” Liz Ann Sonders, who is the chief investment strategist at Charles Schwab, was quoted as saying “The U.S. economy is 68 percent consumer spending, so right there you know that falling oil prices is a benefit.” Another economist said the positive effects could be “worth $400 billion” for the US economy as a whole.

But in the energy space, particularly in the city of Houston, Texas, this plunge has been devastating. It is so bad that in this past week’s issue of the Houston Business Journal (HBJ), it provided a ‘Box Score’ for energy company lay-offs. And that was before Halliburton announced a 10%-15% reduction and Hercules Offshore announced that it had laid off some 30% of its work force since last October. Nationally, for the energy industry, it will be just as bad. In the NPR piece, David R. Kotok, of Cumberland Advisors, said, “cuts in production and energy company payrolls will cost the U.S. economy up to $150 billion.” The Houston Chronicle headlined it was a “Bloodbath”.

I thought about what this plunge in the price of oil could mean for the compliance function in energy and energy related companies going forward. Many Chief Compliance Officers (CCOs) and compliance practitioners struggle with metrics to demonstrate revenue generation. Most of the time, such functions are simply viewed as non-revenue generating cost drags on business. This may lead to compliance functions being severely reduced in this downturn. However I believe such cuts would be far from short-sighted; they would actually cost energy companies far more in the short and long term.

Almost any energy company of any size has gone through a Foreign Corrupt Practices Act (FCPA) investigation, whether internal or formal by the Department of Justice (DOJ) or Securities and Exchange Commission (SEC). Many had gone through enforcement actions. The risk profiles of these companies did not change because of the drop in oil prices. Extractive resources are still located largely in countries with a high perception of corruption. In others, the inherent compliance risks that currently exist for energy companies will certainly not lessen. Unfortunately they may well increase.

At this point I see two increasing compliance risks for energy companies. The first is that companies will attempt to reduce their costs by cutting their compliance personnel. A tangent but equally important component of this will be that companies that do not invest the monies needed to beef up their oversight through monitoring or other mechanisms are setting themselves up for serious compliance failures.

Moreover, what will be the pressure on the business folks of such companies to ‘get the deal done’ with this slashing of oil prices? Further, if there is a 10% to 30% overall employee reduction, what additional pressures will be on those employees remaining to make their numbers or face the same consequences as their former co-workers?

I think both of these scenarios are fraught with increased compliance risks. For companies to engage in behaviors as I have outlined above would certainly bring them into conflict with the Ten Hallmarks of an effective compliance program as set out in the FCPA Guidance. For instance on resources, the FCPA Guidance does not say in a time of less income, when your compliance risk remains the same or increases, you should cut your compliance function or the resources to support it. Indeed it intones the opposite, when stating, “Those individuals must have appropriate authority within the organization, adequate autonomy from management, and sufficient resources to ensure that the company’s compliance program is implemented effectively.” Moreover, the FCPA Guidance adds, “Moreover, the amount of resources devoted to compliance will depend on the company’s size, complex­ity, industry, geographical reach, and risks associated with the business. In assessing whether a company has reasonable internal controls, DOJ and SEC typically consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk pro­file of the business.” So the resource issues is stated in reference to the risk profile of the business and not the current or fleeting economic issues of the day.

Also note that the FCPA Guidance speaks to an analysis from the DOJ side, which would presumably be a criminal side review. For instance, if a company cuts its compliance staff while its risk profile has not decreased, does this provide the required intent to commit a criminal act under the FCPA? Moreover, who would be the guilty party under such an analysis? Would it be the Chief Executive Officer (CEO) who ultimately decides we need a fixed percentage cut of employees or simply a raw number to be laid off? How about the department head (as in the CCO) who is told to cut your staff 10% or we will make the cuts for you? Or is it a company’s Human Resources (HR) department who delivers the dreaded knock on a compliance practitioner’s door (I’m from HR and could you come with me). What if a company’s decision-making authority is so decentralized that there is no one person who can be held accountable?

You should also note the SEC role in FCPA enforcement, as alluded to in the quote from the FCPA Guidance. There will be an assessment of internal controls. Now that the COSO 2013 Framework has become effective, will companies delay plans to implement the new Framework and to begin to audit against it? If so, would that be a per se FCPA violation?

But there is a second reason that I believe that energy companies risk profiles will increase in this industry-specific downturn. Unfortunately it will come from those employees who survive the lay offs. They will be under increased pressure to do the jobs of the laid-off folks so there will be a greater chance that something could slip through the cracks. If you are already working full time at one job and one, two or three other employees in your department are laid-off, which job is going to get priority? Will you only be able to put out fires or will you be able to accomplish what most business folks think is an administrative task?

But more than the extra work the survivors will have laid upon them will be the implicit message that some companies senior management may well lay down, that being Get the Deal Done. If economic times are tough, senior management will be looking even more closely at the sales numbers of employees. The sales incentives could very well move from a question of what will my bonus be if I close this transaction to one of will I be fired if I do not close this transaction. If senior management makes clear that it is bring in more business or the highway, employees will get that message.

Once again, where would the DOJ look for to find intent? Would it be the person out in the field who believed he was told that he or she either brought in twice as much work since there were half as many employees left after lay-offs? Would it be the middle manager who is more closely reviewing the sales numbers and sending out email reminders that if sales do not increase, there may well have to be more cuts? What about the CEO who simply raises one eyebrow and says we need to hunker down and get the job done?

What might be the DOJ or SEC reaction to the downsizing of compliance in the face of such increased compliance risk? The energy industry has not gone through this type of economic downsizing in the new age of FCPA prosecutions, largely since 2004, so there is no relevant time frame of FCPA enforcement to reflect from. However, the financial industry did go through such a contraction in the 2007-2010 time frame. We have seen the DOJ and other financial industry regulators draw huge penalties for a series of anti-money laundering (AML) and LIBOR scandals. My guess is that the DOJ and SEC will not allow companies to use economic arguments in the face of known and recognized increase in compliance risks. Indeed they may focus on some of these points as reasons for increased compliance vigilance in an energy company’s compliance function going forward.

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, 2015