From Trick or Treat through Thanksgiving: Examining the Past to Prepare for the Future

Ed. Note- For those of you who do not know her, Mary Shaddock Jones is one of the compliance professions I regularly rely on for advice. I continually ask her to send over some guest posts as they are always topical, top notch and provide practical advice for the compliance practitioner. I will be out of pocket over the next two weeks and Mary has agreed to take over the lion’s share of posts for my blog. Today she begins her series with a topical post on chocolates and the pre-holiday season from Halloween to Thanksgiving. I know you will not only enjoy her series but get quite a bit out of them.

This summer, the Securities and Exchange commission charged Texas-based medical device company Orthofix International with violating the Foreign Corrupt Practices Act (“FCPA”) through improper payments of bribes (code named “chocolate”) to officials at Mexico’s government-owned health care and social services institution, Instituto Mexicana del Seguro Social (“ IMSS”), in order to obtain or retain business.  Sure, for those of you who regularly read Tom Fox’s blog, this is old news.  However, since he is off and today is Halloween, I thought I would start a series for the next two weeks re-examining some of the more recent, and perhaps not so recent cases with a fresh set of eyes.

The practical pointer for today’s blog is straightforward – it is imperative that companies which have FCPA exposure audit both their petty cash accounts, and all expenses coded to training and promotion. This is apparently where the improper expenditures were “hidden” by employees of Orthofix.  In my experience, companies need to be closely reviewing what little case law or factual allegations exist with regard to the FCPA so that they too know where to find any potential problems that may exist within their own company.  There are only so many ways to hide the dollar.  If you find yourself sitting in front of the DOJ and/or SEC in the future on allegations related to a violation of the FCPA…you will not gain any “chocolate points” if you haven’t implemented a robust compliance program.  But as FCPA practitioners have said over and over again – simply having a Code of Business Conduct, an Anti-Corruption Policy Manual and even person to person training is not enough.  You have to be proactive in trying to find what others don’t want to be found.  That is why the Orthofix employees didn’t book the improper payments as “bribes”.  They aren’t stupid.  They know this is one red flag that will stop the energizer bunny in its tracks.  So instead, they disguise the improper payments in a way that they think is clever.

According to the SEC, in order to obtain cash for the bribes, the Promeca executives wrote checks to themselves, which they justified as “cash advances”.  A smart person in the accounting department would ask – what was the cash advance for?  What was bought?  Are their valid receipts which state what was bought, when was it bought, who was taken to dinner or lunch, what was discussed, etc?  In order to continue the deception, the executives submitted false receipts for imaginary expenses including meals and new car tires.   Practical Pointer:  It may be a boring and tedious task, and one which hopefully never uncovers questionable payments – but companies must have someone in charge of reviewing expense reports – for everyone – from the top dog on down to the dog walker.  Do you have a process in place for reviewing expense accounts?  If not, put one in place.

Unfortunately for Orthofix, the improper payments became too large to hide in expense reports; therefore, a new hiding place had to be located.  The next best thing to expense reports is training and promotional expenses.   Remember that the FCPA includes three affirmative defenses under its anti-bribery provisions – the first of which is “reasonable and bona fide expenditures related to certain promotional activities”.  If the FCPA allows the payment for “promotional expenses”, what better place to hide improper payments than in plain sight?   Just because someone calls an expense a promotional expense, does not mean that the Company does not have to trust, but verify.

Specifically, the FCPA permits payments if the payment to a foreign official was a “reasonable and bona fide expenditure, such as travel or accommodation expense, that was directly related to the demonstration of a product or service, or performance of a contract with a governmental agency.”  Unfortunately, I was unable to determine from the public filings how the training or promotional payments were characterized so as to allow them to remain undetected by the accounting department at Orthofix until hundreds of thousands of dollars in improper payments had been made.  However, the practical pointer for you is this – do you have a process in place which places controls over when expenditures can be made for travel and lodging/training and/or promotional/marketing expenses?

Consider the following policy language:

The FCPA permits the payment of reasonable and bona fide expenditures on behalf of a Government Official and directly related to (1) the promotion, demonstration, or explanation of products or services; or (2) the execution or performance of a contract with a non-U.S. government or agency thereof.

Travel and Lodging: No travel or lodging may be offered or given to a Government Official without the prior written consent of the Company Compliance Officer or his or her designee and must meet the following guidelines: (1) it serves a legitimate Company business purpose; (2) invitations to a Government Official are transparent, in writing, and clearly state the business purpose of the trip; (3) no payment is made directly to a Government Official either through an advance or reimbursement for expenses (the Company should directly purchase travel or lodging from those who provide them, utilizing a travel agent or other third party if possible); (4) providing “per diem” fees or expenses is avoided, particularly where meals are already being provided; (5) no cash payments to a Government Official are made whatsoever; (6) travel and lodging expenses are only provided for the identified Government Official and not for spouses, family, or friends of the Government Official; (7) travel arrangements are directly between the place of residence or employment of the Government Official and the intended destination of the business travel, with no non-business side trips; (8) no reimbursements are paid without presentation of appropriate receipts; (9) providing the travel or lodging is permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); and  (10) other than the travel or lodging identified above, the Government Official is not compensated for his or her participation in the planned trip.

Guidelines for Entertainment: Unless prior written approval from the Company Compliance Officer or his or her designee is obtained, entertainment provided to a Government Official must meet the following guidelines: (1) it serves a legitimate Company business purpose; (2) providing the entertainment is permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); (3) it is of the type and value that is reasonable (not lavish, excessive, or frequent); (4) it is in line with the local customs of the country where provided; (5) it is of a type that is appropriate (e.g. no strip clubs); and (6) it is accurately recorded in the Company’s books and records.

Guidelines for Marketing Expenses: Unless prior written approval from the Company Compliance Officer or his or her designee is obtained, marketing materials (such as pens, caps, or mugs) provided to a Government Official must meet the following guidelines: (1) they serve a legitimate Company business purpose; (2) they are of nominal value; (3) they are of the type and value that are customary and appropriate for the occasion;(4) they are branded with the Company’s name and/or logo; (5) they are permitted under local law and regulations and guidelines of the recipient’s governmental entity (note that some customers have strict policies against receiving gifts); and (6) they are fully and accurately recorded in the Company’s books and records.

Remember, it is not enough to simply have a policy in place; you must also conduct trainings (have the training in both English and the predominant local language of your employees) and audits to ensure compliance.

No more chocolates for today… tomorrow is All Saints Day.  Stay tuned to see who didn’t perhaps make the list of saints.

—————————————————————————————————————————-

Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

—————————————————————————————————————————–

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 Wolfman and Opinion Release 12-02

Even a man who is pure in heart,

and says his prayers by night,

may become a wolf when the wolfsbane blooms,

and the autumn moon is bright.

 

Today is Halloween and in this post I conclude my celebration of the Universal Pictures classic monster movies from the 30s and 40s. Today I submit, for your compliance consideration, my favorite of the classic monsters movies The Wolfman. I simply cannot see this movie enough. From the horrific scene where Lon Chaney Jr. kills Bela, the gypsy who had the pentagram, the mark of the wolf, to the ending scene where Claude Rains inadvertently kills his son, Lon Chaney Jr., in his incarnation as the beast with a silver tipped cane, I find it to be the most psychologically complex of all the classic Universal monsters.

The acting was first rate. Lon Chaney Jr. as Larry brought a psychologically-nuance to the role that rivals only Karloff as Frankenstein’s Monster for depth and complexity. Claude Rains, although a good 6 inches shorter than Chaney, plays his father Sir John Talbot and showed why he was one of the great character actors from the 1930s to the 1960s. Maria Ouspenskaya as the gypsy fortuneteller Maleva who cares for Chaney after he has been attacked by her son and changed into a werewolf brings heart and soul to a role which could have easily fallen into camp. And then there is Evelyn Ankers as Gwen Conliffe, Talbot’s love interest. In many ways she ascended to the ‘damsel in distress’ role created by Fay Wray in King Kong. She is gorgeous in the role and just the right amount of innocence and sex appeal.

In the twilight and with low hanging shrouds of fog, Larry attempts to rescue Gwen’s friend Jenny from what he believes to be a sudden wolf attack, he kills the beast with his new walking stick, but is bitten on the chest in the process. The gypsy fortune teller, Maleva reveals to Larry that the animal which bit him was actually her son Bela (played by the omnipresent Béla Lugosi) in the form of a wolf. She tells Larry that Bela had been a werewolf for years and now he would be transformed into one. When the full moon rises, the sign of the Pentagram appears on Larry and he is transformed into a wolf-like creature and stalks the village, first killing the local gravedigger. He retains vague memories of being a werewolf and wanting to kill, and continually struggles to overcome his condition. He is finally bludgeoned to death by Sir John, with his own silver walking stick, after attacking Gwen.

My favorite scene? It actually occurs in the first sequel, Frankenstein Meets The Wolfman, where two forlorn grave robbers break into the Talbot Family Crypt, where Larry is buried after being killed by his father at the end of the original Wolfman movie. They pry open the burial tomb just as the full moon is arising, which of course awakens the beast in Larry. He transforms into the Wolfman and kills the grave robbers. It simply is a fantastic cacophony of light, shading, violence, folklore and terror.

So what does The Wolfman introduce from the compliance perspective? In this case, it is reverse psychology. It is the latest Department of Justice (DOJ) Opinion Release, 12-02, which was dated October 18, 2012 but was not released publicly until last week. In 12-02 certain Requestors, which were 19 non-profit adoption agencies located in the US, asked the DOJ about bringing certain foreign governmental officials involved in the foreign country’s adoption process to the US. All the foreign governmental officials are involved in the process of allowing children from their country go through the adoption process with the US non-profits involved. The trips to the US will be for two days of meetings.

The purpose of the visit will be to demonstrate the Requestors’ work to the government officials so that the officials can see how adopted children from the foreign country have adjusted to life in the US and to help the Requestors learn how they can ensure that they provide the foreign country’s government with appropriate information during the adoption process. The Requestors will allow the government officials to meet with the Requestors’ employees and to inspect the Requestors’ offices and case files from previous adoptions. The foreign country’s government officials will also meet with families who have adopted children from their country and learn more about the Requestors’ work.

In this Opinion Release, the DOJ opined on a question regarding the payment for travel of these foreign governmental officials and whether the proposed trip would violate the Foreign Corrupt Practices Act (FCPA).

The Opinion Release set out the representations made by the Requestors to the DOJ which formed the basis for its decision. The Requestors stated that they would pay for the following:

• Business class airfare on international portions of flights for ministers, members of the legislature, and the director of the Orphanage Agency; coach airfare for international portions of flights for all other government officials; and coach airfare for domestic portions of flights for all government officials;
• Two or three nights hotel stay at a business-class hotel;
• Meals during the officials’ stays; and
• Transportation between agencies and local transportation.

The DOJ also noted the Requestors spending on meals and hotels would not exceed the rate set by the US General Services Administration for US government employees traveling within the US. The Requestors also made the following presentations which are consistent with prior DOJ guidance on travel, meals and entertainment.

• Entertainment – The entertainment will be of nominal cost and will involve families who have adopted children from the foreign country. In other words, a clear business purpose is involved.
• Selection – The Requestors did not select the foreign governmental officials to attend the trip but left that decision to the foreign government.
• No WAGS – The Requestors would only host the foreign governmental officials selected for the trip. There would be no spouses or family members brought along on this trip.
• Souvenirs – If there are any souvenirs presented to the visiting foreign officials, they will be of nominal value.
• Spending money – There will be no spending money provided to the foreign officials and they will not receive any stipends. There will be no additional monies paid to the visiting officials in any form.

So while poor Larry Talbot was doomed to run afoul of the laws of man when he became the Wolfman, you need not have the same result under your compliance program. I believe that Opinion Release 12-02 shows once again that if you have a compliance question or concern, the Opinion Release procedure is available to you to ask the DOJ if your proposed activity would violate the FCPA. But more than simply showing the procedure, I think that the DOJ once again shows how a reasoned approach, laid out in a rational manner, will be seriously considered, reviewed and can lead to a favorable result. Even the question of business class airfare can be handled in reasoned approach as shown by this Opinion Release. I disagree with the FCPA Professor in that there is a “high level of anxiety and skittishness in this current era of FCPA enforcement out there” because, as this Opinion Release shows you need not fear FCPA enforcement, even when the wolfsbane blooms, and the autumn moon is bright.

I hope that you have enjoyed this series of posts using the Universal Pictures classic monsters films as starting points for the discussion of compliance issues. I certainly have enjoyed writing about them and watching them yet again. A special thanks to my wife Michele for sitting through yet another October viewing of these movies. If you did enjoy these posts and want to see the best versions of these movies currently available, you should check out the Universal Classic Monsters: The Essential Collection [Blu-ray].

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, 2012

How to Handle a Global Multi-Lingual Investigation

Ed. Note-I recently visited with my colleague (and recovering screen writer) Jay Rosen about some of the complexities involved in a global FCPA/Bribery Act investigation where one or more foreign languages is involved. Jay was kind enough to walk me through his thoughts on best practices for such a task. I was so impressed that I asked him if he could spell some of these out in a Guest Post, which he graciously agreed to do. This is his Guest Post.

Global investigation

Let’s take a look at a hypothetical multilingual investigation. Our client FIBLA, a pharmaceutical company, sells its products globally and has potential FCPA issues in France, Italy, Brazil (Portuguese) and Latin America (Spanish). They have engaged a global forensics firm to identify custodians and image hard drives as part of the initial collection effort. The audit committee has hired outside counsel to run the investigation and each organization hits the ground running. There’s only one problem: No one has contemplated how to handle the foreign language componentof this investigation.

As the first forensics team steps off the tarmac in Sao Paolo and speeds to FIBLA’s headquarters to begin collecting documents, they should be considering a key question regarding the foreign language data they will uncover:

1. What do they need to know before they walk through that door?

The answers to this question could vary depending on one’s role in the investigation–forensics company or outside counsel. I would like to focus on the best practices for managing the foreign language portion of this type of case. Though each foreign language matter possesses its own unique set of challenges, the common denominator is: “What is the most cost effective way to match the proper translation solution with the needs of the case?”

Many clients consider translation to be something they can handle in-house because:

• “Rebecca down the hall speaks Spanish.”
• “I’ll use Google Translate.”
• “The associates in our Mexico City office can handle this.”
• “The forensic accountants in Paris or the document reviewers in Ecuador can translate this information on the fly.”

In certain circumstances, all of these options have some validity, but for a mission critical investigation where accuracy and deadlines are paramount, these are not the best choices.

Language filtering solutions
Multi-lingual FCPA investigations demand a different level of sophistication and execution. Faced with a large volume of foreign language documents and pending deadlines, the team should leverage language filtering solutions that will bring order to the document chaos while reducing the time and cost involved in discovering the content of documents that are key to the investigation. In other words, separate the wheat from the chaff. These solutions, offered by most language solutions providers (LSPs), include both technology and human based translation tools.

Tool #1: Language identification
A language identification tool analyzes a document and reports the language distribution as either an absolute value (e.g., English, Italian, Mixed, or unknown) or can deliver a percentage break down (e.g., 5% French, 95% English; 10% Portuguese, 10% Italian, 80% Spanish).

On a document level, the resultant breakdown allows for granular workflows. On a case level, this knowledge determines the appropriate allocation of native speaking document reviewers needed and the most efficient and cost effective use of these resources.

Tool #2: Foreign language key words
Key words are identified by the lawyers who then have them translated to allow searching within foreign language text. Such a translation must account for the nuances inherent in another language. For example, 20 English terms can easy become 100 foreign language terms. Filtering native language documents against key foreign language terms will increase the accuracy of the review and improve the results of responsive searches. A couple hundred dollars invested here can save thousands in attorney review costs.

Tool #3: Machine translation
Machine translation provides a “gisted” understanding of large volumes of electronic documents and can allow English speakers to more easily identify those that are relevant. Thousands of pages can be translated in a fraction of the time required by traditional methods which, in turn, yield significant time and cost savings. Machine translation quality typically correlates to the quality of the source document and how well it can be read by optical character recognition (OCR). If viable, this process is 1/100^th the cost of human translations.

Technology-based filtering solutions help the internal team to efficiently identify “hot” documents while eliminating those with no relevance to the investigation. This ensures that only those documents that are absolutely necessary will be submitted for human translation. For example, in a recent Turkish FCPA matter, Merrill Brink’s filtering tools reduced the number of translated documents to 3,000 out of an initial universe of 1,000,000.

By leveraging these language technology solutions once the initial data has been collected, the review team is able to reduce the amount of potentially discoverable information that bilingual reviewers need to consider. Combining an LSP’s language based technology solutions with sophisticated tools offered by most eDiscovery platforms will help to identify duplicate and forwarded emails, streamline the review process, and result in a reduction of crucial time, resources, and costs.

Here Jay slipped back into his prior life as a screen writer to explain the following:

FADE IN:

When we last saw our heroes, a crack forensics team, “Boots on the Ground,” thudded onto the tarmac in Sao Paolo, piled into waiting black SUVs with tinted glass and sped to FIBLA’s headquarters to begin collecting documents.  In a blistering high tech MONTAGE, we breathlessly see them collect, process and load the data into an eDiscovery hosting tool.  As the grunts fall back to secure the beachhead, the calvary, “Outside Counsel,” arrives in SUPER SLO-MO Quentin Tarantino blaze of slip-on loafers, broad cloth shirts and rep ties to begin a document review using contract attorneys…

FADE OUT:

Usually the law firm will perform a first- and second-level review, confirming which documents are “responsive” or “hot” and only then will they consider how to translate the documents. Some of the same ideas from Part 1(Rebecca down the hall, Google Translate, The Mexico City associates, and Forensic accounts in Paris) may be proposed as viable solutions. Again, I would caution that it is far better to engage an LSP that is well versed in the translation intricacies of these internal and external investigations.

Bilingual review and translations involve different skill sets and different costs are associated with each service. For this reason, it is best to separate the two in most cases. Industry pricing for on-site review in the U.S. varies from $70 to $110 per hour, depending on the region. In many cases, these reviewers are bilingual attorneys who are trained to identify or translate information that is pertinent to the case.

Translation is typically charged by the word and completed off-site by linguists who are trained to understand terminology and context, and to ensure the results are accurately rendered from the source to the target language. The price per word will vary by language, subject matter, turnaround time, and volume.

Although in some cases it may be deemed expedient to have the bilingual reviewers perform the translation, this will usually result in a higher cost and slower delivery. The optimal solution would be to have the reviewers identify responsive documents and feed them to the off-site translators. This way, outside counsel will have a continuous workflow that will save precious time, match resources with their respective area of expertise, and manage the company’s costs.

Human translation solutions
Most LSPs will offer at least two or three levels of human translations, each of which plays a role in the filtering process we have discussed here.

Summary translations
If machine translation has not proved feasible (due to the quality of the source documents or the language not being an option for this solution), the next choice for filtering documents would be summary translations. This often takes the form of a few sentences or perhaps some coded fields which allow for a better understanding of the content of the document. Armed with this intelligence, a decision can be made about which documents need a more complete human translation. This is also an effective way to cull large volumes of documents and identify those which require full human translation.

Basic translations
Documents are translated by a native language linguist and reviewed by a project manager. Although not as polished as a full translations, basic translations enable outside counsel to ascertain the complete content of a document. These documents are used by the investigation team for internal use.

Full translations
Full service translation starts with the basic translation process as described above, but adds a formal editing stage by a second linguist and includes a thorough quality check. Documents that have gone through a full translation processes may be certified upon request and a Certificate of Accuracy (COA) will be issued and notarized. This certification is often required for documents being presented to governmental entities such as the courts, Department of Justice, or the Securities and Exchange Commission. Both technology and human translation solutions should be utilized to reduce the amount of data that requires full translation.

By knowing this information in advance, the team speeding to FIBLA’s headquarters can concentrate on the job at hand—securing the location, collecting the data, and interviewing employees. After all the information is collected and an LSP is engaged, outside counsel can begin to leverage the above mentioned tools. Filtering processes are commenced to match appropriate translation solutions to each step of the investigation, contain the costs of human translations, and most importantly, produce the highest quality translations from professional linguists.

Jay Rosen is a Vice President, Language Solutions at Merrill Brink International, based in Los Angeles, where he advises corporations, forensic professionals and outside counsel on translation solutions for Cross-border and FCPA investigations, Compliance, Ethics, Code of Conduct and eLearning projects, M&A Due Diligence and Patent and IP matters. He can be reached via email at jay.rosen@merrillcorp.com and via phone at 310-729-6746.

———————————————————————————————————————————————————————-

Please join Martha Duncan, CCO at Parametric Technology Corporation, Eddie Cogan, CEO of Catelas Software and myself for a webinar on Wednesday, October 31 on “How Much Risk are You On-Boarding with Each New or Acquisition?” 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. ———————————————————————————————————————————————————————-

10 Questions to Better Management Practices in a FCPA Program

One of the things that I sorely lacked when I worked in-house was any guidance on management practices towards the implementation of either legal or compliance initiatives. Most legal and compliance departments do not train their attorneys or compliance practitioners on management practices for compliance program implementation, enhancements or upgrades after a risk assessment. I was therefore very intrigued when I came across an article in the November issue of the Harvard Business Review, entitled “Does Management Really Work?” by Nicholas Brown, Raffaella Sadun and John Van Reenen. I found the article very useful because it gave succinct advice about what a business can do to improve its management practices and determined that this advice can be applicable to a compliance program.

The authors tested three essential practices which they believe can address even the most complex global problems. The three principles which they believe “are generally considered to be the essentials of good management” are:

• Targets: Does the organization support long term goals with tough but achievable short-term performance benchmarks?
• Incentives: Does the organization reward high performers with promotions and bonuses while retraining or moving underperformers?
• Monitoring: Does the organization rigorously collect and analyze performance data to identify opportunities for improvement?

You might read these and immediately think about Paul McNulty’s (Three) Maxims. I, however, believe that these three management practices can provide some assistance beyond McNulty’s queries. In the article the authors research showed that by the use of these three techniques businesses could not only set parameters but also measure on them, generally had more and better productivity and overall better financial health.

From the compliance perspective how can one use these three relatively straight forward techniques? Interestingly the authors revealed some of the questions used in interviews with over 8,000 manufacturers who were interviewed in this project. I have selected 10 questions which you might want to put use as a starting point for managing your compliance initiatives going forward as I believe that they are very good questions to use in formulating a plan for compliance program implementation or upgrade. I would challenge you to think about some of the answers to these questions in the context of your compliance program.

1. Interconnectedness of Targets – How are compliance goals cascaded down to individual workers? Everyone recognizes the importance of ‘tone-at-the-top’ as it is enshrined in the US Federal Sentencing Guidelines, the Department of Justice’s (DOJ) minimum best practices compliance regime and the UK Bribery Act’s Six Principles of an Adequate Procedures compliance program. However, as many commentators now recognize, it is also tone in the middle and at the bottom, which may equally matter. So how do you ascertain and ensure that top management’s message gets cascaded down into your organization?
2. Clarity and Comparability of Goals – Does anyone complain that your compliance targets are too complex? Certainly the initial role out of a compliance program can be quite a large undertaking. Perhaps another approach might be to focus on high risk areas and remediate them by rolling out initiatives to manage those risks first and then move to other areas. Many companies have reviewed and remedied the third party sales side of their business but are only now looking at the Supply Chain or Procurement side of the equation. If you work on one such problem at a time, it can help move the overall process forward in a more orderly fashion.
3. Consequence Management – How do you deal with repeated compliance failures in a specific business segment or compliance program area? This is certainly one question that you would want to consider carefully. Do you have problems with one business unit or one geographic area from the compliance perspective? Are gifts in China, for example, an ongoing issue for your company? What about travel and entertainment? Areas that show up again and again will merit more focused attention.
4. Instilling a Mind-Set – How do senior managers show that attracting and developing talent who will engage in ethical business conduct is a top priority? Here you should consider bringing in your Human Resources Department for not only assistance but their expertise. If top management will make a commitment to this, you should work to create the appropriate mind-set of doing business the right way throughout your organization.
5. Removing Poor Performers – How long is compliance underperforming tolerated? In many ways, this question is the flip side of number 4 above. I think that many companies would clearly say that they will discipline, up to and including discharge, any employee who engages in practices which violates the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. But this question drills deeper and forces a more rigorous analysis on not just FCPA failures by employees but poor ethical choices which may be less than full FCPA violations.
6. Unique Employee Value Proposition – What makes it distinctive to work at your company? More pointedly, how can your compliance challenges be turned into business leadership opportunities? Ethisphere annually shows that its top list of the Most Ethical Companies out performs the Standard & Poor (S&P) 500. If you can turn the distinctiveness of what your company does into a compliance plus in the marketplace, it could well make your business more profitable.
7. Continuous Improvement – How do compliance programs that are not working typically get exposed and fixed? There is a difference between auditing and monitoring. Monitoring is a commitment to reviewing and detecting compliance programs 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. 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. A robust program should include separate functions for auditing and monitoring. While unique in protocol, the two functions are related and can operate in tandem. Monitoring activities can sometimes lead to audits.  For example, if you notice a trend of suspicious payments in recent monitoring reports from a country in the Far East, it may be time to conduct an audit of those operations to further investigate the issue.
8. Performance Tracking – What key compliance indicators do you use for compliance tracking? Here you need to look at the metrics which you have developed. A good starting point can be with your hotline or helpline. What can you determine from the calls or reports which come in through these systems? What if you have not had any reports for several years, what should that be telling you about your communication to your employee base? Or does it mean that people have not been properly and effectively trained that a hotline or helpline exists and is available for their use or, more ominously, are afraid to make any reports for fear of retaliation or even losing their jobs? This is certainly something you should take a good look into, whichever way the metrics are going for your company.
9. Performance Dialogue – For a given compliance problem, how do you identify the root cause?  If you do not know what the cause of a problem is, you cannot successfully work towards remedying that problem. This does not simply mean firing any persons involved in a potential FCPA violation. You need to dig down and found out what allowed this issue to arise. I once heard that the difference between Japanese and American post-incident investigations is that in the US there is an attempt to assess blame, conversely in Japan there is an attempt to find a solution to the problem. This is the approach that I believe compliance practitioners should take, to try and find a solution by determining the root cause of a compliance failure.
10. Retaining – What are you doing to retain your top employees from the compliance perspective? This is not a question that is typically asked in the compliance department. But one thing you can look at is what your company is doing to retain, promote and take to senior management those employees who do business in an ethical manner and in compliance with your company Code of Conduct.

I found the article to be very useful when applied to the compliance practitioner by not only using the triumvirate of targets, incentives and monitoring as a management practice but also the questions that the authors posed in the context of your company’s own compliance program. We continually face the challenge of keeping up with the ever evolving compliance best practices with little or no budget increase. I found that this article had points which you can ask yourself, and of your compliance program, which can facilitate a robust discussion that can highlight areas for improvement.

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, 2012

The Mummy and Using Challenges to Improve Compliance Cultures

We continue our celebration of the Universal Pictures monster movie films by looking at the classic The Mummy, which was released in 1932 and starred Boris Karloff. In many ways I found this to be the most hauntingly filmed of the classic monster movies. Perhaps this was due to the director Karl Freund, who was in his directorial debut for this film. He is probably best known as Universal’s top cameraman and the person who set up some of the great shots for the gamut of Universal pictures in the 1930s. His use of shadings in the black and white era added an aura of mystery that is not present in today’s films. This movie is probably the best visual feast of all the classic Universal Picture horror films.

One cannot see the movie, or indeed write about it, without talking about the makeup artist, Jack Pierce, one of the truly greatest makeup artists of any era. He headed Universal’s Makeup Department until 1948 and personally created the makeup for all of the classic Universal Pictures monsters. While most people think of Frankenstein’s monster as Pierce’s greatest creation, he saw the Mummy as his true masterwork. The application of the makeup was arduous, taking up to eight hours of work on Karloff to complete the 3000 year old look for the Mummy.

For me, most haunting scene is one which occurs quite early in the movie. After a spell is read aloud, bringing Karloff as the Mummy to life, the casket which houses the Mummy is left open allowing the Mummy to escape into the present day world. One of the young archeologists sees the Mummy walk out of the room and immediately goes insane. I can hear his haunting scream in my head to this day. But here is the key to making this scene so powerful, we never see the Mummy; the only thing we see is some of the rags trailing from his body as he walks out of the room. Too bad today’s gore-fest directors have forgotten what real terror can be.

The basic story line is that Imhotep, the High Priest of Egypt, was mummified after the Pharaoh found out he had fallen in love with the Pharaoh’s wife Princess Anck-es-en-Amonand. As a Mummy, Imhotep was condemned to eternal damnation and his soul would never to go the afterlife. After he is released from this curse in the 20^th Century with the reading of the spell, Imhotep searches for the reincarnation of the Princess. He finds her in modern day London, as Helen Grosvenor, played by the alluring Zita Johann; the Mummy tries to convince her she is the reincarnated Princess Anck-es-en-Amonand and to join him in an eternal love affair. Grosvenor prays to the goddess Isis who sends a ray into Imhotep which turns him into dust.

So the compliance angle here? It’s the difference between two companies in their responses to compliance challenges. Exhibit A is Goldman Sachs and their continuing PR nightmare named Greg Smith. Smith exploded onto the ethics scene with his very public resignation from Goldman Sachs and Op-Ed piece in the New York Times (NYT) in March. The NYT piece castigated Goldman Sachs both internally for their drive towards the all mighty dollar (horror) and their external relationships with their clients, for basically the same reason (horror, horror). This week Smith has made the rounds of several shows including a prominent feature on 60 Minutes to plug his recently released book entitled, “Why I Left Goldman Sachs.”

I had wondered what Goldman Sachs public response would be to Smith’s allegations. Would the firm go “Swift Boat” on him? Would they take any credence to his allegations, investigate them and remediate any issues they found open? Some of these questions were answered in an online post by Kevin Roose, entitled “Goldman Sachs Reveals its Greg Smith Battle Plans”, where Roose attached a Memo that Goldman Sachs sent out to its employees with the talking points that they should use when responding to Smith’s allegations.

Goldman Sachs did not go full ‘Swift Boat’ but only attacked Smith as (1) opportunistic because he was not doing that well on the Goldman Sachs promotion ladder and (2) he really was not in a position to know about the things he was talking about anyway. What I found the interesting part of the Goldman Sachs Memo was that it focused on some of the positive actions the firm had taken regarding ethics and compliance with its Code of Conduct. While I had hoped that Goldman Sachs had performed a deep dive and investigated the allegations made by Smith; it did not announce that it had done so as a part of the talking points in its Memo.

Contrast the Goldman Sachs approach with the ongoing story about NCR and the Foreign Corrupt Practices Act (FCPA) allegations. As reported by Chris Matthews and Sam Rubenfeld in Wall Street Journal (WSJ) article entitled “NCR Investigates Alleged FCPA Violations”, NCR had a lawyer, Daan Thorig, removed and transferred because its business folks in China had the view that Thorig “doesn’t understand China at all”. The issue, which brought all this to a head, was when Thorig would not approve a client entertainment event for Chinese government officials. This same business person, Gary Miao, later requested that Thorig be removed from his position and be replaced with a lawyer who “understands our business”. Lo and behold, Thorig was not only replaced but shipped out half way across the globe. Ominously, the WSJ article reported that “Thorig is no longer with the company.” The above article came about through an interview by the authors with an anonymous tipster who had whistle blown on NCR about L’affair Thorig. NCR’s initial response was to actually attack this anonymous person as not knowing what he was talking about.

So what did this anonymous tipster do? He sat down with two folks who are in Ethisphere’s Top 100 most influential people in the FCPA and wider compliance world and laid out emails for them about NCR’s conduct. In addition to the emails about L’affair Thorig this tipster also had emails about NCR’s business conduct in several other parts of the world which also may raise FCPA implications. In a September, 2012 8K filing NCR then attacked the whistleblower with the following language, “We have certain concerns about the motivation of the purported whistleblower and the accuracy of the allegations we received, some of which appear to be untrue.” I guess they did not learn too much from their first attack.

So what lessons can we draw from these very disparate responses? One would have to say that NCR’s response has been about as wrong-headed as a company’s can be. By basically challenging the anonymous whistleblower to come forward, he (or she) did so with two very well known and well respected journalists in the compliance world. I am sure that the Department of Justice (DOJ) will be very interested in the results of these internal investigations by NCR. But more importantly what kind of message does the reported facts and the public responses of NCR  send to its employee base? Is it keep your mouth shut or else? Do the business guys dictate what compliance approves? How about if you want to bring a problem up the line internally at NCR? Will you be shipped out on the next boat across the globe or even have to leave the company? Unlike the Mummy, Isis will probably not point a death-ray at NCR and turn it to dust but it sure may be in for quite a (FCPA) ride.

Since there are only questions at this point, I would suggest that you sit back and pop in the original version of The Mummy. Just as Helen Grosvenor remembered who she was when she prayed to Isis perhaps NCR will remember that it is a US based company subject to the FCPA and will embrace whistleblowers as a useful tool of the modern compliance program.

One thing I forgot to mention is that as it is a 1932 production, it is pre-Code. So be on the look for some interesting ladies garments. As I said, a visual feast for all.

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, 2012

Marshall on Leadership – A Guide for the Compliance Practitioner

General George Marshall was not only one of the greatest generals that this country has ever produced but he served as US Secretary of State, Secretary of Defense and was the architect of the European recovery plan which bears his name, the Marshall Plan. Nominated by President Franklin Roosevelt to be Army Chief of Staff, Marshall was promoted to General and sworn in on September 1, 1939, the day German forces invaded Poland, a post he held until the end of the war in 1945. As Chief of Staff, Marshall organized the largest military expansion in US history, inheriting an outmoded, poorly equipped army of 189,000 men and, partly drawing from his experience teaching and developing techniques of modern warfare as an instructor at the Army War College, coordinated the large-scale expansion and modernization of the US Army. Though he had never actually led troops in combat, Marshall was a skilled organizer with a talent for inspiring other officers.

Many of the American generals who were given top commands during the war were either picked or recommended by Marshall, including Dwight Eisenhower, Leslie McNair, Mark Wayne Clark and Omar Bradley. Indeed Marshall is well known for having promoted Eisenhower over 300 higher ranking generals to lead the American Expeditionary Forces. Scholars have long debated whether Marshall kept a ‘little black book’ of promising young officers who might merit future promotion. One thing that is more certain is that Marshall did have a very clear idea of the qualities he looked for in promoting someone to officer. In a letter he wrote to General John Pershing in November 1920, Marshall listed his views on the qualities of a successful leader. I found many of these qualities transcend the military officers and are useful when evaluating employees to become compliance practitioners or Chief Compliance Officers (CCO). The qualities Marshall listed are as follows:

1. Good Common Sense. In this area, Marshall favored character over raw intellect. In the compliance world today, the compliance practitioner must know not simply how to work with a business unit, but use compliance to create value. In other words, as Mike Volkov is want to say, do not be ‘Dr. No’. Additionally Marshall did not seek the outlier, the individualist, the eccentric or the dreamer but a person well-grounded in good old American know how.
2. Have Studied Your Profession. Marshall wanted officers who had studied the science of not only military operations but all areas appurtenant thereto, such as logistics and other branches of services. The same is true of the compliance practitioner, particularly with the evolving nature of a minimum best practices compliance program.
3. Physically Strong. Here Marshall is not talking about simply being physically fit, which is requirement in the armed forces, but rather having the fitness to get out into the field. Marshall wanted men who would be in the middle of things. In other words, put ‘boots on the ground’ and learn what is going on in the field, outside of the corporate office.
4. Cheerful and Optimistic. While Marshall based this requirement on the specific circumstances of the American democracy and a two-ocean protection, I believe that his traditional reasoning that American soldiers needed to be led by officers who were optimistic and resourceful is equally valid in the compliance context. Sometimes, the compliance practitioner is required to do less with more and given the dearth of case law available, decision making calculus based upon a solid reasoning is often required.
5. Display Marked Energy. This is related to the physical fitness component cited above. However, it also relates to finding solutions in the face of rapid action. In the compliance world ‘NO’ is not always the best answer but for many it’s the easiest answer. Compliance practitioners are being called upon more frequently to supply answers to complex business situations and they must not simply say ‘that is an FCPA violation’ if it is in reality a high risk proposition, yet one which can be managed effectively with the proper controls in place.
6. 6.      Extreme Loyalty. This is where Marshall specified a ‘team player’. I recognize that the compliance practitioner must stand apart to provide objectivity and I am not talking about US company’s which actually force compliance practitioners to change well-reasoned decisions on what may constitute a Foreign Corrupt Practices Act (FCPA) violation. Here Marshall wanted level headed team players who were both competent and cooperative.
7. Determined.  Here Marshall wanted men who were steady and level headed. This meant that in the face of a rapidly shifting battlefield they could be counted on to soldier on and, more importantly, avoid gross errors of judgment which would cost American lives. Fortunately in the compliance arena, we rarely face anything so catastrophic but if compliance practitioners do not do their jobs, large amounts of a company’s time, resources and money can be put at risk if a FCPA is alleged and an investigation ensues. One needs look no further than Wal-Mart on this score.

General George Marshall was a transformational leader of the US Army. He accomplished this largely through focusing on people. This is also true for a CCO or other senior leader who has to set up a team to deal with a high profile area in a business. It is often said that the true mark of a person is how he or she does in tough situations. One of the best quotes I have ever heard about the US Army Officer Corp from World War II is by the historian Bernard Lewis who said “what was really new and original [about American officers] was the speed with which they recognized their mistakes, and devised and applied the means to correct them.” If you can imbue your Compliance function with people who have this trait, or can learn this skill, you will go quite a long way towards having a world class program.

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, 2012

Global Innovation for Your Compliance Program

One of the areas where the best practices for Foreign Corrupt Practices Act (FCPA) compliance programs is evolving is in the area a less US centric approach and incorporating the diversity across the globe. Many companies are now realizing that there should not be a one size fits all compliance program and that there is a treasure trove of ideas and capabilities in the compliance arena around the globe. This is also true regarding compliance talent as there is much talent outside the US which can and should be utilized by a company in constructing and developing their compliance group. Once found this diversity and talent must be groomed and integrated into an overall compliance structure for success.

A recent article in the Harvard Business Review, entitled “10 Rules for Managing Global Innovation” by Keeley Wilson and Yves L. Doz, explored some of these challenges and provided insight into how to tackle this issue from the corporate innovation angle. I found their article a good road map for the Chief Compliance Officer (CCO) to tap into and develop compliance talent. Wilson and Doz believe that many enablers of innovation occur naturally in a single location because “single location projects draw on large reservoirs of shared tacit knowledge and trust” but when these “projects span multiple locations, many of those natural benefits – often taken for granted –  are lost.” The authors formulated ten principals for successfully managing such global innovation projects across multiple locations which I believe translates into actions that a CCO or compliance group should institute when implementing or enhancing FCPA or Bribery Act compliance regimes.

1. Start Small. The authors believe that to be effective, dispersed teams have to develop a “new set of collaboration competencies and establish a collaboration mind-set.” This can be done by running one or more small projects before the entire system rollout. In this way, a consensus can be developed on working practices and protocols. Additionally systems bugs can be worked out.
2. Provide a Stable Organizational Context. Periods of major change in an organization present their own set of problems, so the authors advise, to the extent possible, a global innovation program should be initiated during times of relative stability.
3. Assign Oversight and Support Responsibility to a Senior Manager. In addition to the usual key of having strong senior executive support as a factor for success, the authors believe that given disparate locations and teams, a strong senior leader will be needed to arbitrate disputes and generally be the ultimate decision maker.
4. Use Rigorous Project Management and Seasoned Project Leaders. The authors believe that for global innovation to succeed there must be “a strong project management team to drive the project on a day-to-day basis and strong team leaders supported by robust tools and processes.” Often times, there are no off-the-shelf tools available so that they must be created to fulfill this role.
5. Appoint a Lead Site. It is important that there be one person at each implementation site who can focus on the bigger picture, the overall integration of the solution. The authors believe that a key to overcoming localized support for their own initiatives is to task one lead to liaise so that he/she can have an understanding of the bigger picture and work towards appropriate resource allocation.
6. Invest Time Defining the Innovation. When an implementation or innovation project is split over several time zones, the authors believe that there “is little latitude for iterative learning.” This means that the goals must be clearly defined and specified from the outset of the project. This definition process also helps but up trust and overall relationships between multiple locations.
7. Allocate Resources on the Basis of Capability, Not Availability. The authors believe that the staffing of a global innovation or implementation project “requires a great deal of attention in order to select and integrate the best possible knowledge and capabilities.” Companies usually staff projects with the resources on the ground that are available. The authors believe that this is a mistake and companies should rather “bring together distinctive and differentiated knowledge and capabilities from around the world to create unique innovations.”
8. Build Enough Knowledge Overlap for Collaboration. Without some overlap, the authors believe that “critical interdependencies between modules may not be apparent until the integration phase” when the cost is too great to change something. The authors cite to the Siemens example where one team member was tasked with liaising with other teams to ensure some overlap.
9. Limit the Number of Subcontractors and Partners. The authors believe that in such global innovation initiatives, the lead should be driven by the company’s own workforce and not led by professional consultants or other third parties. Clearly for employee buy-in it is important for there to be employee involvement, additionally the authors believe that the coordination of third parties may be more time consuming and at the end of the day, more trouble than it is worth.
10. Don’t Rely Solely on Technology for Communication. After the project is completed, it is critical that it be communicated effectively throughout the workforce. The authors believe that many managers “tend to underestimate the challenge of scaling communications globally.” Without robust communications, all of the good work to-date may not be fully disseminated throughout the company. So the human element is important and the authors advise as many communications as possible where there is an opportunity for employee interaction with the project sponsors publicizing the initiative.

The authors focus has been on global innovation initiatives. However I think these ten points are an excellent resource for the compliance practitioner to utilize when developing or rolling out a major compliance initiative. Even Mike Volkov recently saw the light and advocated the decentralization of the compliance function throughout an organization. This decentralization may well bring compliance initiatives from areas or regions not traditionally seen as a hotbed for such ideas. This article establishes a framework for the compliance practitioner to use for such compliance innovation.

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, 2012

Money, Money, Money: Use of Big Data in Your Compliance Program

What is No. 2 on the biggest selling rock and roll album of all-time list? It’s Pink Floyd’s Dark Side of the Moon. In addition to learning that there is no “dark side” to the Moon as it is all dark really; my favorite cut off the album was the song Money. I was thinking about that song and how it might have some relevance to the Foreign Corrupt Practices Act (FCPA) or Bribery Act, in a rock and roll sort of way, when I came across an article in the October issue of the Harvard Business Review, entitled “Big Data: The Management Revolution” by authors Andrew McAfee and Erik Brynjolfsson. The authors’ basic premise is that by exploiting vast new flows of information, a company can improve its performance. However, to do so there must be a corresponding change in the company’s decision-making culture. In business today, many companies are concerned about having not the new thing but the new, new thing. In the FCPA world we might call that evolving best practices as it is another way to phrase many of the emerging business techniques and strategies that can have application to the FCPA compliance practitioner.

What is Big Data?

The authors differentiate ‘Big Data’ from other analytics through three key facets. First is the sheer volume of data that is now available to companies. The authors note that “more data comes across the internet every second than were stored in the entire internet twenty years ago.” The second difference is in velocity with the abundance of real-time or “nearly real-time information”. The authors believe that the “speed of data creation is even more important than the volume.” The final difference is in the form of the data; it is not simply numbers from structured databases but “big data takes the form of messages, updates and images posted to social networks, readings from sensors; GPS signals from cell phones, and more.”

A New Culture of Decision Making

While noting that the technical challenges in capturing or storing ‘Big Data’ can be formidable, the authors believe that the managerial challenges can be even greater. When data is scarce, expensive to obtain or not available in digital forms, the authors posit that “it makes sense to let well placed people make decisions, which they do on the basis of experience they’ve built up and patterns and relationships that that they’ve observed and internalized”, in other words “intuition.” The authors believe that when ‘Big Data’ is involved the Highest Paid Persons Opinion (HiPPO) must “be muted.”

There must be a shift in thinking by the decision makers. The authors believe that two key questions should be “What does the data show?” and then follow up with some more specific questions such as “Where did the data come from? “What kinds of analysis were conducted?” and “How confident are we in the results?” However, as important as these questions might be the bigger challenge by any decision maker using ‘Big Data’ is that they “can allow themselves to be overruled by the data”. The authors believe that nothing speaks louder to employees than “seeing a senior executive concede when data has disproved a hunch.”

Five Management Challenges

The authors write that there are five “particularly important areas” in the effective management of change when it comes to ‘Big Data’.

1. Leadership. ‘Big Data’ does not erase the need for leadership’s vision and insight. However companies will succeed using ‘Big Data’ because leadership teams “set clear goals, define what success looks like, and ask the right questions.” The authors believe that the companies who lead the way in the use of ‘Big Data’ will be those who use these time honed techniques while changing the way they make decisions.
2. Talent Management. While data scientists and other similar professionals skilled at working with large amounts of numbers will be important; the authors believe that “cleaning and organizing” the data so that a decision can be made will be equally important. They note that such skills are not currently taught in universities so that company personnel will need to develop the ability in “crossing the gap between correlation and causation.”
3. Technology. The authors recognize that at the end of the day it is people who will analyze the data but that technology is “always a necessary component of a ‘Big Data’ strategy.” They also believe that the tools available to handle ‘Big Data’ are out there in the marketplace but there is still a skill set required that most IT departments do not have, which is to “integrate all the relevant internal and external sources of data.”
4. Decision Making. Here the authors believe the key is that company personnel who understand the problem must be brought together with the right data and that these same personnel must have “problem solving techniques that can effectively exploit” the ‘Big Data’. This requires a company leadership which puts “information and the relevant decision making rights in the same location”. The authors termed it as the “not invented here syndrome” and that employees must work throughout the decision making calculus.
5. Company Culture. In addition to moving away from the HiPPO syndrome noted above, executives must stop claiming that they are using data and analytics to make decisions when they are simply spicing up their reports “with lots of data that supported decisions they have already made”. The authors believe that the first question that a company should ask is not “What do we think?” but “What do we know?” Such an inquiry will allow businesses to gravitate away from making decisions based on “hunches and instinct” to those based upon the data.

What about the application of ‘Big Data’ to FCPA and Bribery Act compliance? I think this article shows the power of not only data analytics but also continuous monitoring. In their article the authors end by stating “Data-driven decisions tend to be better decisions.” The same is true in compliance. Whether you use a software tool, such as Catelas software to pull down large amounts of information and make decisions based upon this data or design a protocol to continually monitor segments of your information through the guys at Visual Risk IQ, cutting edge technology is available to assist the compliance practitioner. But with all data, the key is how to use it and I believe that compliance practitioners who can review large amounts of information from their own internal company and analyze it quickly and efficiently will be able to better protect their companies and keep them in compliance. This will inevitably lead to more complete and better decisions and companies will be able to respond more quickly to compliance challenges as they arise.

And Pink Floyd? Just remember, Money, Money, Money…or listen to the You Tube version 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, 2012

Brother Can You Swop a Car? FCPA and Bribery Act Implications in the Barter Economy

While the economy has improved from the depths of the Bush Recession of 2008, things are not back where most businesses and governments would like them to be. One of the more interesting responses to the continuing economic doldrums that I have read about is the age old art of bartering. According to the International Reciprocal Trade Association (IRTA), the ongoing economic slump has encouraged companies to offset shrinking orders and ongoing skimpy credit from financial institutions to put excess products to use by bartering them. A recent article in the Financial Times (FT) by reporter Alicia Clegg, entitled “The art of good bartering”, further piqued my interest.

In her article, Clegg quoted Brian Petro, who has a blog entitled “Barterfanatic.com”, who said that bartering allows him continue operating his business through the exchange of goods. Additionally bartering is a way to overcome liquidity problems or by-pass currency restrictions. The IRTA says that bartering has increased substantially over the past four years or so in some of the following countries: the United States, Britain, the Netherlands, France, Italy, Spain, Portugal and “parts of Asia”.

The bartering system, as envisioned by the IRTA and others, has become quite a sophisticated system. Typically a smaller company will “barter their unsold goods and services through a barter exchange, selling to another exchange member in return for trade credits which can be used to buy something from another exchange member.” Larger businesses typically use a different model where they will barter slow moving stock with a trade barter company, who pays the company back in trade credits which the original entity will then use to purchase goods and services. Clegg reported that the barter exchange “typically charges buyer and seller a cash transaction fee of 5-6 percent.”

While the IRTA does have a Code of Ethics and Conduct for its members, it does not speak to anti-corruption or anti-bribery. While most people think that the biggest issue around bartering is tax,  because both buyers and sellers need to assign market values to what they buy and sell in the process, there is also a Foreign Corrupt Practices Act (FCPA) and UK Bribery Act compliance issue involved, which revolves around these exchanges or other intermediaries who facilitate barter deals by providing the credits for goods or services received.

What might the relationship of these intermediaries be under the FCPA or Bribery Act? Let’s take the Bribery Act since that law clearly bans all bribery and corruption between private entities not just with foreign government officials as set forth in the FCPA. Under the Bribery Act, a company can be liable  if someone who performs services on their behalf, like an employee or agent, pays a bribe specifically to get business, keep business, or gain a business advantage for the entity. It is not limited to agents, distributors, sales representatives and the like. The term in the Ministry of Justice’s Six Principles of Adequate Procedures is “associated persons” and an intermediary, such as a barter exchange or other similar entity, may well qualify as an associated person.

What if a barter exchange is based in a well-known money-laundering location? Think that might move up its risk profile? While the IRTA has on its website, that it is in “strategic partnership with the IRS Partnership Outreach” as a “collaborative effort to work with a major government group to educate business owners on reciprocal trade”, it does not take too much insight to see that other laws and regulations might be involved.

What are some of the questions you need to be asking from the compliance perspective if your business is going to engage in bartering? First, and foremost, is to know who you are doing business with and how you are doing business with them. If you are bartering through an exchange, you should perform due diligence on them as they may well be your agent under the FCPA and most probably an “associated person” under the Bribery Act. What compliance protocols do they have in place? Do you have any agreement with them that has FCPA or Bribery anti-corruption/anti-bribery terms and conditions? What rights do you have to protect your product after it has been exchanged?

Consider this “creatively structured” deal that Clegg wrote about. The automotive maker Kia struck an exchange with the UK bartering company Miroma, where Kia swopped some of its auto fleet with a publisher “in return for poster, cinema and press slots for Kia.” From the description in the FT article, it certainly sounded like Miroma acted as the agent for Kia in the series of transactions.

Just as my colleague Aaron Murphy wrote in his book “Foreign Corrupt Practices Act – a Practical Resource for Managers and Executives” about the FCPA issues that many retailers might face, the issues which companies engaging in bartering are in plain sight as well. However, just as those in retailing may not have looked closely and are now paying a high price to look, those companies which engage in bartering and who fail to look at the FCPA and Bribery Act as potential sources of liability should do so sooner rather than later.

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, 2012

Frankenstein, Lance Armstrong and FCPA/Bribery Act Compliance

We continue our series focusing on the classic Hollywood monsters from the Universal Pictures era by taking a look at Frankenstein. Unlike Dracula, where Bela Lugosi basically only played his character in one classic picture, the Englishman Boris Karloff played Frankenstein’s monster in three pictures; two great classics: the original Frankenstein and the sequel The Bride of Frankenstein, and the very good third movie in the series, The Son of Frankenstein.

The basic premise of the first movie was the creation of a man from the body parts of other dead souls. Boris Karloff, actually played Frankenstein’s monster, not Dr. Frankenstein himself. Colin Clive played Dr. Frankenstein who was so drunk with power that he began to think of himself as a god, yet in the end tried to destroy his own creation. However, for most of us, it was Boris Karloff as the Monster who created one of the most single iconic movie performances of all time. Anyone who sees a child puts his arms up and walk with a lumbering stride immediately knows the reference.

What made this performance so iconic? For me it was the pathos that Karloff brought to the role. He imbued the Monster with such a tortured soul that he literally cried out for love and acceptance in a world which was terrified of him. Even the scene from the original movie where he tosses the girl into the lake drove home the humanity that Karloff brought to the role. My suggestion is that you settle in one weekend night for an autumn’s eve of Karloff in the original Frankenstein movies. They are a visual, audio and an intellectual treat for all. Even if you enjoy none of those senses, you can always revert to your childhood and remember the terror he brought the first time you saw the Monster on the screen.

So how does Frankenstein relate to compliance and ethics? Exhibit A for today is my fellow Texan Lance Armstrong. Yesterday, in the FCPA Blog I wrote about Armstrong and ethical values in the context of engaging in conduct which is so unethical, that you would be embarrassed to tell your children about it. Today I want to focus on some other aspects of Armstrong. Should he be analogized to Dr. Frankenstein, the Monster, or perhaps both?

Initially, it should be noted that Wednesday had to be one of the worst PR and financial days a person can have because, not only did Armstrong resign as the chairman of his cancer charity, Livestrong, but, as reported in the Financial Times (FT) article “Disgraced Armstrong Ditched by Nike, RadioShack and AB InBev”, sponsors Nike, RadioShack and AB InBev all announced they were ending their respective relationships with Armstrong. The FT article reported that Armstrong earned an estimated “$15.3m” from endorsements in 2011 and that the “Nike contract alone was worth between $8m and $12m annually”. Hope he still has money to pay his legal bills going forward.

To top it off, Armstrong’s most vocal commercial sponsor, Nike also announced it was severing ties with him via a terse Press Release that stated “Due to the seemingly insurmountable evidence that Lance Armstrong participated in doping and misled Nike for more than a decade” though they did go on to explain they were doing it “with great sadness” Of course this was one short week after standing by their man with the statement that “Lance has stated his innocence and has been unwavering on this position.” Oops.

An article in the online publication Slate, entitled “How Lance Armstrong Is Like Lehman Bros.”, Daniel Coyle looked at the fall of both Armstrong and Lehman Brothers. Coyle found that in the case of both Armstrong and Lehman Brothers “a culture of excess and risk led to record-breaking performances, and then to catastrophe. In both cases, the behavior in question was driven by a distinct set of social forces, including a win-at-all-costs culture, lack of regulation, and the credulousness of journalists and the public.” Further, the sport of cycling is like “a trading floor: small, tightly knit teams competing daily, with great intensity and effort, for marginal rewards. A single percentage point can make the difference between winning and losing.” So what are the lessons for the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act practitioner?

I.                   The Difference Between Winning and Losing

While in cycling there are only 3 places on the podium, Lehman Brothers seemed to misunderstand that in the business world, there can be multiple winners. I have heard both Preet Bharara, the US Attorney for the Southern District of New York, and Stephen Cohen, Associate Director, Division of Enforcement of the Securities and Exchange Commission (SEC), both say essentially the same thing, and that is that there is plenty of business out there for companies to secure without engaging in bribery and corruption.  Bharara went even further and said that those companies which move away from the sweet spot of doing business in an ethical manner to the edges of a system which tempt violations of the FCPA or Bribery Act are more likely to draw regulatory scrutiny. But perhaps the best example I have heard was during an interview I did of a company employee who told me that there was simply “too much money to be made in the middle of the road” without engaging in the high risk conduct which might require him to violate the FCPA.

II.                The Chances of Getting Caught

As noted by Coyle, most cyclists who cheated “did so largely without fear of being caught. During the Armstrong era, cyclists regarded drug testers with the same nod-and-wink aloofness with which Wall Street firms regarded the SEC.” (Ouch!) That statement is why companies must maintain vigilance in their FCPA or Bribery Act compliance programs. Indeed in the US Department of Justice (DOJ) 13 point, or 9 point – take your pick, minimum best practices compliance program or the UK Ministry of Justice’s Six Principles of an Adequate Procedures compliance program both point towards not only internal controls but also internal audit as key components of your compliance program. Whether you view it in the McNulty Maxims of “What did you do to prevent it?” and “What did you do to protect it?” or in the Ronald Reagan formulation of “Trust, but verify”; your compliance program must do more than just have policies and procedures in place, it must also have clear controls.

I recognize that in cycling you can game the system to try and beat the tests. You can even try and bribe your way out of a positive test; you can schmooze your way out of a positive test; you can even have a friendly doctor who back-dates documents for you to show that you had a prescription for that banned and illegal substance. However, with rigorous internal audit, coupled by skeptical external auditors and use of continuous monitoring tools, companies should be better placed to detect indicia of bribery and corruption.

III.             It is the government’s enforcement that backs up the fight against bribery and corruption

Coyle ends his piece by stating that “The Armstrong era happened because doping worked so powerfully and lucratively that no one—not riders, not cycling’s governing body, not the media—was willing to stop it. It was a time of hollow magic.” This ‘hollow magic’ did not end until “the federal government and USADA began their respective investigations, did the truth begin to emerge.” Lance Armstrong yelled from the highest mountain, the question is how, even with a system biased and stacked against him, did he never fail a drug test?

This last sentiment seems to me to be nearly the same thing that many commentators are saying about the FCPA; that it needs to lessened or softened so that US companies “can be competitive”. As Coyle noted, “Many of us instinctively presume that cheating creates a level playing field. In fact, it does precisely the reverse. Widespread cheating rewards the few who have the best information, the most money, and the highest risk tolerance.” The US led the way with the passage of the FCPA back in 1977 and has continued to lead the way since that time, both through the OECD and through leading international enforcement efforts. Does all of this make business better? For my money it does, but I leave it to my colleague Dick Cassin who phrased it in the following manner “Is there is less bribery and corruption – I don’t know but I know that there is more compliance.”

So at the end of the day I do not know who Lance Armstrong may be more like in the classic Frankenstein movies; Dr. Frankenstein or the Monster. He certainly became a physical cycling freak through the use of many different substances, but he lacks the pathos as the Monster was played by Karloff. So he may end up more like Dr. Frankenstein, who lost everything, including his own creation.

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, 2012