FCPA Compliance and Ethics Blog

August 28, 2014

Risk Assessments-the Cornerstone of Your Compliance Program, Part III

7K0A0129Today, I conclude a three-part series on risk assessments in your Foreign Corrupt Practices Act (FCPA) or UK Bribery Act anti-corruption compliance program. I previously reviewed some of the risks that you need to assess and how you might go about assessing them. Today I want to consider some thoughts on how to use your risk assessment going forward.

Mike Volkov has advised that you should prepare a risk matrix detailing the specific risks you have identified and relevant mitigating controls. From this you can create a new control or prepare an enhanced control to remediate the gap between specific risk and control. Finally, through this risk matrix you should be able to assess relative remediation requirements.

A manner in which to put into practice some of Volkov’s suggestions was explored by Tammy Whitehouse, in an article entitled “Improving Risk Assessments and Audit Operations”. Her article focused on the how Timken Company, assesses and then evaluates the risks the company has assessed. Once risks are identified, they are then rated according to their significance and likelihood of occurring, and then plotted on a heat map to determine their priority. The most significant risks with the greatest likelihood of occurring are deemed the priority risks, which become the focus of the audit/monitoring plan, she said. A variety of solutions and tools can be used to manage these risks going forward but the key step is to evaluate and rate these risks. 

LIKELIHOOD 

Likelihood Rating Assessment Evaluation Criteria
1 Almost Certain High likely, this event is expected to occur
2 Likely Strong possibility that an event will occur and there is sufficient historical incidence to support it
3 Possible Event may occur at some point, typically there is a history to support it
4 Unlikely Not expected but there’s a slight possibility that it may occur
5 Rare Highly unlikely, but may occur in unique circumstances

‘Likelihood’ factors to consider: The existence of controls, written policies and procedures designed to mitigate risk capable of leadership to recognize and prevent a compliance breakdown; Compliance failures or near misses; Training and awareness programs.

PRIORITY 

Priority Rating Assessment Evaluation Criteria
1-2 Severe Immediate action is required to address the risk, in addition to inclusion in training and education and audit and monitoring plans
3-4 High Should be proactively monitored and mitigated through inclusion in training and education and audit and monitoring plans
5-7 Significant
8-14 Moderate
15-1920-25 LowTrivial Risks at this level should be monitored but do not necessarily pose any serious threat to the organization at the present time.

Priority Rating: Product of ‘likelihood’ and significance ratings reflects the significance of particular risk universe. It is not a measure of compliance effectiveness or to compare efforts, controls or programs against peer groups.

At Timken, the most significant risks with the greatest likelihood of occurring are deemed to be the priority risks. These “Severe” risks become the focus of the audit monitoring plan going forward. A variety of tools can be used, such as continuous controls monitoring with tools like those provided by Visual RiskIQ, a relationship-analysis based software such as Catelas or other analytical based tools. But you should not forget the human factor. At Timken, one of the methods used by the compliance group to manage such risk is by providing employees with substantive training to guard against the most significant risks coming to pass and to keep the key messages fresh and top of mind. The company also produces a risk control summary that succinctly documents the nature of the risk and the actions taken to mitigate it.

The key to the Timken approach is the action steps prescribed by their analysis. This is another way of saying that the risk assessment informs the compliance program, not vice versa. This is the method set forth by the DOJ in its FCPA Guidance and in the UK Bribery Act’s Adequate Procedures. I believe that the DOJ wants to see a reasoned approach with regards to the actions a company takes in the compliance arena. The model set forth by Timken certainly is a reasoned approach and can provide the articulation needed to explain which steps were taken.

In an article in Compliance Week Magazine, entitled, “Lessons on Risk Assessments from Winnie The Pooh” Jason Medford articulated that a key use of a risk assessment is to assist the internal audit function in developing their internal audit plan. He cited to the Institute of Internal Auditors (IIA) standard 2010.A1, which states “The internal audit activity’s plan of engagements must be based on a documented risk assessment, undertaken at least annually.” He went on to note that “In order to have a truly integrated GRC capability it is necessary for internal auditors to work with other GRC professionals in their organization. They must align their annual audit plan with the organization’s objectives, strategies, and initiatives of the other GRC professionals. They must collaborate, coordinate, and align their audit activities with other GRC professionals to increase visibility, improve efficiency, accountability and collaboration.

Carol Saint, Vice President of Internal Audit for 7-Eleven, who was interview by OCEG President Carol Switzer for the same article said that “We start with a risk assessment, beginning with business units because this is how the organization has designed accountability.  We decompose business units into the processes and sub-processes they own and execute. We evaluate how sub-processes align to achievement of strategic objectives: How do they affect the company’s value drivers? Next, we map financial statement lines to the sub-processes to help prioritize from that lens. Finally, for each sub-process we consider specific risks that could hinder achievement of strategic objectives, as well as fraud risks, significant accounting estimates, benchmarking/ hot topics, and ERM risks. We created an “intensity rating” that measures how often a process/sub-process was mentioned in our stakeholder interviews as a risk to the company. And we also considered how cross-functional a process is so that the element of complexity—a risk accelerator—could help determine audit plan priorities. This year’s plan development process was quite intense, but I think we did a good job of creating a baseline so that future risk assessments are more efficient.”

I hope that you have found this series on risk assessments useful. If you have any questions or better yet would like me to work on a risk assessment for your organization, please contact me.

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, 2014

August 27, 2014

Risk Assessments-the Cornerstone of Your Compliance Program, Part II

7K0A0501Ed. Note-Today, I continue my three-part posts on risk assessments. Today I take a look at some different ideas on how you might go about assessing your risks.

One of the questions that I hear most often is how does one actually perform a risk assessment? Mike Volkov has suggested a couple of different approaches in his article “Practical Suggestions for Conducting Risk Assessments.” In it Volkov differentiates between smaller companies which might use some basic tools such as “personal or telephone interviews of key employees; surveys and questionnaires of employees; and review of historical compliance information such as due diligence files for third parties and mergers and acquisitions, as well as internal audits of key offices” from larger companies. Such larger companies may use these basic techniques but may also include a deeper dive into high risk countries or high risk business areas. If your company’s sales model uses third party representatives, you may also wish to visit with those parties or persons to help evaluate their risks for bribery and corruption that might well be attributed to your company.

Another noted compliance practitioner, William Athanas, in an article entitled “Rethinking FCPA Compliance Strategies in a New Era of Enforcement”, took a different look at risk assessments when he posited that companies assume that FCPA violations follow a “bell-curve distribution, where the majority of employees are responsible for the majority of violations.” However Athanas believed that the distribution pattern more closely follows a “hockey-stick distribution, where a select few…commit virtually all violations.” Athanas suggests assessing those individuals with the opportunity to interact with foreign officials have the greatest chance to commit FCPA violations. Diving down from that group, certain individuals also possess the necessary inclination, whether a personal financial incentive linked to the transaction or the inability to recognize the significant risks attendant to bribery.

To assess these risks, Athanas suggested an initial determination of the touch-points where the operations of manufacturing companies “intersect with foreign officials vested with discretionary authority.” This will lead to an understanding of the individuals who hold these roles within a company. This means that a simple geographic analysis is but a first step in a risk analysis. Thereafter companies should also focus on “those who authorize and record disbursements, as well as those who represent the company in situations where they may be solicited for payments.” The next step is to determine those company employees who may have the incentive “to pay bribes on the Company’s behalf.” This incentive can come from a variety of forms; such as a company compensation plan, which rewards high producers; employees who do not understand the risk they place the company (and themselves) in by engaging in tactics which violate the FCPA; and, finally, those employees who seek to place their individual interests above those of the company.

Athanas concludes by noting that this limited group of employees, or what he terms the “shaft of the hockey-stick”, is where a company should devote the majority of its compliance resources. With a proper risk assessment, a company can then focus its compliance efforts on “intensive training sessions or focused analysis of key financial transactions — on those individuals with the opportunity and potential inclination to violate the statute.” This focus will provide companies the greatest “financial value and practical worth of compliance efforts.”

Lawler suggests that you combine the scores or analysis you obtain from the corruption markers you review; whether it is the DOJ list or those markers under the UK Bribery Act. From there, create a “rudimentary risk-scoring system that ranks the things to review using risk indicators of potential bribery.” This ensures that high-risk exposures are done first and/or given more time. As with all populations of this type, there is likely to be a normal or ‘bell curve’ distribution of risks around the mean. So 10-15% of exposure falls into the relative low-risk category; the vast majority (70-80%) into the moderate-risk category; and the final 10-15% would be high risk.

Earlier this week I wrote a piece about the Desktop Risk Assessment. I will not repeat the entire blog post here but only use some of the areas you could assess as a starting point for discussion. If you do not have the time, resources or support to conduct a worldwide risk assessment annually, you can take a different approach. You might try assessing other areas annually through a more limited focused risk assessment, which a colleague of mine calls the Desktop Risk Assessment. Some of the areas that such a Desktop Risk Assessment could inquire into might be the following:

  • Are resources adequate to sustain a culture of compliance?
  • How are the risks in the C-Suite and the Boardroom being addressed?
  • What are the FCPA risks related to the supply chain?
  • How is risk being examined and due diligence performed at the vendor/agent level? How is such risk being managed?
  • Is the documentation adequate to support the program for regulatory purposes?
  • Is culture, attitude (tone from the top), and knowledge measured? If yes, can we use the information enhance the program?
  • Disciplinary guidelines – Do they exist and has anyone been terminated or disciplined for a violating policy?
  • Communication of information and findings – Are escalation protocols appropriate?
  • What are the opportunities to improve compliance?

There are a variety of materials that you can review from or at a company that can facilitate such a Desktop Risk Assessment. You can review your company’s policies and written guidelines by reviewing anti-corruption compliance policies, guidelines, and procedures to ensure that compliance programs are tailored to address specific risks such as gifts, hospitality and entertainment, travel, political and charitable donations, and promotional activities.

This list is not intended to be a complete list of items, you can pick and choose to form some type of Desktop Risk Assessment but hopefully you can see some of the things areas you can assess and deliver any remedial action which may be warranted. Further, if you aim to perform an annual Desktop Risk Assessment with a full worldwide risk assessment every two years or so, you should be in a good position to keep abreast of compliance issues that may change and need more or greater risk management. And do not forget the that the FCPA Guidance ends its section on risk with, “When assessing a company’s compliance program, DOJ and SEC take into account whether and to what degree a company analyzes and addresses the particular risks it faces.”

A completely different approach was articulated by Leonard Shen, Vice President (VP) and Chief Compliance Officer (CCO) at PayPal, in a presentation to Compliance Week. His approach is not the right approach for every company but for those initiating their compliance journey, or a company considering a significant upgrade due to some systemic issue; this approach may be a more effective approach than the traditional risk assessment where a team of lawyers, CPAs and internal auditors assess a company’s compliance environment.

In a company which is initiating its compliance program, it can be perceived as a sea change of culture. However, Shen indicated that he had used an approach which worked to alleviate those types of concerns which also provided enough information to perform a robust assessment which could be used to form the basis of an effective compliance program. He termed this type of approach as one to “engage and educate.” While the approach had a two word name, it actually had three purposes; (1) to engage the employees in what would form the basis for an enhanced compliance program; (2) to educate the employees generally in compliance and ethical behavior; and (3) through the engagement of employees, to gather information which could be used to form the basis of a risk assessment.

Shen and his compliance team traveled to multiple company locations, across the globe, to meet with as many employees as possible. A large number these meetings were town hall settings, and key employee leaders, key stakeholders and employees identified as high risk, due to interaction with foreign governmental official touch-points, were met with individually or in smaller groups. Shen and his team listened to their compliance concerns and more importantly took their compliance ideas back to the home office.

From this engagement, the team received several thousand-employee suggestions regarding enhancements to the company’s compliance program. After returning to the US, Shen and his team winnowed down this large number to a more manageable number, somewhere in the range of a couple of hundred. These formed the basis of a large core of the enhancements to the existing company compliance program. After the enhanced compliance program was rolled out formal training began. During the training, the team was able to give specific examples of how employee input led to the changes in the enhanced program. This engaged the employees and made them feel like they were a part of, and had a vested interest in, the company’s compliance program. This employee engagement led to employee buy-in.

During the town hall meetings, and the smaller more informal group meetings, Shen and his team were doing more than simply listening, they were also training. However, the training was not on specific compliance provisions; it was more generally on overall ethics and how the employees could use compliance as a business tool. Most ethical standards of a company are not found in an existing compliance program, they are found in the general anti-discrimination guidelines and ethical business practices such anti-competitiveness and use of customer confidential information prohibitions. Often these general concepts can be found in a company’s overall Code of Conduct or similar statement of business ethics; workplace anti-discrimination and anti-harassment guidelines can be found in Human Resource policies and procedures.

Concepts such as anti-competitiveness and use of customer and competitor’s illegally obtained confidential information may be found in anti-trust or other business practice focused guidelines.

Shen and his team’s aim on the education component of “engage and educate” was to have the company employee’s start thinking about doing business the ethical way. It was ethical concept based training designed to be in contrast to a rules based approach, where employees believe they are taught the rules, and then try to see how close they can get to the line of violating the compliance rule without actually stepping over the line. Moreover, by having this general ethical business training, it laid the groundwork for the enhancement of the company’s compliance program and the training that would occur when the enhancement was rolled out.

A third key component of the “engage and educate” program is the risk assessment component. Shen’s approach here was not the traditional control-testing model, where documents are pulled and tested against a standard. Shen and his team listened, listened and listened. They listened to their employees concerns and they listened to the compliance issues they raised. As they were listening they began to ask questions about what was done and why. The questioning was not in an adversarial, interrogation mode but ferreting out the employees concerns while having the employees educate the team on the actual procedures that were used in several areas identified as key high risk areas.

Shen emphasized that this was an assessment and not an audit so no detailed forensic work was needed or used. However, by listening, and gently questioning, Shen and his team were able to garner enough information to create a risk assessment profile which informed and became the basis of their compliance program enhancement. Shen and his team did not identify to the company employees that they were engaged in a formal risk assessment. He believed that in many ways, he and his team were able to garner more useful information with which to inform their compliance program enhancement.

Shen’s “engage and educate” approach worked for his company at that point in time. It may not work for other companies as a traditional risk assessment but it does provide a different model if your company is beginning to create their compliance program, or is looking into a major enhancement.

Tomorrow, I will look at how you might use a risk assessment 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, 2014

 

August 26, 2014

Risk Assessments-the Cornerstone of Your Compliance Program, Part I

7K0A0079Yesterday, I blogged about the Desktop Risk Assessment. I received so many comments and views about the post, I was inspired to put together a longer post on the topic of risk assessments more generally. Of course I got carried away so today, I will begin a three-part series on risk assessments. In today’s post I will review the legal and conceptual underpinnings of a risk assessment. Over the next couple of days, I will review the techniques you can use to perform a risk assessment and end with a discussion of what to do with the information that you have gleaned in a risk assessment for your compliance program going forward.

One cannot really say enough about risk assessments in the context of anti-corruption programs. Since at least 1999, in the Metcalf & Eddy enforcement action, the US Department of Justice (DOJ) has said that risk assessments that measure the likelihood and severity of possible Foreign Corrupt Practices Act (FCPA) violations identifies how you should direct your resources to manage these risks. The FCPA Guidance stated it succinctly when it said, “Assessment of risk is fundamental to developing a strong compliance program, and is another factor DOJ and SEC evaluate when assessing a company’s compliance program.” The UK Bribery Act has a similar view. In Principal I of the Six Principals of an Adequate Compliance program, it states, “The commercial organisation regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed.” In other words, risk assessments have been around and even mandated for a long time and their use has not lessened in importance. The British have a way with words, even when discussing compliance, and Principal I of the Six Principals of an Adequate Compliance program says that your risk assessment should inform your compliance program.

Jonathan Marks, a partner in the firm of Crowe Horwath LLP, said the following about risk assessments in his 13-step FCPA Compliance Action Plan, “A comprehensive assessment of the potential bribery and corruption risks – both existing and emerging risks – associated with a company’s products and services, customers, third-party business partners, and geographic locations can serve as the basis for the compliance program. The risk assessment determines the areas at greatest risk for FCPA violations among all types of international business transactions and operations, the business culture of each country in which these activities occur, and the integrity and reputation of third parties engaged on behalf of the company.”

The simple reason is straightforward; one cannot define, plan for, or design an effective compliance program to prevent bribery and corruption unless you can measure the risks you face. Both the both the US Sentencing Guidelines, the UK Bribery Act’s Consultative Guidance list Risk Assessment as the initial step in creating an effective anti-corruption and anti-bribery program.

What Should You Assess?

In 2011, the DOJ concluded three FCPA enforcement actions which specified factors which a company should review when making a Risk Assessment. The three enforcement actions, involving the companies Alcatel-Lucent SA, Maxwell Technologies Inc. and Tyson Foods Inc. all had common areas that the DOJ indicated were FCPA compliance risk areas which should be evaluated for a minimum best practices FCPA compliance program. Both the Alcatel-Lucent and Maxwell Technologies Deferred Prosecution Agreements (DPAs) listed the seven following areas of risk to be assessed.

  1. Geography-where does your Company do business.
  2. Interaction with types and levels of Governments.
  3. Industrial Sector of Operations.
  4. Involvement with Joint Ventures.
  5. Licenses and Permits in Operations.
  6. Degree of Government Oversight.
  7. Volume and Importance of Goods and Personnel Going Through Customs and Immigration.

All of these factors were reiterated in the FCPA Guidance which stated, “Factors to consider, for instance, include risks presented by: the country and industry sector, the business opportunity, potential business partners, level of involvement with governments, amount of government regulation and oversight, and exposure to customs and immigration in conducting business affairs.”

These factors provide guidance into some of the key areas that the DOJ apparently believes can put a company at higher FCPA risk. These factors supplement those listed in the UK Bribery Consultative Guidance states, “Risk Assessment – The commercial organization regularly and comprehensively assesses the nature and extent of the risks relating to bribery to which it is exposed.” The Guidance points towards several key risks which should be evaluated in this process. These risk areas include:

  1. Internal Risk – this could include deficiencies in
  • employee knowledge of a company’s business profile and understanding of associated bribery and corruption risks;
  • employee training or skills sets; and
  • the company’s compensation structure or lack of clarity in the policy on gifts, entertaining and travel expenses.
  1. Country risk – this type of risk could include:

(a) perceived high levels of corruption as highlighted by corruption league tables published by reputable Non-Governmental Organizations such as Transparency International;

(b) factors such as absence of anti-bribery legislation and implementation and a perceived lack of capacity of the government, media, local business community and civil society to effectively promote transparent procurement and investment policies; and

(c) a culture which does not punish those who seeks bribes or make other extortion attempts.

  1. Transaction Risk – this could entail items such as transactions involving charitable or political contributions, the obtaining of licenses and permits, public procurement, high value or projects with many contractors or involvement of intermediaries or agents.
  2. Partnership risks – this risk could include those involving foreign business partners located in higher-risk jurisdictions, associations with prominent public office holders, insufficient knowledge or transparency of third party processes and controls.

Another approach was detailed by David Lawler, in his book “Frequently Asked Questions in Anti-Bribery and Corruption”. He broke the risk areas to evaluate down into the following categories: (1) Company Risk, (2) Country Risk, (3) Sector Risk, (4) Transaction Risk and (5) Business Partnership Risk. He further detailed these categories as follows:

  1. Company Risk-Lawyer believes this is “only to be likely to be relevant when assessing a number of different companies – either when managing a portfolio of companies from the perspective of a head office of a conglomerate or private equity house.” High risk companies involve, some of the following characteristics:
  • Private companies with a close shareholder group;
  • Large, diverse and complex groups with a decentralized management structure;
  • An autocratic top management;
  • A previous history of compliance issues; and/or
  • Poor marketplace perception.
  1. Country Risk-this area involves countries which have a high reported level or perception of corruption, have failed to enact effective anti-corruption legislation and have a failure to be transparent in procurement and investment policies. Obviously the most recent, annual Transparency International Corruption Perceptions Index can be a good starting point. Other indices you might consider are the Worldwide Governance Indicators and the Global Integrity index.
  2. Sector Risk-these involve areas which require a significant amount of government licensing or permitting to do business in a country. It includes the usual suspects of:
  • Extractive industries;
  • Oil and gas services;
  • Large scale infrastructure areas;
  • Telecoms;
  • Pharmaceutical, medical device and health care;
  • Financial services.
  1. Transaction Risk-Lawyer says that this risk “first and foremost identifies and analyses the financial aspects of a payment or deal. This means that it is necessary to think about where your money is ending up”. Indicia of transaction risk include:
  • High reward projects;
  • Involve many contractor or other third party intermediaries; and/or
  • Do not appear to have a clear legitimate object.
  1. Business Partnership Risk-this prong recognizes that certain manners of doing business present more corruption risk than others. It may include:
  • Use of third party representatives in transactions with foreign government officials;
  • A number of consortium partners or joint ventures partners; and/or
  • Relationships with politically exposed persons (PEPs).

There are a number of ways you can slice and dice your basic inquiry. As with almost all FCPA compliance, it is important that your protocol be well thought out. If you use one, some or all of the above as your basic inquiries into your risk analysis, it should be acceptable for your starting point.

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, 2014

August 25, 2014

Trying Something Different – the Desktop Risk Assessment

IMG_0774How many among you out there are sushi fans? Conversely, how many out there consider the idea of eating raw fish right up there with going into to the dentist’s office for some long overdue remedial work? One’s love or distaste for sushi was used as an interesting metaphor for leadership in this week’s Corner Office section of the New York Times (NYT) by Adam Bryant, in an article entitled “Eat Your Sushi, and Expand Your Horizon”, where he profiled Julie Myers Wood, the Chief Executive Officer (CEO) of Guidepost Solutions, a security, compliance and risk management firm. Wood said her sushi experience relates to advice she gives college students now, “One thing I always say is “eat the sushi.” When I had just graduated from college, I went with my mom to Japan. We had a wonderful time, but I refused to eat the sushi. Later, when I moved to New York, I tried some sushi and loved it. The point is to be willing to try things that are unfamiliar.”

I thought about sushi and trying something different in the context of risk assessments recently. I think that most compliance practitioners understand the need for risk assessments. The FCPA Guidance could not have been clearer when it stated, “Assessment of risk is fundamental to developing a strong compliance program, and is another factor DOJ and SEC evaluate when assessing a company’s compliance program.” Many compliance practitioners have difficulty getting their collective arms about what is required for a risk assessment and then how precisely to use it. The FCPA Guidance makes clear there is no ‘one size fits all’ for about anything in an effective compliance program.

One type of risk assessment can consist of a full-blown, worldwide exercise, where teams of lawyers and fiscal consultants travel around the globe, interviewing and auditing. However if there is one thing that I learned as a lawyer, which also applies to the compliance field, is that you are only limited by your imagination. So using the FCPA Guidance that ‘on one size fits all’ proscription, I would submit that is also true for risk assessments.

As with Wood’s admonition that you might want to try sushi even if you think you may not like it. I think that there are several different types of risk assessments that can be used to help to advance your compliance regime going forward. This means that if you do not have the time, resources or support to conduct a worldwide risk assessment annually, you can take a different approach. You might try assessing other areas annually through a more limited focused risk assessment, which a colleague of mine calls the Desktop Risk Assessment.

Some of the areas that such a Desktop Risk Assessment could inquire into might be the following:

  • Are resources adequate to sustain a culture of compliance?
  • How are the risks in the C-Suite and the Boardroom being addressed?
  • What are the FCPA risks related to the supply chain?
  • How is risk being examined and due diligence performed at the vendor/agent level? How is such risk being managed?
  • Is the documentation adequate to support the program for regulatory purposes?
  • Is culture, attitude (tone from the top), and knowledge measured? If yes, can we use the information enhance the program?
  • Disciplinary guidelines – Do they exist and has anyone been terminated or disciplined for a violating policy?
  • Communication of information and findings – Are escalation protocols appropriate?
  • What are the opportunities to improve compliance?

There are a variety of materials that you can review from or at a company that can facilitate such a Desktop Risk Assessment. You can review your company’s policies and written guidelines by reviewing anti-corruption compliance policies, guidelines, and procedures to ensure that compliance programs are tailored to address specific risks such as gifts, hospitality and entertainment, travel, political and charitable donations, and promotional activities.

You could assess your company’s senior management support for your compliance efforts through interviews of high-level personnel such as the Chief Compliance Officer (CCO), Chief Financial Officer (CFO), General Counsel (GC), Head of Sales, CEO and Board Audit or Compliance Committee members to assess “tone from the top”. You can examine resources dedicated to compliance and also seek to understand the compliance expectations that top management is communicating to its employee base. Finally, you can gauge operational responsibilities for compliance.

Such a review would lead to the next level of assessment, which would be generally labeled communications within an organization regarding compliance. You can do this by assessing compliance policy communication to company personnel but even more so by reviewing such materials as compliance training and certifications that employees might have in their files. If you did not yet do so, you should also take a look at statements by senior management regarding compliance, such as actions relating to terminating employees who do business in compliance but do not make their quarterly, semi-annual or annual numbers set in budget projections.

A key element of any best practices compliance program is internal and anonymous reporting. This means that you need to review mechanisms on reporting suspected compliance violations and then actions taken on any internal reports, including follow-ups to the reporting employees. You should also assess whether those employees who are seeking guidance on compliance for their day-to-day business dealings are receiving not only adequate but timely responses.

I do not think there is any dispute that third parties represent the highest risk to most companies under the FCPA, so a review of your due diligence program is certainly something that should be a part of any risk assessment. But more than simply a review of procedures for due diligence on third party intermediaries, you should also consider the compliance procedures in place for your company’s mergers and acquisitions (M&A) team; focusing on the pre-acquisition phase.

One area that I do not think gets enough play, whether in the FCPA Inc. commentary or in day-to-day practice is looking at what might be called employee commitment to your company’s compliance regime. So here you may want to review your compliance policies regarding employee incentives for compliance. But just as you look at the carrots to achieve compliance with your program, you should also look at the stick, in the form of disciplinary procedures for violations. This means you should see if there have been any disciplinary actions for employee compliance violations and then determine if such discipline has been applied uniformly. If you discipline top sales people in Brazil, you have to discipline your top sales folks in the US for the same or similar violations.

This list is not intended to be a complete list of items, you can pick and choose to form some type of Desktop Risk Assessment but hopefully you can see some of the things areas you can assess. In his article on Ms. Woods, Bryant quoted her for the following key trait she observed from successful leaders, “They were able to identify and focus on core things. When you go into an agency or a company, there are a million things you could fix. But you can’t fix everything, so you make a decision about your priorities, and then you act on them.” A Desktop Risk Assessment may well help you to do so.

If you aim to perform an annual Desktop Risk Assessment with a full worldwide risk assessment every two years or so, you should be in a good position to keep abreast of compliance issues that may change and need more or greater risk management. And do not forget the that the FCPA Guidance ends its section on risk with, “When assessing a company’s compliance program, DOJ and SEC take into account whether and to what degree a company analyzes and addresses the particular risks it faces.” Finally, if you never have tried sushi, I urge you to do so as it not only tastes good but its good for you as well.

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On Tuesday, August 26th I will be co-presenting with Marie Patterson VP Marketing for Hiperos on a webinar focusing on GSK in China-One Year Later. I will review the continued saga of the GSK corruption investigation in China, the Humphreys’ and Wu convictions and what it means for your compliance program going forward. The event is free and begins at 1 PM EDT. I hope that you can join us. For details and Registration, click here.

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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, 2014

August 19, 2014

A Surprise in Progressive Rock – FCPA Internal Investigations

Prog RockThis past weekend I saw some great bands and heard some great music. On Friday night I finally got to see Yes perform two fabulous albums, Close to the Edge and Fragile complete uncut and straight through. To say I was blown away would be putting it mildly. But there was one great revelation that I received from the show and that was the opening band, Syd Arthur. They are an English band, from Canterbury, and very much the inheritors of the prog rock mantle from bands such as Yes. Their sound was simply amazing and if you are into progressive rock at all, I would suggest you check them out.

I thought about my surprise on finding a more current and certainly younger band so proudly carrying the prog rock mantle when I returned back to Houston and was contacted by a reporter asking for my comments about the appeal of Shell v. Writt to the Texas Supreme Court. For those compliance practitioners amongst you who may have placed this state court libel action to the recesses of your mind or never even heard about it; it is something you should pay attention to as the case has some clear implications about the manner in which companies conduct and use internal investigations.

The case has a long involved Foreign Corrupt Practices Act (FCPA) history. It involves Panalpina and its customer Shell. David Smyth, in his great blog Cady Bar the Door, reported, in a post entitled “Texas Court of Appeals Has Put Some FCPA Internal Investigations in an Awkward Spot”, the Department of Justice (DOJ) contacted Shell about its dealings with Panalpina. Sometime later, “Shell agreed to conduct an internal investigation into its dealings with Panalpina. As Shell’s “managing counsel” later testified, “Shell agreed to conduct the internal investigation with the understanding that it would ultimately report its finding to the DOJ . . . .” A DOJ Fraud Section attorney wrote a follow-up letter noting, “[I]t is our understanding that Shell intends to voluntarily investigate its business dealings with Panalpina Inc. and all other Panalpina subsidiaries and affiliates.”” Unfortunately for all involved, “Shell submitted an investigative report that pointed the finger at Writt.  Specifically, Shell said Writt had been involved in illegal conduct in a Shell Nigerian project by recommending that Shell reimburse contractor payments he knew to be bribes and failing to report illegal contractor conduct he was aware of.”

Writt sued Shell for libel and Shell defeated Writt at the trial court on the basis that it had an “absolute privilege to say what it did in its investigative report to the DOJ.” In Texas absolute privilege applies because the unfettered flow of information to the judicial system and administrative proceedings is favored over the worry that someone might be wrongly named in such information.

However, a Texas Court of Appeals reversed the trial court ruling holding that absolute privilege does not apply where a party voluntarily turns over information to a prosecutor before a judicial proceeding is initiated or contemplated.

As Smyth explained, “In the court’s view, DOJ was acting purely in a prosecutorial and non-judicial capacity.  Shell submitted its investigative report on February 5, 2009, and DOJ did not file a criminal complaint against the company until November 2010, 20 months later.  As the court said, “Just because the DOJ ultimately filed a judicial proceeding against Shell does not establish that it was proposing that one be filed when it contacted Shell on July 3, 2007 or received Shell’s report on February 5, 2009.””

Shell has appealed this matter to the Texas Supreme Court. Under Texas law, an appeal to the Texas Supreme Court is discretionary and at this point, the Texas Supreme Court has not indicated whether it will accept the case. Interestingly the US Chamber of Commerce submitted a letter brief, on behalf of its members, urging the Texas Supreme Court to accept the case for review. In its penultimate paragraph it states, “At the end of the day, it is an unavoidable truth that any business that wishes to be a good corporate citizen by reporting its FCPA violations to regulators will necessarily implicate its own employees of wrongdoing. Thus, any rule that imposes costs on a company implicating its employees in wrongdoing will necessarily chill voluntary reporting of FCPA violations and impose unfair burdens on those companies who nonetheless choose to self-report.”

One of the more interesting arguments made by the Chamber was that there is currently enough incentive for companies to get investigations right. While noting that the Court of Appeals had worried about the “concern that absolute immunity from suit might motivate parties to “deflect blame” for FCPA violations onto its employees “without fear of consequence””; the Chamber said, “But there are more effective ways to prevent false reports. For example, false statements to government officials are already a crime punishable under 18 U.S.C. § 1001. Moreover, a false report against an employee would also implicate the business itself. After all, corporations act through their employees. Far from deflecting blame, then, a false accusation of an FCPA violation against an employee would incriminate the company as well.”

The real problem with this argument is that it leaves no remedy for any employee who is wrongly accused (libeled in legal parlance) in an internal FCPA investigation report. It has always been against the law to give false reports to government officials so nothing is new in that argument. One might argue that the civil justice system is better to evaluate such wrongful claims. But Smyth points to another reality when he ended his piece with the following, “FCPA investigations these days are a different animal, and probably deserving of different treatment by the courts.  As of now, a company conducting an internal FCPA investigation in Texas has to ask, what do we do if one of an investigation reveals one of our employees as a bad actor?  Do we say as much in the report we turn over to the government, as the government surely expects? If we do, are we signing on for libel litigation by the employee?”

Whatever the Texas Supreme Court decides, this case points to the need to do your best to get it right. That means having an investigation protocol that you can follow. It may mean having outside counsel handle an investigation when it is appropriate. If you conclude that one or more of your employees has violated the FCPA, you need to be able to back up that assertion with facts, evidence and reasonable inferences therefrom.

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, 2014

August 10, 2014

Where to Now St. Peter? – Due Diligence Going Forward in China

Tumbleweed ConnectionWhatever you might think of where his career went, Elton John had some great early stuff. I still rank Tumbleweed Connection right up there as one of my favorite albums of all-time. And while it was packed with some great tracks, one of my most favorite was Where to Now St. Peter? It was the opening track on Side 2 and dealt with whether a dying soldier would end up in heaven or hell. While perhaps having quite the spiritual overtones, I did think about this song when I read about the convictions on Saturday of Peter William Humphrey, a 58-year-old British national, and his wife, Yu Yingzeng, a 61-year-old naturalized American, on charges of illegally purchasing personal information about Chinese nationals.

In a one day trial the couple was convicted of illegally purchasing information on Chinese citizens. In an article in the Financial Times (FT), entitled “China court hands GSK investigator jail term and orders deportation”, Gabriel Wildau and Andrew Ward reported that husband Humphreys received a two and a half year jail term which was “just short of the three-year maximum”. In an article in the Wall Street Journal (WSJ), entitled “China Convicts Two Corporate Investigators”, James T. Areddy and Laurie Burkitt reported that he was also ordered to pay a fine of approximately $32,500 and will be deported from the country when his jail term is completed. Wife Yingzeng received a two year jail term and was ordered to pay a fine of approximately $23,000 but will be allowed to remain in the country after her sentence is completed.

In a New York Times (NYT) article, entitled “In China, British Investigator Hired by Glaxo, and Wife, Sentenced to Prison”, David Barboza reported that the couple “acknowledged that from 2009 to 2013, they obtained about 250 pieces of private information about individuals, including government-issued identity documents, entry and exit travel records and mobile phone records, all apparently in violation of China’s privacy laws.” According to the NYT article, wife Yu claimed that she did not know her actions where illegal and was quoted as saying, “We did not know obtaining these pieces of information was illegal in China. If I had known I would have destroyed the evidence.” According to the WSJ, the privacy law which was the basis of the conviction, was enacted in 2009 “to make it illegal to handle certain personal medical records and telephone records” but that the law itself “remains vague” on what precisely might constitute violation.

From the court statements, however, it did appear that the couple had trafficked in personal information. As reported by the WSJ, “In separate responses over more than 10 hours, My Humphreys and Ms. Yu denied that their firm trafficked in personal information, saying they had hired others to obtain personal data when clients requested it.” From the documents presented by the prosecution, it would seem clear that the couple had obtained my items which were more personal in nature. They were alleged by prosecutors to have “used hidden cameras to gather information as well as government records on identification numbers, family members, real-estate holdings, vehicle owner, telephone logs and travel records.”

Recognizing the verdicts under Chinese laws are usually predetermined and the entire trials are scripted affairs, there is, nonetheless, important information communicated to the outside world by this trial. First and foremost is, as reported in the NYT article is a “chilling effect on companies that engage in due diligence work for global companies, many of whom believe the couple may have been unfairly targeted.” The WSJ article went further quoting Geoffrey Sant for the following, “It impacts all attempts to do business between the U.S. and China because it will be very challenging to verify the accuracy of company or personal financial information.” In other words, things just got a lot tougher to perform, what most companies would expect to be a minimum level of due diligence.

Second is the time frame noted in the court statements as to the time of the violations, from 2009 to 2013. Many had assumed that Humphreys and Yingzeng’s arrests related to their investigation work on behalf of the British pharmaceutical giant GlaxoSmithKline PLC (GSK) which was trying to determine who had filmed a sex tape of the company’s head of Chinese operations, which was then provided to the company via an anonymous whistleblower. This would seem to beg the question of whether the couple would have been prosecuted if they not engaged in or accepted the GSK assignment.

But as Elton John asked, “Where to now St. Peter?” You should always remember that performing due diligence is but one of five steps in the management of the third party life cycle. If you cannot perform due diligence at a level that you do in other countries or that you could even have done in China before the Humphreys and Yu trial, you can beef up the other steps to help proactively manage your third parties. I often say that your real work with third parties begins when the contract is executed because then you have to manage the relationship going forward. So, if you cannot perform the level of due diligence you might like, you can put more resources into monitoring the relationship, particularly in the area of invoice review and payments going forward.

In a timely article found in this month’s issue of the SCCE magazine, Compliance and Ethics Professional, Dennis Haist and Caroline Lee published an article, entitled “China clamps down on bribery and corruption: Why third-party due diligence is a necessity” where they discussed a more robust response to the issue as well. They note that the retention of third party’s to do business in China is an established mechanism through which to conduct business. They advise “For multinationals with a Chinese presence, or plans to enter the market in the near future, now is the time to pay close attention to the changing nature of the business landscape as it relates to bribery and corruption.” Further, they suggest that “In order to ensure compliance with ABAC [anti-bribery/anti-corruption] regulatory scrutiny, multinationals must demonstrate a consistent, intentional and systematic approach to third-party compliance.” But in addition to the traditional background due diligence, they believe that companies should consider an approach that moves to proactively managing and monitoring third parties for compliance. Lastly, at the end of the day if a regulator comes knocking from the Department of Justice (DOJ) or Serious Fraud Office (SFO), you will need to demonstrate the steps you have put in place and your active management of the process.

In the FT, WSJ and NYT articles it was clearly pointed out that the invisible elephant in the room was GSK. Also it is not clear what the personal tragedy that Humphreys and Yu have endured will mean for GSK or the individuals caught up in that bribery scandal going forward. Humphreys had previously said that he would not have taken on the GSK sex tape assignment if it had been disclosed to him that the company had sustained allegations of corruption by an internal whistleblower. Perhaps one lesson may be that in the future companies will have to disclosure more to those they approach to perform such investigative services.

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, 2014

August 6, 2014

Theme from Shaft and Continuous Improvement of Your Compliance Program, Part I

Isaac HayesThe composer of what I believe to be the absolute coolest movie theme ever was born on this date in 1942, Isaac Hayes. Hayes continually succeeded in many areas. In the 1960s it was with soul music on the great label Stax. In the 90s it was as the voice of Chef on the animated TV series South Park. But for my generation it was for the theme song, and indeed entire soundtrack, to the movie Shaft that I will always remember Hayes for. The success of that soundtrack led not only to nearly four more decades in the public eye, but as I will never forget sight of Isaac Hayes, playing shirtless in heavy chains and sunglasses as he performed the #1 pop single “Theme from ‘Shaft'” on national television the night he was awarded the Academy Award for Best Score.

How Hayes continued to reinvent of himself as a performer informs my blog posts over the next two days as I look at continuous improvement in your Foreign Corrupt Practices Act (FCPA) compliance program. Today, I will review the regulators view on continuous improvement and tomorrow I will provide some specific techniques that you can engage in to help satisfy this prong of the Ten Hallmarks of an Effective Compliance Program.

You should keep track of external and internal events that may cause change to business process, policies and procedures. Some examples are new laws applicable to your business organization and internal events driving changes within a company. Such internal changes could be a company reorganization or major acquisition. This type of review appears to be similar to the Department of Justice (DOJ) advocacy of ongoing risk assessments. The FCPA Guidance (Guidance) specifies, “a good compliance program should constantly evolve. A company’s business changes over time, as do the environments in which it operates, the nature of its customers, the laws that govern its actions, and the standards of its industry. In addition, compliance programs that do not just exist on paper but are followed in practice will inevitably uncover compliance weaknesses and require enhancements. Consequently, DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and not allow them to become stale.”

Continuous improvement requires that you not only audit but also monitor whether employees are staying with the compliance program. In addition to the language set out in the FCPA Guidance, two of the seven compliance elements in the Federal Sentencing Guidelines (FSG) call for companies to monitor, audit, and respond quickly to allegations of misconduct. These three activities are key components enforcement officials look for when determining whether companies maintain adequate oversight of their compliance programs.

A review plan is an excellent tool for the compliance practitioner because it provides a method for the ongoing evaluation of policies and sets forth a manner to communicate and train on any changes that are implemented. More than simply staying current, this approach will help provide the dynamics that the DOJ continually talks about in keeping your program fresh. Lastly, such a review plan can also guide the compliance practitioner in creating an ongoing game plan for compliance program upgrades and updates that Stephen Martin advocates.

The Guidance makes clear that each company should assess and manage its risks and specifically notes that small and medium-size enterprises likely will have different risk profiles and therefore different attendant compliance programs than large multi-national corporations. Moreover, this is something that the DOJ and Securities and Exchange Commission (SEC) take into account when evaluating a company’s compliance program in any FCPA investigation. This is why a “Check-the-Box” approach is not only disfavored by the DOJ, but, at the end of the day, it is also ineffectual. It is because each compliance program should be tailored to the enterprise’s own specific needs, risks, and challenges.

One tool that is extremely useful in the continuous improvement cycle, yet is often misused or misunderstood, is ongoing monitoring. This can come from the confusion about the differences between monitoring and auditing. Monitoring is a commitment to reviewing and detecting compliance variances in real time and then reacting quickly to remediate them. A primary goal of monitoring is to identify and address gaps in your program on a regular and consistent basis across a wide spectrum of data and information.

Auditing is a more limited review that targets a specific business component, region, or market sector during a particular timeframe in order to uncover and/or evaluate certain risks, particularly as seen in financial records. However, you should not assume that because your company conducts audits that it is effectively monitoring. A robust program should include separate functions for auditing and monitoring. Although unique in protocol, the two functions are related and can operate in tandem. Monitoring activities can sometimes lead to audits. For instance, if you notice a trend of suspicious payments in recent monitoring reports from AsiaPac, it may be time to conduct an audit of those operations to further investigate the issue.

Your company should establish a regular monitoring system to spot issues and address them. Effective monitoring means applying a consistent set of protocols, checks, and controls tailored to your company’s risks to detect and remediate compliance problems on an ongoing basis. To address this, your compliance team should be checking in routinely with local Finance departments in your foreign offices to ask if they’ve noticed any accounting irregularities. Regional directors should be required to keep tabs on potential improper activity in the countries in which they manage. These ongoing efforts demonstrate that your company is serious about compliance.

The DOJ emphasized again with the 2011 Pfizer Deferred Prosecution Agreement (DPA), the need for a company to establish protocols for auditing. It included the following detail on auditing protocols:

  • On-site visits by an FCPA review team comprised of qualified personnel from the Compliance, Audit and Legal functions who have received FCPA and anti-corruption training.
  • Review of a representative sample (appropriately adjusted for the risks of the market) of contracts with and payments to individual foreign government officials as well as other high-risk transactions in the market.
  • Creation of action plans resulting from issues identified during the proactive reviews; these action plans will be shared with appropriate senior management and should contain mandatory remedial steps designed to enhance anti-corruption compliance, repair process weaknesses, and deter violations.
  • A review of the books and records of a sample of third party representatives that, in the view of the FCPA proactive review team, may present corruption risk. Prior to such an investigation, however, the company should have procedures in place to make sure every investigation is thorough and authentic, including document preservation protocols, data privacy policies, and communication systems designed to manage and deliver information efficiently.

Tomorrow, I will review some specific steps you can take to meet these goals.

For your listening pleasure, close your eyes and listen to the Theme From Shaft, 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, 2014

July 25, 2014

Code of Conduct, Compliance Policies and Procedures-Part IV

Policies and ProceduresThis is the fourth and final installment of my series on the the importance of a Code of Conduct and anti-corruption compliance policies and procedures in your compliance program and how you should go about drafting or updating Code of Conduct and anti-corruption compliance policies and procedures. On Tuesday, I reviewed the underlying legal and statutory basis for the documents as a foundation of your overall anti-corruption regime. In subsequent posts, I looked at how to go about drafting your Code of Conduct and anti-corruption compliance policies and procedures. Today, I will end the series on how to keep all of the above vibrant and dynamic through a discussion of how to assess, review and revise them and your Code of Conduct on a timely basis.

Simply having a Code of Conduct, together with policies and procedures is not enough. As articulated by former Assistant Attorney General, for the Criminal Division of the US Department of Justice, Lanny Breuer, “Your compliance program is a living entity; it should be constantly evolving.” In an article in the SCCE Magazine, entitled “Six steps for revising your company’s Code of Conduct”, authors Anne Marie Logarta and Ruth Ward suggest considering the following issues before you take on an update of your Code of Conduct.

  • When was the last time your Code of Conduct was released or revised?
  • Have there been changes to your company’s internal policies since the last revision?
  • Have there been changes to relevant laws relating to a topic covered in your company’s Code of Conduct?
  • Are any of the guidelines outdated?
  • Is there a budget to create/revise a Code?

After considering these issues, the authors suggest that you should benchmark your current Code of Conduct against others companies in your industry. I would also add that your standards, policies and procedures should be reviewed and updated in the same manner. If you decide to move forward the authors have a six-point guide which they believe will assist you in making your revision process successful, which I have used as a basis to include revisions to your compliance policies and procedures.

  1. Get buy-in from decision makers at the highest level of the company 

The authors believe that your company’s highest level must give the mandate for a revision to a Code of Conduct and compliance polices and procedures. It should be the Chief Executive Officer (CEO), General Counsel (GC) or Chief Compliance Officer (CCO), or better yet all three to mandate this effort. Whoever gives the mandate, this person should be “consulted at every major step of the Code review process if it involves a change in the direction of key policies.”

  1. Establish a core revision committee 

You should have a cross-functional working group would be ideal to head up your effort to revise your Code of Conduct and compliance polices and procedures. This group should include representatives from the following departments: legal, compliance, communications, HR; there should also be other functions which represent the company’s domestic and international business units; finally there should be functions within the company represented such as finance and accounting, IT, marketing and sales.

From this large group, the topics can be assigned for initial drafting to functions based on “relevancy or necessity”. These different functions would also solicit feedback from their functional peers and deliver a final, proposed draft to the Drafting Committee. The authors emphasize that creation of a “timeline at the outset of the revision is critical and hold the function representatives accountable for meeting their deliverables.”

  1. Conduct a thorough technology assessment 

The cornerstone of the revision process is how your company captures, collaborates and preserves “all of the comments, notes, edits and decisions during the entire project.” They believe that technology such as SharePoint or Google Cloud can be of great assistance to accomplish this process even if you are required to train team members on their use.

In addition to this use of technology in drafting your Code of Conduct and compliance polices and procedures revisions, you should determine if they will be available in hard copy, online or both. If it will be available online, you should assess “the best application to launch your Code and whether it includes a certification process”. Lastly, there must be a distribution plan, particularly if the Code and compliance polices and procedures will only be available in hard copy.

  1. Determine translations and localizations 

The authors emphasize, “If your company does business internationally, then this step is vital to ensure you have one Code, no matter the language.” They do note that if you decide to translate your Code of Conduct be sure and hire someone who is an “approved company translation subject matter expert.” Here I would simply say to contact Jay Rosen at Merrill Brink, as those guys are the one of the top Language Service Providers and know what they are doing when it comes to translations. The key is that “your employees have the same understanding of the company’s Code-no matter the language.” 

  1. Develop a plan to communicate the Code of Conduct 

A rollout is always critical because it “is important that the new or revised Code is communicated in a manner that encourages employees to review and use the Code on an ongoing basis.” Your company should use the full panoply of tools available to it to publicize your new or revised Code of Conduct and compliance polices and procedures. This can include a multi-media approach or physically handing out a copy to all employees at a designated time. You might consider having a company-wide Code of Conduct and compliance polices and procedures meeting where the new or revised documents are rolled out across the company all in one day. But remember, with all thing compliance; the three most important aspects are ‘Document, Document and Document’. However you deliver the new or revised Code of Conduct, you must document that each employee receives it.

6.   Stay on Target 

The authors end by noting that if you set realistic expectations you should be able to stay on deadline and stay within your budget. They state that “You want to set aside enough time so that you won’t feel rushed or in a hurry to get it done.” They also reiterate that to keep a close watch on your budget so that you do not exceed it.

These points are a useful guide to not only thinking through how to determine if your Code of Conduct, and compliance policies and procedure needs updating, but also practical steps on how to tackle the problem. If it has been more than five years since it was last updated, you should begin the process that the authors have laid out. It is far better to review and update if appropriate than wait for a massive FCPA investigation to go through the process.

There are numerous reasons to put some serious work into your Code of Conduct, policies and procedure. They are certainly a first line of defense when the government comes knocking. The FCPA Guidance makes clear that “Whether a company has policies and procedures that outline responsibilities for compliance within the company, detail proper internal controls, auditing practices, and documentation policies, and set forth disciplinary procedures will also be considered by DOJ and SEC.” And by considered, I think it is clear that this means the regulators will take a strong view against a company that does not have well thought out and articulated policies, procedures or Code of Conduct; all of which are systematically reviewed and updated. Moreover, as Allen emphasized, “having policies written out and signed by employees provides what some consider the most vital layer of communication.” Together with a signed acknowledgement, these documents can serve as evidentiary support if a future issue arises. In other words, the ‘Document, Document and Document’ mantra applies just as strongly to this area of anti-corruption 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, 2014

July 22, 2014

Code of Conduct, Compliance Policies and Procedures-Part I

Policies and ProceduresFor the remainder of this week, I will have a four-part episode on your Code of Conduct and anti-corruption compliance policies and procedures. In today’s post I will review the underlying legal and statutory basis for the documents as a foundation of your overall anti-corruption regime. In subsequent posts, I will review how to go about drafting your Code of Conduct and anti-corruption compliance policies and procedures and how to assess, review and revise them on a timely basis.

The cornerstone of a US Foreign Corrupt Practice Act (FCPA) compliance program is its written protocols. This includes a Code of Conduct, policies and procedures. These requirements have long been memorialized in the US Federal Sentencing Guidelines (FSG), 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 FSG assumes 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? The starting point, as per the FSG, reads as follows:

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, 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 said 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. 

Stephen Martin and Paul McNulty, partners in the law firm of Baker and McKenzie, developed one of the best formulations that I have seen of these requirements in their Five Elements of an Effective Compliance Program. In this formulation, they posit that your Code of Conduct, policies and procedures should be grouped under the general classification of ‘Standards and Procedure’. They articulate that every company has three levels of standards and controls. First, every company should have a Code of Conduct, which should, most generally express its ethical principles. But simply having a Code of Conduct is not enough. So a second step mandates that very company should have standards and policies in place that build upon the foundation of the Code of Conduct and articulate Code-based policies, which should cover such issues as bribery, corruption and accounting practices. From the base of a Code of Conduct and standards and policies, every company should then ensure that enabling procedures are implemented to confirm those policies are implemented, followed and enforced.

FCPA compliance best practices now require companies to have additional standards and controls, including, for example, detailed due diligence protocols for screening third-party business partners for criminal backgrounds, financial stability and improper associations with government agencies. Ultimately, the purpose of establishing effective standards and controls is to demonstrate that your compliance program is more than just words on a piece of paper.

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 which 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, 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 your Code of Conduct for five years, I would suggest that you do in short order as much has changed in the compliance world.

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, 2014

July 17, 2014

John Bell Hood and the Measurement of Conduct Risk

John Bell HoodReaders of this blog know I am huge Civil War buff. Growing up in Texas, I only focused on the Southern side as a youngster and while this led to a sometime myopic view of events, in my mid-20s when I did begin to study the Northern side of the war, because I had never seriously studied from that perspective an entire panorama opened up for me.

One thing that never changed however, was the disaster that befell the South from the appointment of John Bell Hood to commander of the Army of Tennessee, which opposed General Sherman’s advance into Georgia since his stunning defeat of the Confederate forces at Chattanooga and later Lookout Mountain in Tennessee in late 1863. On this day 150 years, Confederate President Jefferson Davis replaced General Joseph Johnston with John Bell Hood as commander of the Army of Tennessee. Davis, impatient with Johnston’s defensive strategy in the Atlanta campaign, felt that Hood stood a better chance of saving Atlanta from the forces of Union General William T. Sherman. President Davis selected Hood for his reputation as a fighting general, in contrast to Johnston’s cautious nature. Hood did what Davis wanted and quickly attacked Sherman at Peachtree Creek on July 20 but with disastrous results. Hood attacked two more times, losing both and destroying his army’s offensive capabilities. Over the next two weeks in 1864, Hood’s actions not only led to President Abraham Lincoln’s reelection but spelled, once and for all, the doom of the Confederacy.

I thought about the risks of appointing Hood to command when I read a recent article in the Compliance Week Magazine by Carol Switzer, co-founder and President of the Open Compliance and Ethics Group (OCEG), entitled “A Strategic Approach to Conduct Risk”. Her article was accompanied by an entry in the OCEG Illustrated Series, entitled “Managing Conduct Risk in the GRC Context”, and she also presented thoughts from a Roundtable which included John Brown, Managing Principal, Risk Segment, Financial and Risk Division at Thompson Reuters; Tom Harper, Executive Vice President-General Auditor Federal Home Loan of Chicago and Dr. Roger Miles, Behavioral Risk Lead, Thompson Reuters.

In her article, Switzer pointed to the “Ill-advised risk taking” which led to the near-collapse of the financial sector as the genesis for the creation of the UK’s new Financial Conduct Authority (FCA). But she also noted that conduct risk is something that exists in industries far afield from the financial sector where “sales schemes driven by inappropriate incentive plans and outlandish short-term objectives” can cause severe financial consequences to an organization. As an example of the need for change in the financial section, Switzer quoted Clive Adamson, FCA director of supervision, on the need to address conduct risk, “Achieving an effective conduct- or customer-focused culture is challenging for firms, particularly for those whose focus has been primarily on profitability and shareholder returns. … From what we see, there are key drivers that set and re-enforce this conduct-focused culture, with the most important being clear and ongoing leadership from the top of the organization, constant re-enforcement, hiring practices, incentive structures, effective performance management, and penalties for not doing the right thing, all of which should set the tone for a framework for decision making on a day-by-day basis.”

Switzer continued that “Throughout his speech and other materials published by the FCA, there is a theme that returns over and over again to integrity, leadership, culture, the concept of controls over conduct, and strong risk management—all tied to an outcome of business success. What is this? It is a vision of principled performance—a point of view and approach to business that enables organizations to reliably achieve objectives while addressing uncertainty and acting with integrity. And it is refreshing to see leaders (and in some cases past wrongdoers) in the financial sector rising to the occasion and establishing a principled performance approach to conduct risk, even though they may not yet call it that.”

Harper described conduct risk as follows, “Conduct risk embodies elements of the risks that we have been discussing over the past few years, including not only operational and compliance risk, but also reputational risk and tone-at-the-top. The idea that organizations need to ‘do the right thing’ and balance the immediate pressure of short-term growth and revenue along with meeting the aspirations of equity holders and managers is not new. In the past, conduct risk was primarily mitigated by the long-term focus on the goals of the organization of the board and management.”

In the Illustrated Series piece included with the article, Switzer set out four principles for managing conduct risk. These principles are an excellent starting point for the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption compliance practitioner in that it can be used to evaluate, assess and manage conduct risk in such a context.

Assess Conduct Risks

Miles stated that, “The idea of benchmarking “conduct” as a basis for business, or life in general, is actually of course a very old one. Constraints on behavior are exactly the right direction to go in, though it’s not yet clear how these will be framed, let alone policed. Now with the FCA’s new Risk Outlook 2014, there’s a big step forward. They have a deep commitment to sharing understanding about how various elements of behavior feed through into good and bad product design, into selling or mis-selling.” Based on this Switzer believes that you should first identify potential conduct risks in your business. After such identification, you should conduct a risk and control assessment. From this measure, you can best determine the level of inherent and residual risk. Finally, you should carry out an emerging risk workshop to develop a more complete risk profile.

Establish Risk Appetite

Brown pointed towards the increased complexity in financial institutions as a key problem. As part of the solution, Switzer writes that the first step is to connect the risks, controls and other framework elements to your company’s organization chart. From there, you should determine risk capacity, your company’s current risk profile and its risk appetite. Next you should measure your risk appetite adherence. Finally, you will need to align your risk appetite with your company’s risk governance framework.

Measure and Monitor 

Here Switzer suggests that there be a detailed information collection on any issues associated with risk events. It is important from that point, you begin to track key risk indicators. Miles noted that “Managing risks due to behaviors and cultures requires a deep understanding of psychological drivers and developing programs to modify those drivers”; as such measurements would allow your company to begin to move from simple detection and prevention to predictive controls through the use of behavioral and analytical modeling. Finally, you could use the above information to perform scenario analysis on emerging risks.

Communicate and Manage

Switzer advocates that you communicate and train your company’s employees on your organization’s risk culture. You should also work to ensure that employees have accepted their risk conduct appetite metrics. Brown said, “Behavioral drivers will vary around the world based on societal culture. I’ll focus on what might be appropriate for U.S.-based organizations. Most people operate to maximize their personal return, so compensation structures are an obvious avenue to modify conduct. If my bonus or equity compensation is based on specific targets, such as new accounts, loans written, or customer satisfaction index, I will try to maximize those targets.” This is why you should continue to collect all key data about conduct risk in one data repository. Finally, you should also continue to provide reports and analyses on conduct risk to key stakeholders and regulators, if required.

Switzer ended her article with the following quote from Gary Kasparov, “Think about it: After just three opening moves by a chess player, more than 9 million positions are possible. And that’s when only two players are involved in the game. Now imagine all the possibilities faced by companies with a whole host of corporations responding to their new strategies, pricing, and products. The unpredictability is almost unimaginable.” From this she added, “This couldn’t be truer than when facing the myriad challenges presented under the umbrella concern of conduct risk. Masterful strategic planning and execution is essential to stay in the game and win.”

The risks that General Hood was willing to engage in were catastrophic for his army and the Confederacy. If Jefferson Davis had used a risk conduct analysis to think through the effects of elevating Hood to command of the Army of Tennessee the results might have been very different for all involved. Switzer’s article provides a valuable tool for the compliance practitioner to bring to bear on specific conduct which could put a company at risk.

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, 2014

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