FCPA Compliance and Ethics Blog

August 1, 2011

The FCPA Compliance Audit: A Market Approach to Moving the Bar Forward

The issue of audit rights in compliance terms and conditions is one that leads to debates both pro and con. My This Week in FCPA colleague Howard Sklar and I have sparred on this issue. Usually the debates centers around the threshold question of if you have the rights must you audit the contractual counter-party which has agreed to allow itself to be audited. I argue that if you have audit rights that you must, at least selectively use them. However, if you do not ever use these audit rights, it may put you in a worse position than if you did not have the rights. The next argument is usually along the lines that the counter-party will never allow your company to audit them. The third argument is that auditing takes too much time and is too costly.

In my discussions with Howard I usually respond that it is always better to have audit rights. The concept of the compliance audit of counter-parties is in the US Sentencing Guidelines for organizations accused of violating the Foreign Corrupt Practices Act (FCPA); the Department of Justice’s (DOJ) best practices for effective compliance programs which have been released with each Deferred Prosecution Agreement (DPA) over the past year; the UK Bribery Act’s Six Principles of Adequate Procedures; and the OECD Good Practices. The reason all of these guidelines incorporate it into their respective practices is that it is one of the key tools to utilize in managing any business relationship from the compliance perspective going forward.

In response to the second argument, I think the answer is more straight-forward. Under any reputable commercial contract, the party paying the money ALWAYS has the right to audit the company which receives the money. While this audit is typically limited to auditing invoices, backup documentation and other evidence of services provided or product delivered, it is nevertheless a standard clause that almost every company has seen in a contract. I believe that good communication with a counter-party, to explain the genesis of the compliance audit and why it has become a best practice, is an important part of the ongoing dialogue between the parties, both before, during and after contract negotiations.

I believe that the response to the third objection is also straight-forward. I previously wrote about the Apple 2011 Supplier Responsibility Report. Apple looked at a variety of issues that affect its business relationships with its suppliers, these areas included training, protecting of workers, use of underage labor and social responsibility. One of the areas that Apple audited and reported about was compliance. I believe the Apple example shows that companies can successfully audit their suppliers, channel ops partners and any others in their sales or distribution chains. I understand that people will respond that this is Apple, one of the biggest and most visible US companies around. However, my point is that Apple is a concrete example of a successful and transparent compliance audit.

While not in the compliance area, I recently read about two US companies, Proctor & Gamble and Kaiser Permanente, who grade their suppliers on their environmental practices. In an article in the November 2010 issue of FastCompany, author Damian Joseph quotes Dean Edwards, VP and chief procurement officer at Kaiser Permanente, “We’re sending a message to vendors loud and clear…Green up your act today, lest you lose a huge client tomorrow.” Author Joseph posed the question to Jeff Erikson, an expert in supply chain management as “How do you control distant suppliers and enforce new standards?” Erikson answered, “There are no easy answers but asking the question is a positive change in behavior.”

I think that the final two quotes encapsulate the strongest reasons for the compliance audit. Nothing changes company or business behavior like market based factors. The (FCPA can and does change behavior to move companies and countries toward the rule of law. That is certainly an advantage of the Act and something that should be considered when amendments to the FCPA are bandied about under the claim that the FCPA costs US company’s jobs.


Episode 14 of This Week in FCPA is upheld. Howard Sklar and I discuss several issues including:

  1. Business Roundtable in DC
  2. Diageo
  3. Lindsey allegations of prosecutorial misconduct
  4. Carson jury instructions
  5. National Strategy to Combat Transnational Organized Crime
  6. Niger now has a “High Commission”
  7. Diebold has no news, but we report on it anyway
  8. Travel Act gets challenged, nobody notices
  9. RBS gets hit for AML, without actually violating anything

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, 2011

The Benefits of Investigating Employee Complaints

Filed under: compliance programs,Investigations,Lindsey Walker — tfoxlaw @ 1:46 am

Ed. Note-today we are pleased to host an article by our colleague from north of  the Border, Lindsey Walker of i-sight.com. 

Managers can’t sit with their hands over their ears chanting “lalala I can’t hear you”. Ignorance is far from bliss when it comes to workplace misconduct. Ongoing misconduct such as fraud, theft, discrimination and other activities can lead to an unsafe workplace, as well as significant costs to an organization. Failure to address employee complaints about any of these activities can only cause more trouble for you and your organization.

Ignoring Complaints

I came across the article, “Careful Investigation of Internal Complaints May Reduce Fraud Exposure,” written by William H. Maruca, Esq. and Carl J. Rychcik, Esq. Partners at Fox Rothschild LLP for Becker’s Hospital Review. The article discusses the number of incidents that were reported internally before an employee filed a lawsuit:

“A recent study by theNationalWhistleblowersCenterfound that 89.7% of employees who eventually file a lawsuit, such as a False Claims Act case, initially reported their concerns internally, either to supervisors or compliance departments. In other words, a lawsuit was only filed after the employee failed to get satisfaction from the employer’s handling of the issue.”

The numbers above send a loud message to employers – investigate employee complaints! The article goes on to explain:

“Many of these cases could potentially have been mitigated and/or prevented by (1) having a sufficient internal compliance program in place, and/or (2) carefully investigating any complaints and reacting appropriately. Taking some simple steps before a lawsuit is filed can ultimately mean the difference in preventing litigation and/or saving significant money.”

Investigations are Key

Here are 5 reasons why you should always investigate internal complaints:

1. Investigations help organizations prove that they take their code of conduct and other workplace policies seriously by enforcing rules and consequences.

2. Investigating employee complaints allows you to find out whether or not a violation of the company’s policy has in fact occurred. Should a lawsuit arise or the government gets involved, you’ll be better prepared to handle inquiries if you investigated promptly and secured necessary evidence.

3. Investigations can be expensive, as we’ve learned with cases likeAvon, but lawsuits aren’t cheap either. Investigating employee complaints helps reduce risks and keeps your reputation intact. Companies have been rewarded for being cooperative and taking initiative by conducting internal investigations. Companies that fail to investigate are often slammed in the media and criticized by the public for their lax approach to misconduct.

4. Encouraging internal reporting helps you detect misconduct in its earlier stages. The sooner you investigate, the sooner you put an end to the misconduct reported. For fraud cases, this is particularly important, as stopping fraud sooner results in less money lost to fraud.

5. Investigating employee complaints allows you to identify patterns of misconduct and take the necessary steps to prevent it in the future. If you find that a significant number of investigations deal with sexual harassment, then you might want to take that as a sign that more time needs to be spent on that subject during employee training. Use the information from investigations to guide employee training and revamp policies, emphasizing on the problem areas identified by employee complaints.

Lindsey Walker can be reached at LWalker@customerexpressions.com.

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