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 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.

==============================================================================================================================================================================================================================================

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.

==============================================================================================================================================================================================================================================

 

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 21, 2014

What Can You Do When Risk Changes in a Third Party Relationship?

RiskThe GlaxoSmithKline PLC (GSK) corruption matter in China continues to reverberate throughout the international business community, inside and outside China. The more I think about the related trial of Peter Humphrey and his wife, Yu Yingzeng for violating China’s privacy laws regarding their investigation of who filmed the head of GSK’s China unit head in flagrante delicto with his Chinese girlfriend, the more I ponder the issue of risk in the management of third parties under the Foreign Corrupt Practices Act (FCPA). In an article in the Wall Street Journal (WSJ), entitled “Chinese Case Lays Business Tripwires”, reporters James T. Areddy and Laurie Burkitt explored some of the problems brought about by the investigators convictions.

They quoted Manuel Maisog, chief China representative for the law firm Hunton & Williams LLP, who summed up the problem regarding background due diligence investigations as “How can I do that in China?” Maisog went on to say, “The verdict created new uncertainties for doing business in China since the case hinged on the couple’s admissions that they purchased personal information about Chinese citizens on behalf of clients. Companies in China may need to adjust how they assess future merger partners, supplier proposals or whether employees are involved in bribery.”

I had pondered what that meant for a company that wanted to do business in China, through some type of third party relationship, from a sales representative to distributor to a joint venture (JV). What if you cannot get such information? How can you still have a best practices compliance program around third parties representatives if you cannot get information such as ultimate beneficial ownership? At a recent SCCE event, I put that question to a Department of Justice (DOJ) representative. Paraphrasing his response, he said that companies still need to ask the question in a due diligence questionnaire or other format. What if a third party refuses to answer, citing some national law against disclosure? His response was that a company needs to very closely weigh the risk of doing business with a party that refuses to identify its ownership.

The more that I thought about that answer the more I became convinced that it was not only the right answer under any type of FCPA compliance program but also the right response from a business perspective. A company must know who it is doing business with, for a wide variety of reasons. The current situation in China and even the convictions of Humphrey and Yu do not change this basic premise. You can ask the question. If a party does not want to disclose its ownership, you should consider this in any business relationship going forward.

The Humphrey and Yu conviction do not prevent you from asking the question about ownership. Their convictions mean that you may not be able to verify that information through what many people thought was publicly available information, at least publicly available in the west. I was struck by one line in the Areddy and Burkitt article, “It’s not just that the tactical business practices need to change; it’s the mind set” quoting again from Maisog.

I breakdown the management of third parties under the FCPA into five steps, which are:

  1. Business Justification and Business Sponsor;
  2. Questionnaire to Third Party;
  3. Due Diligence on Third Party;
  4. Compliance Terms and Conditions, including payment terms; and
  5. Management and Oversight of Third Parties After Contract Signing.

The due diligence step is but one of these five. Further due diligence is performed in large part to verify the information that you receive back from a proposed third party. So what if you can longer use avenues previously open to you in markets such as China? Perhaps there are other ways to manage this issue. Areddy and Burkitt also interviewed Jerry Ling, a partner at Jones Day, for the following “companies will need to analyze Chinese accounting documents themselves and conduct more in-person interviews with anyone they want to know more about in China.”

Ling’s point dovetails directly into what I heard from the DOJ representative. There is nothing about the Chinese law, or any other country’s law, which prevents you from asking some basic questions that are found in the Step 2 Questionnaire cited above. You can always ask who the owners of a company are, whether they are direct or beneficial. You can always ask if a company, its owners or its senior management have been involved in any incidents involving bribery and corruption and you can always ask if the company has a Code of Conduct and/or compliance program and whether its owners or senior management are aware of the FCPA and have had training on it.

Assuming the company will answer your questionnaire, the difficulty you may find yourself in now is verifying the information that you receive. In Ronald Reagan parlance, you may trust but you may not be able to verify it. Ling said in the WSJ article that “The challenge now for clients is that it’s hard to get good information.”

However, due diligence is but one step in the management of any third party in a FCPA compliance program. Just as when risk goes up and you increase your management around that risk, the situation is similar in here. Putting it another way, if you cannot obtain private information such as personal identification numbers during the due diligence process, you can put greater management around the other steps that you can take. Further, there has been nothing reported which would suggest that publicly filed corporate licenses or other information that might show ownership can no longer be accessed. Court records and public media searches also seem to still be available.

But what if you simply cannot determine if the information you are provided regarding ownership is accurate or even truthful? You can still work to manage the relationship through your commercial terms by setting your commission or other pay rates at a reasonable amount of scale. If you are dealing with a commissioned sales representative, you can probably manage this area of the relationship by setting the commission in the range of 5%. You can also manage the relationship by reviewing invoices to make sure there is an adequate description of the services provided so that they justify whatever compensation the third party is entitled to receive under the contract. You may also want to schedule such a third party for an audit ahead of other parties to help ensure adherence to your compliance terms and conditions.

There may be times when you cannot verify the true or ultimate beneficial owner of a third party. That does not have to be the end of the analysis. If that situation arises, you may want to see if there are other risk mitigation tools at your disposal. Put another way, if such a red flag arises, can it be cleared? Can it be managed? If your company is looking a major deal for multi-millions and your agent will receive a six or seven figure commission, the risk of not knowing with certainty may be too great because in such a case, an unknown owner could be a government official who has awarded the contract. But if your agent receives a considerably smaller commission and hence there is a considerably small amount of money to constitute a bribe, you may be able to manage that risk through a close and effective relationship management process.

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 7, 2014

Continuous Improvement Of Your Compliance Program, Part II

7K0A0246Yesterday, I began a two-part series on continuous monitoring of your anti-corruption compliance program. In Monday’s post, I looked at the regulatory framework for such a requirement. In today’s conclude with some thoughts on how to continually improve and update your Foreign Corrupt Practices Act (FCPA) or UK Bribery Act compliance regime and take a look again at how the regulators might view your program, in some quick, easy and pithy ways.

Anti-corruption, anti-bribery, anti-money laundering (AML) programs policies and procedures and even export control systems are seemingly in a constant state of evolution. Many companies are struggling with the challenge of implementing effective controls and monitoring risks across a spectrum that could include the three above listed compliance areas as well as others. One area that has evolved into a minimum best practices requirement for compliance is that of continuous monitoring.

While many companies will look at continuous monitoring as a software solution that can assist in managing risk, provide reporting metrics and, thereby, insights across an organization, it should be viewed more holistically. You will need to take many disparate systems, usually across a wide international geographic area, which may seem like an overwhelming process. Justin Offen, explained this in his article, entitled “Mission Impossible? Six steps to continuous monitoring”, where he detailed a six-point program to ensure that your “CM solution doesn’t become part of the problem” rather than a solution.

  1. Know your global IT footprint. It is important to understand how continuous monitoring will be incorporated into your company’s overall IT strategy as well as your compliance strategy. This advocates that this inquiry begins with understanding what your current IT structure is and what it is anticipated to be in 3 and 5 years. Once you identify your global IT footprint you can determine which system will be the best fit.
  2. Define scope and necessary resources. You should determine what your goal is, begin by identifying your needs and then prioritize them. You should perform a risk analysis and then rank the risks. Next, you need to understand the amount of talent you have in your organization, identify who can implement and work with the system and determine your budget, which may need to be increased based upon your need for outside experts and unknown contingencies.
  3. Conduct a pilot or proof of concept. A phased rollout can be used as a proof of concept, which can yield greater functioning efficiency throughout your entire program implementation. It should also allow you to chalk up an early success to present to the inevitable nay-sayers in your organization.
  4. Decrease false positives. This is important because improper or incomplete testing may well lead to a larger amount of false positives which you are required to evaluate and clear. From each test, you can further refine your continuous monitoring solution to the specific needs of your organization and increase time and efficiency in your overall continuous monitoring program.
  5. Establish your escalation protocol. You should establish a response protocol when an exception or Red Flag arises. This protocol should include an escalation protocol if the Red Flag suggests that it is warranted or additional investigation determines a wider problem exists. This protocol should include specific individuals and departments that need to be notified, the makeup of your initial and secondary triage team and the accountability for each person in the process, all the way up to the Board.
  6. Demonstrate control through case management. This demonstrates once again the maxim of Document, Document and Document. You need to be ready to “respond with appropriate documentation of any transaction that’s been reviewed, showing the level of review and any additional steps taken.”

The benefits of such a continuous monitoring program are significant; the creation of documentation that can lead to a ‘ready response’ by a company to an issue before it becomes a larger problem, coupled with the ability to recall all steps and information when a regulator comes knocking. Internally, using the pilots or proofs of concepts, the compliance department can bring in other stakeholders to see the value of continuous monitoring within the organization.

You Have a Strategic Plan – Now What Do You Do?

Have you thought about your anti-corruption through the lens of a strategic plan? If not, you might want to use the formulation proffered by Bruce Rector, in an article entitled “Strategic planning needs constant follow-up to be successful”. Recognizing that a strategic plan can serve as guide for your company going forward, it must actually be utilized to garner any use out of it. I believe that the steps he lays out translate, without difficulty, into steps a compliance officer can take to meet the suggestion laid out by Offen above.

  • Review the Goals of the Strategic Plan. This requires that you arrange a time for the Chief Compliance Officer (CCO) and team to review the goals of the Strategic Plan. To the extent possible this should be done in person. The CCO should lead a discussion of the Strategic Plan and determine how this goal in the Plan measures up to its implementation in your company.
  • Design an Execution Plan. The “Keep it Simple Sir” or KISS method is the best to move forward. This would suggest that for each compliance goal, there should be a simple and straightforward plan to ensure that the goal in question is being addressed. Any such plan must be specific with clear goals for all involved, with tasks handed out, deliverables defined and a definite timeline for delivery.
  • Put Accountabilities in Place. In any plan of execution, there must be accountabilities attached to them. Simply having a time line is not enough. This means that the persons tasked with the responsibility of performing the tasks be clearly identified, by both the individual so tasked and the actual task they are assigned to complete. Accountability requires that there be follow-up to confirm that these targets are met. This requires the CCO or other senior compliance department representative to put these in place and then mandate a report requirement on how the task assigned is being achieved.
  • Schedule the Next Review of the Plan. There should be a regular review of the process. While noting that this may seem time consuming, this means the group responsibility gets into a regularity, which will assist the process moving forward more smoothly. It also allows any problems which may arise to be detected and corrected more quickly than if meetings are held at a less frequent basis.

It is a function of the CCO to reinforce the vision and goals of the compliance function, where assessment and updating are critical to an ongoing best practices compliance program. If you follow this protocol, you will put a mechanism in place to demonstrate your company’s commitment to compliance by following through on intentions as set forth in your strategic plan.

The Regulators Perspective

What does an effective compliance program look like? Over the years, we have heard various formulations of inquiries that regulators might use when reviewing a compliance program. While not exactly a review of a compliance protocol, one of my favorites is what I call McNulty’s Maxims or the three questions that former United States Deputy Attorney General, and Baker & McKenzie LLP partner, Paul McNulty said were three general areas of inquiry the he would assess regarding an enforcement action when he was at the DOJ. They are: first: “What did you do to stay out of trouble?” second: “What did you do when you found out?” and third: “What remedial action did you take?”

Stephen Martin said that an inquiry he might make was along the lines of the following. First he would ask someone who came in before the DOJ what the company’s annual compliance budget was for the past year. If the answer started with something like, “We did all we could with what we had ($100K, $200K, name the figure), he would then ask, “How much was the corporate budget for Post-It Notes last year?” The answer was always in the 7-figure range. His next question would then be, “Which is more business critical for your company; complying with the FCPA or Post-It Notes?” Unfortunately, it has been Martin’s experience that most companies spent far more on the Post-It Notes than they were willing to invest in compliance.

Andrew Ceresney, Director of the Division of Enforcement of the SEC, speaking at Compliance Week 2014, said that he has “found that you can predict a lot about the likelihood of an enforcement action by asking a few simple questions about the role of the company’s legal and compliance departments in the firm.” He then went on to detail some rather straightforward questions that he believes could show just how much a company is committed to having a robust compliance regime.

  • Are legal and compliance personnel included in critical meetings?
  • Are their views typically sought and followed?
  • Do legal and compliance officers report to the Chief Executive Officer (CEO) and have significant visibility with the board?
  • Are the legal and compliance departments viewed as an important partner in the business and not simply as support functions or a cost center?

Near the end of his presentation, Cerensey said that “Far too often, the answer to these questions is no, and the absence of real legal and compliance involvement in company deliberations can lead to compliance lapses, which, in turn, result in enforcement issues. When I was in private practice, I always could detect a significant difference between companies that prioritized legal and compliance and those that did not. When legal and compliance were not equal partners in the business, and were not consulted as a matter of course, problems were inevitable.”

McNulty’s Maxims, Martin’s question on budget and now Cerensey’s questions all provide significant guideposts to how regulators think about FCPA compliance programs. For me, I think the point is that companies which actually Do Compliance are easy to spot. For all the gnashing of teeth about how hard it is to comply with what the DOJ and SEC want to see in FCPA compliance, when the true focus can be distilled into whether a company actually does compliance as opposed to saying how ethical they are, I think it simplifies the inquiry and the issues senior management and a Board of Directors really needs to pay attention to.

Continuous improvement through continuous monitoring or other techniques will help key your compliance program abreast of any changes in your business model’s compliance risks and allow growth based upon new and updated best practices specified by regulators. A compliance program is in many ways a continuously evolving organism, just as your company is. You need to build in a way to keep pace with both market and regulatory changes to have a truly effective anti-corruption compliance program. The Guidance makes clear that the “DOJ and SEC will give meaningful credit to thoughtful efforts to create a sustainable compliance program if a problem is later discovered. Similarly, undertaking proactive evaluations before a problem strikes can lower the applicable penalty range under the U.S. Sentencing Guidelines. Although the nature and the frequency of proactive evaluations may vary depending on the size and complexity of an organization, the idea behind such efforts is the same: continuous improve­ment and sustainability.”

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

August 5, 2014

Termination of a Third Party or Breaking Up Should Not Be Hard To Do

7K0A0223One of treats each month for the compliance professional is reading the GRC Illustrated column by Carole Switzer, President of the Open Compliance and Ethics Group (OCEG), in the Compliance Week magazine. Not only does Switzer write a highly informative and useful column but she also includes two standard features. The first is an illustrated guide that lays out visually her counsel and the second is that she also includes interviews from a Roundtable of compliance industry participants. In the July edition Switzer discussed an issue that brings much gnashing of teeth to both compliance practitioners, lawyers from the legal department and business folks alike; the situation where you must terminate a third party relationship.

In the article, entitled “Breaking Up Is Hard To Do”, Switzer relates how ‘to avoid pain by planning for the end of a third party relationship’, together with an illustrated diagram of “Third Party Risk Management in Financial Service”; she couples these with a Roundtable on “Financial Sector Third Party Risk” with participants Walter Hoogmoed, Jr., a Principal at Deloitte, Marie Patterson, VP-Marketing at Hiperos, and Billy Spears, Chief Ethics, Privacy and Compliance Officer at Hyundai Capital America.

Switzer begins by noting that it all should begin with “an exit strategy, a transition plan or a pre-nup—whatever the title, it’s best to begin by planning for the end which, in the case of business at least, will always eventually come. Whether due to contract completion or material breach, turning over responsibility to another party, or abandonment of the contracted activity altogether, contract termination is an inevitable phase in the third-party relationship lifecycle.” Planning for the end is important because,  “The more long term and layered the relationship, the more difficult it will be to disentangle. The deeper the third party is embedded in and uses the confidential information of the company and its customers, the greater the risks presented by failing to design a smooth transition process.”

It should originate with clearly specified contract termination rights but that is only the starting point, “ To work out a smooth transition, the plan must also include internal change management processes and policies, designated transition team members, contingencies, and adequate resources and time allowances.” While speaking to risk from cyber-security, Switzer details some of the points for consideration. You should have clear procedures for “data retention or destruction, termination of access control for shared technology, and removal of system connectedness, including consideration of what fourth parties (your third party’s third parties) may have.” Your corporate values must be protected by “clearly designating the disposition of shared intellectual property and infrastructure assets.” Next you need to think through your transition plan by “ensuring rights to hire or continue use of key contractor employees who have been servicing your account, arranging to bringing new contractors or internal managers up to speed, and filing any regulatory or other required notifications.” Finally, bear in mind that your reputation must be protected during this transition process “by controlling and planning for issuance of public statements and social media postings by terminated contractors or their employees, or the best laid transition plans may be for naught.”

In the Illustrated component to her article, Switzer lays out a five-step integrated risk management process, which is a useful view of the entire cycle:

  1. Plan and Organize. Under this step you should develop a plan to evaluate the level and complexity of risk. Switzer suggests some of the things you should consider are the volume of business engaged in by the third party representative, the nature of the risks involved, the extent to which the third party representative will use sub-contractors and any required legal or regulatory approvals required for the geographic areas which the third party representative will conduct business with or for you.
  2. Perform Due Diligence. Here you should assess each third party’s compliance controls relative to the level of risk you have determined is present. Here the standard inquiries are such items as ultimate beneficial owners, anti-corruption compliance and risk management controls currently in place, incident management and reporting and conflicts of interest.
  3. Manage Contracts. This step involves the ongoing review and assessment of the contractual relationship. If new or greater risks arise and they have not been previously addressed, you may need to add new contract terms to address them going forward. In addition to your standard anti-corruption compliance terms and conditions, you should have key performance indicators (KPIs), confidentiality terms and conditions and sub-contractor requirements.
  4. Conduct Ongoing Monitoring. Under this step, you need to “oversee and pro-actively monitor and review each third party relationship at a level commensurate with risk” and “ensure that issues are identified and appropriately escalated for remediation.”
  5. Manage Terminations. If required, you should follow your established plan for transition to ending the relationship and transitioning to another third party representative. You should also consider the need to “protect information, maintain smooth operations and protect reputation during the transition.”

In her Roundtable, Switzer received some very useful information from the participants in a couple of broad areas. The first was the use of sub-contractors by a company’s third party representatives, which Switzer articulated as ‘fourth parties’. Patterson commented that “If the third party is going to sub-contract work, the bank needs to ensure that the third party has adequate controls in place to assess and manage their sub-contractor risk and that the bank has the ability to terminate their relationship with the third party in the event there is an issue with the fourth party.” Hoogmoed emphasized the ‘interdependences’ of the relationships. He said that “contract provisions should be enhanced for clarity of controls and liability, approvals for serial outsourcing should be implemented, and selective testing for fourth/fifth parties should be considered.” Spears pointed not only to due diligence but also strong contract terms as a key to the management of this issue, “Due diligence coupled with a strong legal contract team are crucial. It is very important to develop a minimum standard, in the contract with the third party, to ensure that the third party only does business with fourth parties that meet the first-party requirements… The provisions should include that no sharing beyond a fourth party is allowable. The last critical point of this is to ensure that the first party adds a mechanism for accountability. This mechanism is what prevents this from becoming a rabbit hole.”

Switzer ended the Roundtable by asking what was the most important part about third party risk management? Spears pointed that “having a solid plan for setting the tone with third parties is the key.” From Hoogmoed’s perspective, it all begins with understanding on risk, or as the FCPA Guidance intones, it all begins with a risk assessment. He said, “Developing some advanced risk tiering and assessment methods will help organizations focus their limited resources on managing the risk, compliance, and controls on the most critical/highest risk relationships. Engaging senior management in the risk analysis and reporting is also very important to balance the appropriate level of risk taking with the costs and investments necessary for the business.” Patterson took a different approach focusing on the feedback that Hiperos has received from their customers, and said, “the most important aspects of the recent guidance all deal with impact. The scope of the guidance has been broadened, both in terms of the expansion of what a “critical” activity is and the redefinition from vendor to third party. The importance of these obligations has been elevated with the explicit inclusion of the board at a much deeper level than previously, and the requirement for independent audit to be involved. And finally, the effort has been expanded significantly to include the entire lifecycle of third party management from planning through termination and every step in between.”

As usual, Switzer’s monthly column provides solid information to the compliance practitioner about what you need to know to inform your compliance regime. This month is no different. Although rarely written about, the termination of a third party relationship can be as important a step as any other in the management of the third party lifecycle. While having the contractual right to terminate is a good starting point, it is only the starting point. You not only need to have a compliance and legal plan in place but a business plan in place as well. For if you do not, you may well find yourself in the same place that Switzer started her article, quoting Neil Sedaka that “Breaking Up Is Hard To Do.”

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.

July 29, 2014

Bringing It All Home, the Two Tough Cookies Wrap It Up For You, Part II

Tales from the CryptNote-I asked the Two Tough Cookies if they could put together a series of blog posts wrapping up the lessons they have seen and learned and written about in their series of Tales from the Crypt. They graciously put together a series of posts on the seven elements of an effective compliance program from their 10 tales of Business Conduct. Today, Part II of a Three Part Series…

3. Exercise Due Diligence to Avoid Delegation of Authority to Unethical Individuals

This one is tough, especially in global organizations. In many countries, you simply cannot run a background check, as criminal records are not public. In others, you can run them, but the criminal offense must be related to the job to exclude the candidate from being hired.   In yet others, you can run them, but you can’t use them due to overly strict privacy rules. Then there’s the matter of cost relating to doing all this due diligence. The best thing you can do is determine the following:

  • First, is your business subject to a potential FCPA violation? If you are not “at risk” of public corruption because you are not engaging at any level with foreign government officials, then half the battle is won. Of course, you still run the risk of commercial corruption (bribes, kick backs, etc. with trading partners), but at least the spectre of government sanctions is not looming so large over you.
  • If you are “at risk” of an FCPA violation (you have interaction with govt. officials, including customs) have you developed a robust due diligence program, based on some corruption index to determine the level of due diligence required for your staff, your trading partners?
  • Have you identified your red flags thoroughly to spot anomalies in your business that would signal a deeper view is recommended?
  • Do you have staff to conduct the due diligence, or a vendor to do it on your behalf?
  • Are background checks run on everyone, or just certain individuals, or certain risk areas?
  • Have you taken a hard look at your gift policies to determine whether or not there are glaring holes that could give rise to inappropriate influence in business dealings?
  • Have you taken cultural considerations under advisement in your gift policies? Are they more stringent, or lax, compared to the US? Are the gift policies in Russia different than the gift policies in the US, because someone convinced someone else that you just can’t get things done without greasing a palm here or there?
  • Do you have a formal committee reviewing all charitable contributions, or, are ‘charitable contributions” acceptable as “facilitation” to get non-discretionary government functions moving along? Does your organization allow “facilitation payments” – if so, you better take a second, third, fourth look….

The point I’d like to emphasize here is that even companies that make it on the “World’s Most Ethical Companies” list also make it to the DOJ’s investigation list for foreign corruption, or violation of embargoes, sanctions, and the like. People interpret rules when the rules change, depending on the country. People then make mistakes in favor of what makes business sense to them, in their country, in their environment. You just have to make sure you’ve done what’s reasonable to prevent those mistakes.

  1. Communicate and Educate Employees on Compliance and Ethics Programs

Here’s where the tone from the top, middle and bottom are key to your culture. This is probably the most important thing you want to measure. I am fond of saying 90% of a good ethics & compliance program is communication, and 10% is actions/deeds. While deeds do speak louder than words, it’s the communications – what you say, how you say it, what you mean by it, your intent – that frames up the actions of others.     So you want to measure

  • Are the messages the same, the deeper you get into the organization? Is the understanding of the messages cascading from above the same the further down you go? Easy enough to measure with post-learning survey tools. Give all top, middle, and lower management the same “meeting in a box” and see if the understanding after delivery is the same. Reminds me of that campfire game, where the story starts at one end of the circle, and is completely different by the time the last person hears the tale. Your objective, of course, is to ensure that every person in the corporate audience hears the same message, and has the same take-aways, no matter who is telling the tale.
  • What kind of audience do you have? Does everyone have access to a computer, or do you have the challenge of manufacturing workers, with multiple languages and facilities to manage, and no technical means of reaching them? Have you done what’s necessary to ensure your training and communications mechanisms address every type of audience, or are pockets left out of the mix?
  • What learning aids do you have to help with understanding the code of conduct? Are the examples you use for harassment appropriate for your audience? Do you have a team of global reviewers who will not only preview your training, but offer suggestions on how to localize it to make it appropriate, meaningful and relevant to the teams they serve? If so, do they look at all communications pieces, or only certain ones? If only certain ones, which ones? And why?
  • Are there any leaders who go above and beyond when you launch your annual or quarterly training? I had an Asian business President who made sure he took the course the first day it was launched, and then sent a message to his leadership team about what he learned from the course, and what he wanted them to take away to their teams after they took the course. All of his team had the course done within the first month. I wanted to clone the guy, I swear!

I’m also reminded of mandatory harassment training I gave in Brazil one year. I relied upon the canned on-line training to help with my meeting amongst management, who all spoke English well. I was planning on asking them to cascade the messages to their teams while I was there, but they pointed out that the training was a farce. Women, they told me, wanted wolf calls lobbed in their direction in Brazil – it was not only culturally acceptable, but encouraged. This was substantiated by the several women in the room. Check. Fortunately, I had other examples at the ready to use for a facilitated session, which I vetted with the women on the team prior to delivery. Lesson learned? Make sure your ethics & compliance steering committee has global membership, and are willing to preview your training and communications prior to launch to ensure cultural relevance. If you don’t do this, your ethics & compliance program will be perceived as a joke. Not a desirable outcome, I would say….

  1. Monitor and Audit Compliance and Ethics Programs for Effectiveness

So, how do you measure a non-event? I often ponder…. The challenge in highly ethical organizations is that you have, at first blush, very little to measure. If everyone’s doing a good job, how do you measure effectiveness. Is it because you have a great program that you have absolutely no calls on the hotline? Or is it that everyone is trembling in fear of retaliation the reason for no calls to the hotline? Hmmm.

Some of the things you can measure include

  • Indicators and ‘yardsticks’ – do you crawl, walk, or run to goals?
  • Do you seek periodic stakeholder feedback (including E&C council input)
  • What kind of documentation do you collect – trend analyses of HelpLine metrics, feedback on program enhancements as they are implemented, feedback on training and communications
  • Do you routinely conduct a “Lessons Learned” exercise after substantiated hotline calls?
  • Does your HR team engage in site assessments when a location, facility, or team seems to have a lot of issues that arise from a single manager or set of team leaders?
  • How often are your Code, policies, procedures updated and reviewed?   Are they tested for readability and understanding? Are they just published, or is training introduced for new policies as they are issued?
  • Do you conduct risk assessments and/or change training or communications based on perceived risk areas?
  1. Ensure Consistent Enforcement and Discipline of Violations

Does your organization allow for mistakes? Many will say they do, but when the rubber meets the road, you will find that they can be unforgiving for some transgressions, and unbelievably forgiving for others…. You will want to measure

  • Whether or not there appears to be wiggle room when folks stray. Deeds in this aspect do speak louder than words.
  • Are roles and responsibilities clearly defined, with escalation clauses when things go wrong?
  • Does your organization communicate when things go wrong as well as when things go right? I know one organization that struggled mightily when I suggested we let everyone know what actions we took for certain code violations. The attorneys were all worried that someone would sue, of course, but in the end, integrity prevailed. We were able to sanitize the situations in such a way to communicate what had been done, and what discipline was taken, without anyone learning personal details. Importantly, it drew a virtual line in the sand by publicizing transgression and discipline, so that people knew boundaries. Of course, this was after years of me observing that discipline seemed to be discretionary within the organization, and as a result, trust in management “doing right” was eroding significantly. It didn’t hurt that my observations were followed by multiple hotline calls saying the same thing… but it should never get to that point, should it?

Also measure whether or not policies and communications:

  • Encourage reporting
  • Identify resources to raise concerns
  • Prohibit retaliation for good faith concerns
  • Identifies management as the primary resource for issues or concerns
  • The average timeline to resolve complaints
  • Whether or not you benchmark reports that express fear of retaliation or unwillingness to consult with management first. This is tough to do, unless you build it in to your hotline reporting mechanism as a “customer service” function at the end of every call or report, actively soliciting this very feedback when a report is made.
  1. Respond Appropriately to Incidents and Take Steps to Prevent Future Incidents

So, you are at the point where you have confidence you have the right policies and procedures in place to keep yourselves honest. But in case someone didn’t get the memo of “expected behavior” you have to make sure you respond appropriately, and take steps to avoid future missteps. One organization I worked at realized the culture of an acquired subsidiary was so awful that it opted to sell it off rather than try to fix it. They had other issues in the larger organization, but they knew a bad deal when they saw it, and took steps to rid themselves of an untenable position. Another organization I worked at kept throwing money at a subsidiary, when it probably would have been better to toss in the towel. Different organization, different results, neither perfect, but it fit them as they saw things.

When gauging the culture of your organization, some things you want to look at are the rewards and sanctions for behavior:

Positive rewards:

  • Retention of employment
  • Recognition
  • Appreciation
  • Commendation
  • Monetary or stock reward

Negative sanctions:

  • Termination or Suspension
  • Demotion
  • Probation
  • Appraisal comments/warnings
  • Reduction in compensation or bonus

You also want to measure your Performance Appraisal Systems, and look to see whether or not they include sections on:

  • Demonstrated Ethics and values in workplace conduct
  • Good communication skills
  • Building trust with stakeholders
  • Being fair or equitable
  • Maintaining a high level of quality or integrity in decision-making
  • Reporting Concerns
  • Empowering subordinates to reporting concerns
  • Training and development initiatives for the team

Tomorrow the Two Tough Cookies sum it all up…

This publication contains general information only and is based on the experiences and research of the authors. The authors are 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 authors, their affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Authors give their permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the authors.

 

July 28, 2014

Bringing It All Home, the Two Tough Cookies Wrap It Up For You, Part I

Tales from the CryptNote-I asked the Two Tough Cookies if they could put together a series of blog posts wrapping up the lessons they have seen and learned and written about in their series of Tales from the Crypt. They graciously put together a series of posts on the seven elements of an effective compliance program from their 10 tales of Business Conduct. Today, Part I of a Three Part Series…

We’ve talked a lot in our Tales from the Crypt about the signs to watch for that indicate something’s gone wrong, from minor cultural twists to lapses of integrity that are tantamount to criminal activity. We all wish we had a crystal ball we could peer into to predict how various maneuvers will translate into the larger universe of corporate culture. One of the best tools to use to gauge the cultural baseline is an organizational ethics audit, reminding yourself that “what gets reported gets measured.”

Your first hurdle, of course, is getting executive leadership to support the initiative. If they don’t support it, then you have your first cultural indicator. After all, if you have nothing to hide, you have nothing to lose by peering under the covers, now do you? So let’s assume your leadership is supportive of developing, and/or sustaining, a “high integrity” organization. So what do you want to measure? The ‘seven elements of an effective compliance program’ is a good start, but by no means exhaustive. After all, many organizations fulfill “ethics oversight” by having a CCO in title (usually, the GC or CFO), but the day-to-day oversight and management of the program is led by staff members who are not empowered to work towards positive change. You know who you are, you know the daily frustration of knowing what should be done, and what leadership will allow. So while “oversight” is met, is it really “effective?”

So let’s remind ourselves of the seven elements once again:

1. Establish Policies, Procedures and Controls

2. Exercise Effective Compliance and Ethics Oversight

3. Exercise Due Diligence to Avoid Delegation of Authority to Unethical Individuals

4. Communicate and Educate Employees on Compliance and Ethics Programs

5. Monitor and Audit Compliance and Ethics Programs for Effectiveness

6. Ensure Consistent Enforcement and Discipline of Violations

7. Respond Appropriately to Incidents and Take Steps to Prevent Future Incidents

How do these elements translate into an organizational ethics audit? And how do our 10 rules of business conduct in the workplace (from our “Tales from the Crypt” series) fit in? Let’s break it down into manageable chunks.

1. Establish Policies, Procedures and Controls

Under this “bucket” include your Code of Conduct, your Vision and Values statements for your organization, and the various policies and procedures you rely upon to get business done. What you want to know, when conducting your audit, is not just do you have these, but

  • Does your Vision statement create an actionable description of the future? If so, what is it, and more importantly, do your people know it, and understand what role they play in achieving that future?
  • Is “Integrity” one of your Values?
  • What’s the purpose and Focus of your Code of Conduct? What kind of tone does it set, is it widely distributed, prominently displayed, easy to read? Does it have learning aids, and examples of not only wrong doing, but “right” doing behaviors? What expectation does it set? Is it universal or have you caved to various constituencies and created multiple versions (not translations, but actual versions) to “meet the needs” of various cultures. If you have, then you are net setting a single standard that all can live by, and you will have people applying their own standard to their behaviors, not yours. Ethics should not be subject to interpretation, nor external pressures such as Worker’s Councils, unions, or special interest groups.
  • Are your policies relevant to your business, or did someone just borrow something from an HR toolkit to get you started? Do you have a formal non-retaliation policy (and not just a nod towards the concept in your Code of Conduct), and formal procedures to deter retaliation. The rules in this area need to be cut and dry to make people know you “have their back” when the you know what hits the fan. You want to encourage people to step up, and the only way you can do that is a rock solid approach to non-retaliation.
  • Last, but not least, are your policies “uniformly enforced?” Much like the sentencing guidelines, organizations, large and small alike, should be dealing with transgressions with an even hand to truly have an ethical culture. People like boundaries, like to know where the line in the sand is drawn. Trust me on this. So do you know exactly where your organization’s boundaries are? Or does the line move from incident to incident?

2. Exercise Effective Compliance and Ethics Oversight

As I mentioned before, many organizations have day-to-day oversight managed by staff, with a titular CECO residing with one of the executive leaders, like the GC or the CFO. Larger organizations have dedicated compliance officers who aren’t forced to wear multiple hats, who truly have teams of dedicated compliance officials reporting up to their organization. This is particularly true in highly regulated industries, such as finance, insurance, healthcare, food and drug manufacturing, where government oversight plays a large role in day to day business.   It is fair to say that smaller organizations don’t need to have a dedicated compliance officer per se, but when you have a staff attorney, for instance, managing the day to day operations of your ethics and compliance program, you have put that person in a Catch 22. Period. You may want an attorney in that spot for attorney client privilege, but if you do that recognize that you’ve also handcuffed the person from being able to independently report wrong doing if something goes drastically wrong, as they are duty bound to keep matters confidential, even within the business.

So you want to measure whether or not the person with day-to-day oversight has the freedom (or mechanisms) to raise concerns.

  • If it’s a staff attorney, is the job description written so that when wearing the compliance hat, the attorney hat comes off? Tough to do, but possible.
  • Are there layers of management between the day-to-day person who is managing the ethics and compliance program, and the person with the “title” CECO?
  • Are there many people with “compliance” in their title, and do they work together, or independently? I have worked in organizations where “compliance” was part of several functions, but the right hand, and the left hand, weren’t speaking to each other. Trade Compliance reported to one division, Environmental Compliance reported to another division, product compliance reported to yet a third division, HIPAA compliance to yet a fourth, and so on. None of these units worked together, some were staffed heavily, some staffed thinly, and the actual “head” of Integrity & Compliance was ineffective at convincing senior leadership that all compliance functions should be at least working towards the same goals in the organization. It all depended on the business leader at the top of the silo and whether or not they were effective in getting the support they needed to run their business. It also depended on whether or not the business unit was a profit center or a cost center, and if a cost center, where it reported up into the business – as a G&A expense, or an administrative cost aligned with operations. Those that were part of operations were well-funded, those reporting in on the administrative side as a pure cost center (including the “head”) were poorly resourced.
  • Do you have an ethics steering committee or working group that represents all functions and business units, and is staffed by executive or senior leaders who are in a position to make decisions for the larger organization? This serves as a checks and balance that is critical if the day-to-day oversight is led by a staffer. The staffer can build consensus with a larger group that has a vested interest in the outcome by holding those critical meetings before the meeting to test run proposals, and receive important feedback on how to effectively present a proposal to the team to ensure acceptance and success. The staffer can also go to a trusted member of the committee if he or she feels that the CECO is not receptive to hearing concerns and serve as a sounding board. Hopefully, that is.

Tomorrow, elements 3-7.

Who are the Two Tough Cookies?

Tough Cookie 1 has spent the more than half of her 20+ legal career working in the Integrity and Compliance field, and has been the architect of award-winning and effective ethics and compliance programs at both publicly traded and privately held companies.  Tough Cookie 2 is a Certified Internal Auditor and CPA who has faced ethical and compliance challenges in a variety of industries and geographies and recently led a global internal audit team. Their series “Tales from the Crypt: Tough Choices for Tough Cookies” are drawn largely from real life experiences on the front line of working in Integrity & Compliance, and personal details have been scrubbed to protect, well, you know, just about everyone…

This publication contains general information only and is based on the experiences and research of the authors. The authors are 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 authors, their affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Authors give their permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the authors.

July 24, 2014

Code of Conduct, Compliance Policies and Procedures-Part III

Policies and ProceduresToday, I continue with Part III of my four-part series on the best practices surrounding your Code of Conduct and anti-corruption policies and procedures. In this post, I take a look at drafting policies and procedures. I conclude with some thoughts by well-known policy pundit Michael Rasmussen on management of policies going forward.

One of the key components of any best practices compliance regime under any anti-bribery and anti-corruption program is policies and procedures. Policies and procedures tie together a company, its business environment, the risks it faces and the compliance requirements. Policies procedures are a specific requirement for any anti-corruption/anti-bribery compliance regime. In the FCPA Guidance it stated, “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.” Under the UK Bribery Act, policies are discussed in the Six Principles of an Adequate Procedures compliance program under Principle V – Communication, where it states “The business seeks to ensure that its bribery prevention policies and procedures are embedded and understood throughout the company through internal and external communication, including training, that is proportionate to the risks it faces.”

As further stated in the FCPA Guidance, “Among the risks that a company may need to address include the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.” Policies help form the basis of expectation and conduct in your company and Procedures are the documents that implement these standards of conduct.

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

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

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

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

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

Interesting, Allen emphasizes, “having policies written out and signed by employees provides what some consider the most vital layer of communication. A signed acknowledgement can serve as evidentiary support if a future issue arises.” I also like it when others recognize my ‘Document, Document and Document’ mantra for FCPA compliance.

While I think that most compliance practitioners understand this need for policies and procedures, one of the things that is not usually emphasized at a company is effective policy management. Michael Rasmussen writing in Compliance Week in an article entitled “Improving Policies Through Metrics” discussed the need for effective policy management. He believes that it requires that a company must periodically review their policies to ensure that they are relevant and aligned with both current laws and corporate objectives. This is because today’s business environment is dynamic and involves both internal and external factors, so, consequently, as a company evolves and changes its policies need to be updated to reflect these changes.

Rasmussen believes that at a minimum, policies must be reviewed annually. He recommends that each policy should go through a yearly review process to determine if it is still appropriate. There should be a “system of accountability and workflow that facilitates” any policy review process. The end product should be a decision to “retire the process, keep the policy as it is, or revise the policy.” Rasmussen lists five items that a policy owner should evaluate as a part of the policy review process.

  • Violations. Here Rasmussen believes that information from reporting systems such as hotlines or other anonymous lines as well as internal or external investigations must be reviewed. Not only would such information indicate if a company policy was violated but the follow-up investigation would help to determine how the policy might have failed, whether it was through “lack of awareness, unauthorized exceptions [or] outright violations.”
  • Understanding. Here Rasmussen writes that there should be an analysis of “training and awareness programs, policy attestations” and attendant metrics to determine an appropriate level of policy understanding. He believes that questions to a helpdesk or compliance department could help to discover any ambiguities in a policy that might need to be corrected.
  • Exceptions. If you have a policy it should be followed. If an exception to a policy was granted the reason for the exception should have been documented. If there are too many exceptions granted for a policy, it might indicate that “the policy is inappropriate and unenforceable” and therefore should be revised.
  • Compliance. A policy should govern and authorize internal controls. These internal controls should be reviewed in conjunction with the policy review to determine overall policy effectiveness. This is because “At the end of the day the policy needs to be complied with.”
  • Environment. All the factors around a policy are in flux. This includes a company’s risk profile, its business strategy, laws and regulations. Since a business’ climate is dynamic, a policy should be reviewed in the context of a company’s overall situation and revised accordingly.

If there is a change in a policy it is important that not only the correct change be made but that any change is documented. An audit trail is a key component for a company to internally understand when a change is made and the reason for that change but also to demonstrate to a regulator effective policy management and to present “a defensible history of policy interactions on communications, training, acknowledgements, assessments and related details needed to show the was enforced and operational.” This audit trail should include “key data points such as the owner, who read it, who was trained, acceptance acknowledgements and dates for specific policy versions”. In addition to an audit trail, policy revisions should be archived for referral back at a later time. So, once again, the key message is document, document and document.

Just as best practices in the FCPA compliance arena evolve, so do business practices, markets and risks. If you throw in the complexities from an inter-connected global business milieu, the task becomes even tougher. Business policies are one of the keystones of a company’s communications to its employees on what it expects and what is required of its employees. To keep policies up-to-date and properly take advantage of this valuable tool, policies need to be evaluated and updated as appropriate. If your company fails to do so this takes away from the value of having policies in the first place. I hope that you will use the techniques which Rasmussen has described to help you effectively manage your policies going forward.

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

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

Next Page »

The Rubric Theme. Blog at WordPress.com.

Follow

Get every new post delivered to your Inbox.

Join 4,602 other followers