Innovating in Compliance to Create Shared Stakeholder Value

Mercifully, the season is over for the Houston Astros. To say that the 2013 Astros will become the poster child for abysmal-ness would be to insult poster children. After all, the owner designed the team to lose so that he could make more money. By cutting the payroll down to almost $10MM, he guaranteed the Astros would be one of the worst teams of all-time. Congratulations Astros management, you succeeded. The Astros assured their place in glory by breaking the record for the most strikeouts by one team in one season; breaking previous the mark of 1,529 in 2010 set by the Arizona Diamondbacks with a total of 1,530 this year. Congratulations Astros owner, Jim Crane on continuing to use the backs of the former Astros fan base to be the most profitable team of all-time!

I thought about the opposite of Jim Crane and his dive to the bottom when I read an article in the Harvard Business Review (HBR), entitled “Innovating for Shareholder Value”, where authors Marc Pfitzer, Valerie Bockstette and Mike Stamp looked at businesses which innovated to meet their stakeholders needs and build a profitable enterprise. While the authors focused more clearly on businesses that design and implement initiatives which deliver both social and business benefits, it became clear to me that the solutions which the authors proposed would be very useful to the compliance practitioner in both designing and implementing a compliance program. So, adapting the authors five mutually reinforcing elements to create a more profitable enterprise from social issues to ethics and compliance, I present the following approach.

Embedding the Purpose

While it may be difficult for a company to define a social purpose that it wishes in engage in, it should not be difficult for a company to define its goals in the compliance arena. Simply put, a company needs to do business in compliance with anti-corruption legislations such as the Foreign Corrupt Practices Act (FCPA) or anti-bribery laws such as the UK Bribery Act through a best practices compliance program. I believe that by doing so a company will move towards the pursuit of the shared value of doing business ethically and in compliance with such laws. Ultimately it all starts at the top of an organization because resources, both human and financial, will be required to channel the purposes of compliance throughout an organization. This means that compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company. As managers and employees take their cues from these corporate leaders, it is imperative that companies demonstrate their commitment from such senior management and their leaders.

Defining the Need

The need to do business ethically and in compliance is well-known. However, the key is that each company assesses and manages its risks. The FCPA Guidance makes clear that a risk assessment is the cornerstone of any FCPA compliance program. The Guidance states, “One-size-fits-all compliance programs are generally ill-conceived and ineffective because resources inevitably are spread too thin, with too much focus on low risk markets and transactions to the detriment of high-risk areas. Devoting a disproportionate amount of time policing modest entertainment and gift-giving instead of focusing on large government bids, questionable payments to third-party consultants, or excessive discounts to resellers and distributors may indicate that a company’s compliance program is ineffective.” The authors also posit that you may wish to achieve an equally comprehensive view of the problem by looking at the people affected and the barriers to setting up and implementing such a program in your company. They go on to state that “Such knowledge provides the basis for anticipating resource requirements, developing the business case, and identifying the necessary execution capabilities inside and outside the company.”

How Do You Manage Your Risk?

One of the blight’s of a Chief Compliance Officer’s (CCO’s) existence is the perception that there is no measurable Return on Investment (ROI) for a compliance program. The same is often enquired of a corporate legal department, which handles the contracts for all of a company’s business. But I believe that for compliance the perception is wrong. The view should be – how does compliance help a company manage its risk? Every transaction has commercial risk. But dealings with foreign government officials and state owned enterprises bring the additional risk of the FCPA. Moreover, every country has its set of anti-corruption and anti-bribery laws which must be followed. I cannot emphasis this final point too much, particularly after what has happened over the past three months in China. Over 20 western companies have announced they are internally investigating bribery and corruption or have been ‘shocked’ to hear their company’s name announced by Chinese regulatory authorities.

Create the Optimal Innovative Structure

Here the message is that compliance needs to work with its business units to help to integrate the compliance function into the decision making process. The authors suggest the three following components: (1) that compliance has a clear purpose; (2) that there are mutual understandings as to the rights and obligations of both the compliance function and the business unit; and (3) this leads to a strong inter-relationship between the two. This requires the compliance function to understand the business unit function and structure. I believe that risk assessment is a key tool here to help compliance understand not only the product and service offerings but the market as well. However a risk assessment still requires you to create an appropriate compliance program for your company. You need to manage your risks going forward.

Co-Creating with External Stakeholders

This is certainly one area that my Astros completely fail to consider – external stakeholders. Apparently the Astros are only concerned about being the most profitable team of all time by out losing every other team in Major League Baseball (MLB). But fortunately most corporations understand they do not function in a vacuum but in conjunction with others. Those include shareholders, employees, third parties, customers and, I would add, a world of existing regulations. But for the compliance practitioner, I believe that this means working with all such groups can help to build a stronger compliance regime. Clearly, a strong ethical and compliance culture directly supports a strong compliance program. As stated in the FCPA Guidance, “By adhering to ethical standards, senior managers will inspire middle managers to reinforce those standards. Compliant middle managers, in turn, will encourage employees to strive to attain those standards throughout the organizational structure.” But more than just employees are stakeholders in moving forward within compliance, in today’s world, third parties are also a part of a company’s ongoing compliance solution. Shareholders expect that, at a minimum, the companies which they invest in will follow the rules and design and implement an appropriate compliance system. If one is not in place shareholders can help to create one through the mechanism of a shareholder derivative action. Just as a baseball team has multiple stakeholders, so does a modern, multi-national corporation.

The authors present a lengthy study of several companies which used the five steps discussed above to help create profitable social enterprises. I believe this framework presents a calculus for the compliance practitioner to not only think through the design and implementation of a compliance regime but to pitch such an enterprise to management.

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, 2013

Compliance Programs as Knowledge Networks

The more I read articles about management and business systems, the more I am convinced that compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act can be viewed as a formative business process. In this month’s issue of the MIT Sloan Management Review, in an article entitled “Designing Effective Knowledge Networks” authors Katrina Pugh and Laurence Prusak explore how companies can help to facilitate desired behaviors and outcomes by paying attention to the dimensions of knowledge network design.

The authors begin by noting that knowledge networks are as old as humanity itself. They define knowledge networks as “collections of individuals and teams who come together across organizational, spatial and disciplinary boundaries to invent and share a body of knowledge. The focus of such networks is usually on developing, distributing and applying knowledge. For-profit and nonprofit organizations of all sizes are seizing on this model to learn more quickly and collaborate productively. However, for every successful network, others have lost steam due to poor participation, goal ambiguity, mixed allegiances or technology mismatches.” What intrigued me about this concept was that if you think of a compliance regime as a knowledge network of how to do business ethically and in compliance, the authors have some key concepts to help you in your system design.

I.                   Framework for Knowledge Network Effectiveness

The authors begin by setting out a framework to capitalize on the “cohesion, conversation and connectedness” of a knowledge network. It all begins with an outcome, which is then calculated to meet your area of focus, which, for the compliance practitioner, is your compliance program. Next are the Behaviors, which the authors deem to be “conducive to outcomes: cohesion, demonstration of trust, connection sharing, using a common technology platform and making investments in collaboration”. Here the key is that network members are committed to “moving knowledge sharing to the platform so that everyone can benefit” from it. Next are the Dynamics, which are defined as “feedback loops, the systems and structures that sustain a given behavior. Dynamics can also be patterns of interaction with the outside world, such as reactions to market threats and incentives.” Finally, the authors detail the Design/Construction of the network. This final framework component “encompasses the set of conditions that network leaders explicitly put in place to trigger those dynamics and, in turn, set behaviors into motion.”

II.                 Eight Design Dimensions of Knowledge Networks

The authors identified eight performance information techniques and incentives to move behaviors forward. These eight design dimensions encompass three general concepts; those being Strategic, Structural and Tactical.

A.    Strategic

1. Leader’s Shared Theory of Change. Here the authors said that leaders can describe the mechanisms through which the “network activities will have an impact on” its members and the organization. It is important so that everyone is well aligned and acts consistently.
2. Objectives/Outcomes/Purpose. The authors state “leaders help define the network’s purpose and target outcomes. Outcomes can be solving a specific problem or combining forces and knowledge. They can be classified as one or more of the network goals described earlier, such as support of individual members.” They further advocate that a “charter or similar document lays out the network’s objectives and purpose, which need to be sufficiently crisp that members can state them.”
3. Role of Expertise and Experimental Learning. Interestingly the authors believe that safety and respect are critical so that members will feel like they can speak out and speak up. It is critical that those persons who have the most knowledge do not dominate all of the proceedings. Leaders who understand the disparity of knowledge in their team members can “set a tone of safety and humility.”
4. Inclusion and Participation. This part is key for the compliance practitioner because a knowledge network does not exist in a vacuum. There are always operational or other competing organizational models. It is not necessarily convergence but rather to “balance technical or operational expertise with convening or networking skills.”

B.     Structural

1. Operating Model. Under this step “Knowledge network leaders decide what roles, responsibilities and decision processes are needed for optimal network operations. All stakeholders, including the public, should be described in the operating model, and there should be clarity about how resources are allocated.” However this step is dynamic and not static as operations can change over time and “the core leadership team may rotate to add fresh ideas and reduce burnout.”
2. Convening Structures and Infrastructures. Under this piece, the authors proposed that leaders should use all the business’ communications tools available, stating “online and real-time or live convenings serve to build cohesion, connectivity, collaboration and engagement.” The amount of “face-to-face and voice-to-voice interaction depends on the network objectives. Rapid idea development and innovation require live discussions (online or in meetings), while intellectual capital management requires document management and broadcast communication.”
3. Facilitation and Social Norm Development. Here the authors suggest that knowledge network leaders should “take on the roles of facilitators and change agents, not just project managers.” To do so, they “could agree about how to model and develop positive interactions within the network.” Many prevailing social norms, “such as inclusion, openness, transparency, accountability, curiosity and quality” should therefore be integrated explicitly into the facilitation processes.

C.    Tactical

1. Measurement, Feedback and Incentives. Network leaders should look for evidence of the success or failure of participation in the network. Once again this is key for the compliance practitioner. The metrics must be both “credible and appropriate in terms of effort and relevance.” This database can be viewed monthly, quarterly or on different time frames but the key is to use the data to assess where you might be going and what improvements you might need to made. The authors end this point by stating that “High-performing network leaders manage to minimize bureaucratic review and tie performance to incentives quickly so that members feel pride, connection and even healthy competition.”

III. Conclusion

I found this article very useful because it presented many of the concepts that a compliance practitioner must work through in the implementation or enhancement of a compliance program. While the authors’ presentation was focused on knowledge networks, if you accept that a compliance program is really a network of knowledge which helps guide employees on how to conduct business in compliance with anti-corruption laws such as the FCPA; I believe it can help to do business within the guidelines of a best practices compliance 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, 2013

The Cost of Stupid is Less Than the Cost of Bribery and Corruption

After the butt-slide play, you might think that the sad sack Houston Astros could not sink even lower but I guess setting the Major League Baseball (MLB) record for the worst record for three straight years is not enough. Yesterday, as reported by Sam Gardner in Fox Sports Online, in a post entitled “Buzz: Astros botch Ladies Night”, the Astros managed to insult over 50% of the population with the following promotion sent out by Twitter,

9/27 is Ladies Night by @StateFarm! Ladies can learn about baseball, enjoy music, food, drinks & more! For info & tix http://www.astros.com/ladies

The Astros, teaching anyone about baseball? Really? Here are some of the tweets back in response:

Yvette Betancourt  @Yvetteab

@astros implying women don’t know about baseball?

Christie @ATXChristina

@astros @StateFarm eff both of you. Baseball was the first game I learned about as a kid. Used to keep score at games. #Misogyny

Patrick Monaghan @pkmonaghan

#Astros tweets from 1950? I learned baseball scorekeeping FROM MY MOTHER. My wife has seen more games than you. Jesus. @astros @StateFarm

And my personal favorite:

Hunter Felt @HunterFelt

@scATX What’s worse? The assumption that women would need to be taught about baseball or the idea that the @astros could do so?

Unfortunately, the Astros can only increase the cost of being so idiotic. But it did make me wonder what might be some of the costs of allegations of bribery and corruption? For the British company, GlaxoSmithKline PLC (GSK) apparently it means a big hit on sales in its Chinese operations since the story broke about its alleged corruption of Chinese medical services professionals, this past summer. In an article in the Financial Times (FT), entitled “GlaxoSmithKline China sales face growing pressure”, reporters Andrew Jack, Patrick Jenkins and David Oakley, noted that sales of the company’s products in China had dropped over 30% since the publication of the original allegations. They also reported that “As the Chinese authorities have expanded corruption and pricing probes into western and domestic drug companies since July, analysts have forecast slowed growth for the industry after a long period of expansion driven by extended medical cover and marketing to a rising middle class.” They quoted Andrew Baum, a pharmaceutical analyst with Citi, who said that “indications from his latest research suggested an absolute drop in revenues as a result of manufacturers “suspending activities” and “hospitals that are wary” of talking to drug companies following the clampdown.” While Baum “expected GSK to suffer the greatest impact, but predicted other multinational pharmaceutical companies would also report absolute sales declines in China of 10-20 per cent.”

In another FT article, entitled “Bribery fears infect drug dealings in China”, by Andrew Jack and Patti Waldmeir, they highlighted some of the current allegations against western pharmaceutical companies as explained in the bribery box score below:

Company	Amount of Alleged Bribe	Source of Allegation	Bribery Scheme
GSK	$500MM	Chinese police investigation	Use of intermediaries, travel agencies to bribe doctors
Eli Lilly	$4.9MM	Former employee	Kickbacks to doctors to prescribe the company’s products
Sanofi	$277K	Whistleblower	Bribes paid to doctors described as research grants
Novartis	$8200	Company sales rep	Payments to 200 hospitals for non-existent post-trial surveys

However, there are more, and perhaps even greater, costs associated with bribery and corruption; those of which can be effected upon the population of a country where the bribery occurs. As the Foreign Corrupt Practices Act (FCPA) is a supply side-focused law, we here in the US compliance community usually try to point out the costs to businesses which engage in bribery and corruption, such as the drop in sales experienced by GSK. Jack and Waldmeir pointed to the costs for those in China where bribery in the health care industry is alleged to have occurred. The article discussed three different allegations of corruption and how they all have potentially devastating effects.

Fake Clinical Trials

The article pointed to one set of allegations which involved “multi-nationals conducting “phase IV” clinical trials”. These trials are performed after a drug is approved and “which critics claim are often for marketing purposes.” The corruption involved a third party to the companies involved who “filled out fake “clinical research forms” on trials which never took place.” Under this scenario, doctors were on record for participating in the trials but never actually participated because there were no such trials. Subsequently, any results which were claimed had no basis in fact.

Commissions for Prescriptions

Another scheme highlighted was commission payments to doctors for one company’s pharmaceutical products prescribed to patients. While the medical student attempted to backtrack by saying the doctors would only prescribe one drug over another similar drug if they received ‘commissions’; such waffling misses the entire point. The recommendation was made based upon the self-interest of the doctor in receiving the commission and not based upon the needs of the patients.

Infant Formula

In one of the worst examples of the effects of corruption, in 2008, thousands of Chinese infants became sick after drinking tainted baby milk which had been sold as safe for consumption. In response to this horrific event, “middle-class parents will go to any length to buy imported formula which they think is safe.” Moreover, “doctors and nurse often urge parents to start their newborns on formula, right from the maternity ward.” Unfortunately the Chinese media have alleged that “medical staff has been bribed to favor one brand over another”.

Entering into this imbroglio, is the French company Groupe Danone, which professed that it was “shocked” at such allegations aimed towards them, when the Chinese state television aired allegations that the “company bribed doctors and nurses to recommend its brand.” The national television company quoted a company manager who said that “the company pays hundreds of Yuan each year to bribe staff in Tianjin hospitals to feed newborns” the company’s brand. This bribery scheme extended past doctors to include nurses as well; both of whom received monthly incentive payments to use and recommend the company’s product.

Yet these allegations of wide-spread bribery and corruption are having other effects as well. Jack and Waldmeir cited to Marc de Garidel, chief executive of Ipsen SA, who said that some western companies have stopped doing promotions in China altogether. Obviously there is more and greater scrutiny by Chinese officials on not only western companies but Chinese health care providers as well; to the point that de Garidel said that in some areas, doctors did not even want to meet with pharmaceutical company representatives. Furthermore, and always omnipresent is the possibility of joint prosecutions by other national jurisdictions such as the US under the FCPA or UK government under the Bribery Act.

Another interesting effect has been on recruiting and hiring for western company’s Chinese operations. Jack and Waldmeir cited to Gregory Lovas, a corporate recruiter in the life science industry with CTPartners, who said that in the past “companies had seen China postings as a way of exposing their future leaders to an expanding market as now seeking greater existing “language, cultural understanding and market knowledge.” Lovas also said that for middle-managers his clients want “background checks and references stretching back as far as 10 years.”

As Forest Gump might say, “Stupid is as stupid does.” I wonder just how many more stupid mistakes the Astros can make this year. After all, there were only four days left in their 2013 season. As for bribery and corruption in China, the outlook is more long term. Deutsche Bank predicted that corruption investigations could well be “longer and larger” than originally thought. Or as Bette Davis intoned, if you are doing business in China, you had better fasten your seatbelt. It is going to be a bumpy ride.

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, 2013

Getting Your Employees to Internally Market Your Compliance Program

It has often struck me that one of the things the compliance function must do is to internally market its role in a company. By this I do not mean the internal competition for funding that occurs annually, although that is certainly something which the compliance function must also go through. The internal marketing function of compliance is to get employees not only to understand the message of compliance but, even more so, to think about and use compliance in their day-to-day operations. I recently heard a podcast on social media marketing which had some concepts I thought applicable to the compliance function and its internal marketing role within a company.

The podcast is on the Social Media Examiner site, which brands itself as “Your Guide to the Social Media Jungle.” The podcast, entitled “Social Sharing: How to Inspire Fans to Share Your Stories” is hosted by Michael Stelzner, Chief Executive Officer (CEO) and Founder of the site. Stelzner interviews Simon Mainwaring, author of We First: How Brands and Consumers Use Social Media to Build a Better World. Mainwaring is a consultant who has worked with brands like Nike and Motorola and is hosting the upcoming “We First Social Branding Seminar” in West Hollywood in a few days.

The focus of the podcast was on the use of social media by your employees and customer base to increase market share. However, Mainwaring said something that struck me as key to building a successful compliance program. He was discussing your employee base as one of your most key marketing resources because they are your first and best line of advertising. He said that to allow them to market successfully there are three key components, (1) Let your employees know what you stand for; (2) Celebrate their efforts; and (3) Give them a tool kit of different ways to participate. I think each of these concepts can play a key role for the compliance practitioner in internally marketing their compliance program.

I.                   Let Your Employees Know What You Stand For

In the FCPA Guidance, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) said that the basis of any anti-corruption compliance program is the Code of Conduct as it is “often the foundation upon which an effective compliance program is built. As DOJ has repeatedly noted in its charging documents, the most effective codes are clear, concise, and accessible to all employees and to those conducting business on the company’s behalf.” That well known @CodeMavencc, Catherine Choe, has said that she believes “Two of the primary goals of any Code are first, to document and clarify minimum expectations of acceptable behavior at a company, and second, to encourage employees to speak up when they have questions or witness misconduct.”

But more than the Code of Conduct, does your company really communicate that it stands for compliance? Obviously formal anti-corruption training under the Foreign Corrupt Practices Act (FCPA) is important but I think that more is required to reinforce that your company has a culture of compliance throughout the organization. In other words, are you communicating what you stand for and not simply the rules and regulations of a compliance program?

II.                Celebrate Their Efforts

Once again the FCPA Guidance speaks to the need to incentivize employees in the company realm. The Guidance states, “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many Guiding Principles of Enforcement forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance program, and rewards for ethics and compliance leadership. Some organizations, for example, have made adherence to compliance a significant metric for management’s bonuses so that compliance becomes an integral part of management’s everyday concern.” But more than simply incentives, it is important that “[M]ake integrity, ethics and compliance part of the promotion, compensation and evaluation processes as well.”

Mainwaring’s concept means going beyond incentivizing. To me his word ‘celebration’ means a more public display of success. Financial rewards may be given in private, such as a portion of an employee’s discretionary bonus credited to doing business ethically and in compliance with the FCPA. While it is certainly true those employees who are promoted for doing business ethically and in compliance are very visible and are public displays of an effective compliance program. I think that a company can take this concept even further through a celebration to help create, foster and acknowledge the culture of compliance for its day-to-day operations. Bobby Butler, Chief Compliance Officer (CCO) at Universal Weather and Aviation, Inc. has spoken about how his company celebrated compliance through the event of Compliance Week. He said that he and his team attended this event and used it as a springboard to internally publicize their compliance program. Their efforts included three separate prongs: they were hosting inter-company events to highlight the company’s compliance program; providing employees with a Brochure highlighting the company’s compliance philosophy and circulating a Booklet which provided information on the company’s compliance hotline and Compliance Department personnel.

III.             Give Your Employees a Tool Kit For Compliance

Obviously a key component of any effective compliance program is an internal reporting mechanism. The FCPA Guidance states that “An effective compliance program should include a mechanism for an organization’s employees and others to report suspected or actual misconduct or violations of the company’s policies on a confidential basis and without fear of retaliation.” The Guidance goes on to also discuss the use of an ombudsman to address employee concerns about compliance and ethics. I do not think that many companies have fully explored the use of an ombudsman but it is certainly one way to help employees with their compliance concerns. Interestingly, an interview in the Wall Street Journal (WSJ) today, with Sean McKessy, Chief of the SEC’s Office of the Whistleblower, he stated that “What I hear is that companies are generally investing more in internal compliance as a result of our whistleblower program so that if they have an employee who sees something, they’ll feel incentivized to report it internally and not necessarily come to us.”

But, more than a reporting tool for compliance, there are other ways a company can help employees do business in a compliant manner. One commercial tool which immediately comes to mind is Navigator, developed by the firm of Stroz Friedberg LLC, which the firm calls “a groundbreaking mobile and desktop application that makes your compliance program come alive! It automates clear answers and approval processes, and even offers data analysis for enhanced decision-making. The Navigator “app” is custom-tailored to each client and offers an array of benefits to any organization seeking easier ways to drive a positive corporate compliance culture.” I have seen this tool and it is way cool.

Yet there are other tools which are available, at no cost, and can be downloaded onto a mobile device such as a smartphone or iPad. These include the O’Melveny & Myers LLP Foreign Corrupt Practices Act Resource Guide; which concentrates solely on the FCPA and is primarily a new vehicle to distribute content it already makes available upon request. This content includes O’Melveny’s FCPA Handbook and O’Melveny’s In-House Counsel’s Guide to Conducting Internal Investigations. In addition, the app features five resource sections that serve as an interactive, illustrative directory with titles ranging from ‘O’Melveny Authored Client Alerts’ to ‘DOJ Opinion Releases.’

Another approach is found in the Latham & Watkins LLP’s AB&C Laws app which takes an international approach to anti-corruption and anti-bribery laws and its scope is international, with the content focused on organizing and easing access to statutes and regulatory guidance according to specific fields of interest, from legislative frameworks to extra-territorial application to enforcement and potential penalties. It also includes official guidance such as steps (where available) that can be taken to reduce the risk of liability for bribery and corruption.

There is much to be learned by the compliance practitioner from the disciplines of marketing and social media. These three concepts are useful to aiding companies in getting their sales pitches out and can be of great help to you, the compliance practitioner, in communicating marketing throughout your company as well.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

Don’t Butt-Slide into Second Base: Be a Better Company

Most fortunately, the final week of the baseball season is here. This means that I no longer have to contend with living in the same city as the joke of an alleged major league team – the Houston Astros, at least when the regular season ends next week, the Astros stop playing and the play-offs begin. To say that the Astros season has been ridiculous for masquerading as a Major League Baseball (MLB) team would be a compliment but it moved to the absurd last week as one play summed it up better than anything that I could have made up – the butt-slide play. In this play, Astros shortstop, Jonathan Villar, slid face first into the butt-cheek of Reds second baseman Brandon Phillips. (For a video clip of the play, click here.)

The butt-slide play sums up the Astros 2013 season of futility. From the start of the season, with a team made up of largely AAA players, to the end of a season made up mostly of A-AA players. In between we’ve been treated to the Astros ending a 23 year relationship with the Astros wives charity, via a terse one-line email (i.e. you’re fired); to the interview of owner Jim Crane who informed us that he had made $100MM in the trucking business so he must be the smartest guy in the room; to a current 105 losses while on their way to yet another record-loss season; let’s not forget their TV contract with Comcast and the fabulous viewing figures recorded on Sunday by the Nielsen rating service, which racked up a fantastic score of 0.00, with an average audience of zero households viewing the game and, finally, all of this while being the most profitable team in the history of MLB. But, still, the ‘butt-slide’ says it all. When your slide into second base becomes not only a metaphor for the team’s entire season but fodder for an entire nation’s laughingstock, it really is time to cash it in.

Yesterday in the FCPA Blog, in a post entitled “Who Speaks for the Compliance Officers?”, Michael Scher said “The [International] Chamber [of Commerce] apparently will not be satisfied until there is little or no enforcement.” Scher’s statement was based on the letter that the International Chamber of Commerce (ICC) sent to the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) complaining about the FCPA Guidance, issued last year, which as Scher stated, “The letter has been correctly criticized for off-target “belly-aching.”” Scher’s criticism follows that of Michael Volkov,  see his blog post “FCPA “Reform”: Another Shot in the Dark” in Corruption,  Crime and Compliance and Jessica Tillipman’s blog post “Let’s Just Be Honest for a Moment” also in the FCPA Blog.

Instead of whining and belly-aching there might be another way for corporate America, and indeed the ICC, to approach the Foreign Corrupt Practices Act (FCPA) compliance. That path was laid about by Leslie Dach, in an article in the October issue of the Harvard Business Review (HBR), entitled “Don’t Spin a Better, Story. Be a Better Company”. The article was quite interesting for the following information which appeared with the author’s credentials, “Leslie Dach wrote this column shortly before stepping down as the executive vice president of corporate affairs at Walmart. He previously served as vice chairman of Edelman, a global communications firm.” While this statement certainly does not make clear why Dach left Wal-Mart, (i.e. did he ‘resign to pursue other opportunities’?) it does give one pause for some reflection.

Nevertheless, I found Dach’s thesis quite interesting. Dach’s bottom line is that he believes “it is a huge mistake to assume that once you’ve explained your perspective, the public will embrace you…I know what doesn’t work: thinking you can tell a better story without actually becoming a better company.” Ultimately Dach advises, “If a drumbeat of criticism starts up against your company, don’t rush to raise your voice above it. Stop to listen. And commit to getting better.” Dach detailed several areas inside the company where goals such as sustainability, women’s economic empowerment and more-healthful food were “compatible with building a stronger business.” He cited Wal-Mart’s increased efficiency of its trucking fleet and turning its waste stream into recycling income as examples of sustainability. He said that buying from local, women-owned businesses strengthened the company’s ties with local communities. He said that offering more healthful food meant more relevant products for the company’s consumers.

I thought about Dach’s ideas in the context of Wal-Mart and other companies which are going through very public FCPA-based or other corruption investigations. Publicly released information indicates that Wal-Mart may be spending over $1MM per day on their ongoing internal investigation and getting their compliance program up to speed. But what if the company took it a step further and applied Dach’s ideas to compliance. In his article he wrote about the company’s efforts to source $20bn of products from women-owned businesses. This took a concerted effort to identify which merchandising areas had the potential to produce such an amount of product, which the company could sell in its stores. This was coupled with incentives for the company’s buyers to show progress in purchasing goods from women-owned enterprises. But even more the company “took a 360-degree approach to the work, engaging our entire supply chain and our customers, communities, and employees.” Here is the part I liked best about Dach’s piece,  while the tone was set by Chief Executive Officer (CEO) Mike Duke “ultimately, the challenge isn’t the CEO’s job, or one person’s job; it is everyone’s job.”

Last December Matt Ellis wrote a great piece on his blog site, FCPAméricas, entitled “Wal-Mart, Go Big on FCPA Compliance”, where he challenged the company to innovate in compliance “by playing to its strengths.”  He cited examples of work in the company’s supply chain; its opportunities to “educate foreign audiences on [anti-corruption] compliance” through teaching persons in the communities where it has locations on “how to identify and avoid risks of petty corruption.” Ellis ended his piece with the following, “Wal-Mart has the spotlight. Time will tell if it chooses to use it.”

I think that Dach’s challenge to create a better company, coupled with Ellis’ specific challenge for Wal-Mart to go big for compliance, present an excellent juxtaposition to the whining and belly-aching of the ICC. Rather than claim that the FCPA is (1) too difficult to understand; (2) too hard to follow; and (3) unfair, they could advocate Dach’s approach to use the law as a basis to become better businesses. I cannot think of any non-criminal enterprises which aver that they want to do business unethically and corruptly. Companies faced with intense FCPA or other anti-corruption law scrutiny, such as GlaxoSmithKline PLC (GSK), might well take this opportunity to move outside the ordinary and become better companies by doing compliance right and better. Such actions would not only put them in better stead with the regulators but make them better companies. In other words, don’t simply whine like the ICC and butt-slide into second base.

Also, as it appears Leslie Dach is no longer working for Wal-Mart, they may want to give him a call to help them figure out how to do so.

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Episode 6 of the FCPA Compliance and Ethics Report is up. In this episode, I talk about the role of senior management in a compliance program. To watch or listen, click here.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

Lunch with the FCPA Compliance and Ethics Blog – UK Edition with Barry Vitou

A couple of weeks ago I had the opportunity to enjoy a day of fabulously sunny weather in London and, more importantly, have lunch with Barry Vitou, one of the two founding partners of the Blogsite, thebriberyact.com. So I am able to present the next installment of Lunch with the FCPA Compliance and Ethics Blog. Just as sometimes my inspiration, Lunch with the FT, travels to the US to interview a noteworthy person, this edition comes from the UK. Over a lovely entrée of some grilled white fish whose name in French I could neither understand nor repeat, we chatted about all things Bribery Act, Foreign Corrupt Practices Act (FCPA) and generally anti-corruption and anti-bribery.

For those of you who do not know him, Barry, together with Richard Kovalevsky QC, founded thebriberyact.com site after, in 2009, they began to follow the legislative meanderings for the UK Bribery Act and decided to start a website to highlight the legislation and bring commentary and analysis to the new law. As I have previously stated, “If you only have one resource for all things UK Bribery Act related, you could not find a better site. Barry Vitou and Richard Kovalevsky have put together that rarest of all blog sites, one that covers an entire subject in-depth, with both practical insight and analysis. Their interviews of the relevant players allow all compliance practitioners to develop insight into what the top UK regulatory officials are thinking about on the Bribery Act.”

Barry has practiced law for nearly 20 years and is a partner at the firm of Pinsent Masons LLP. At Pinsent Masons, he heads the firm’s corporate crime team specializing in corporate risk and cross border corporate crime issues. As Barry puts it, he helps companies with ‘tape at the top’, prevention  advice as well as offering ‘the ambulance at the bottom’ when accidents happen.  Barry’s busy.

While the topics we discussed at lunch were wide-ranging, one of the issues I was most interested in was Barry’s take on the GlaxoSmithKline PLC (GSK) corruption investigation in China. As my readers will recall, I believe that the GSK matter will be a true game-changer in compliance because of the entry of China onto the international stage for the prosecution of western companies for corruption and bribery in China. With typical British reserve Barry explained to me that he did not view the situation was as unexpected or draconian as I have opined. While neither of us could discern the true motives behind the Chinese government’s aggressive pursuit of GSK, Barry believed that the issue of corruption in China has been present and indeed well known for some period of time. So he was not surprised an issue did arise.

However, from his perspective what was perhaps different was the very public way that investigation has played out. Particularly, when GSK publicly tried to distance itself from its Chinese operations (read: rogue employees); the Chinese government simply upped the ante by announcing its investigation had found evidence that the alleged bribery involved was coordinated by the GSK management and was not simply the work of rogue employees.  In this war of words it’s too early to know what went on.  But, one thing is for sure. Unlike the US anti-corruption regulators the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) or UK Serious Fraud Office (SFO), none of which will comment about ongoing investigations, the Chinese government has no such compunction. Indeed there is certainly no jury panel to prejudice in China. But the point is that there is no way to win in any such battle. True or not.  Damage is done.

We also talked about the ongoing JP Morgan hiring program which is under FCPA scrutiny now. Once again we turned to the more general point that this matter may have mushroomed outside the original area of concern regarding the hiring of Chinese government officials sons and daughters in China to a wider review across Asia. Here I have to credit Barry with one of the great lines of British compliance understatement. He said that when any program comes under such intense scrutiny, you may well find other “imperfections” in your compliance process. But his take was not simply on this understated way of looking at things but to the larger point that the key question is what actions did you take when you found such imperfections? Barry went on to explain that when he lectures, trains or meets with companies one of the things that he tries to get across is that regulators on both sides of the Atlantic will measure you in large part on your response so it is far better to begin remediation as soon as you can do so rather than to wait.

We also talked about the SFO and where it might be in any Bribery Act investigation and prosecutions. He believes a key is that the SFO is reverting to type and will focus on prosecution of Serious Fraud. Barry opined that the SFO has several open, high profile investigation ongoing. Further, although the SFO Director, David Green, would certainly like to bring a high profile prosecution, he would not rush to do so out of expedience. Barry also said that it was his opinion that non-English companies which come to London to be listed on the London Exchange will certainly have to follow UK law if they wish to avail themselves of the benefits of UK registration.

Unfortunately our lunch had to end as Barry had to return to his office. But the meal, company, conversation and weather were all first rate. Until my next installment of Lunch with the FCPA Compliance and Ethics Blog, bon appetite.

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, 2013

May You Get What You Want: The Curse of the FCPA Compliance Defense

Ed. Note – this week, I am pleased to join my colleagues David Simon, partner at Foley & Lardner LLP, and William ‘Bill’ C. Athanas, partner at Waller Lansden Dortch & Davis, LLP, in a tripartite debate on the efficacy of the affirmative defense of a compliance program to the Foreign Corrupt Practices Act (FCPA). Previously, I presented my views, from the perspective of a former in-house counsel, on why a compliance defense would not help to create greater compliance with the FCPA. Yesterday, Simon discussed his views, from the perspective a white collar defense practitioner, on why a compliance defense under the FCPA would foster greater compliance with the Act. In the concluding post today, Athanas presents his views as a former Department of Justice (DOJ) prosecutor. I hope that you have enjoyed our debate.

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Watching the FCPA compliance defense debate from the sidelines over the past couple of years, I usually find myself agreeing with whomever I read last.  David Simon, Professor Kohler, and Chamber of Commerce’s position paper, Restoring Balance, all lay out compelling arguments in favor of a compliance defense, and Tom Fox, Howard Sklar and the Justice Department are equally persuasive in opposition.  If nothing else, I appreciate the opportunity to take part in this exercise because it forces me finally to stake out and defend a position on the issue.

In doing so, I have tried to consider the well-reasoned policy arguments for and against that have been made by others (particularly David and Tom’s articles), and re-examine them from a purely pragmatic standpoint.  Ultimately, I find that I concur in the view that enacting a compliance defense is unnecessary because: a) such evidence is already factored into the enforcement decision-making calculus, and b) the notion of enabling corporations to raise a defense at trials that will never occur is essentially meaningless.  But I do not oppose a compliance defense simply because I conclude that is has no utility.  Rather, my opposition to that defense stems from the belief that its enactment would actually cause harm to those companies who take seriously the FCPA’s obligations and endeavor to ensure compliance with its mandates, making it more difficult for them to operate in this enforcement environment.

I do not wish to rehash the points Tom makes so effectively, but I would like to add a comment or two on arguments often advanced by compliance defense supporters.  For example, the claim that a compliance defense is necessary to counterbalance the unfairness of enforcement actions premised on a “rogue employee” theory.  While few would dispute the injustice of isolated instances of misconduct carried out by a rogue employee in contravention of consistently expressed mandates serving as the basis for huge fines and collateral consequences imposed on otherwise well-intentioned corporate citizens, noting those concerns in the abstract falls short, in my view, without evidence that “rogue employee” enforcement actions are actually being pursued on a widespread – or even limited – basis.  In other words, before I can conclude that the FCPA enforcement model needs to be fixed, I need to see evidence that it is broken.

I do not see that evidence.  It may be that there are instances where otherwise marginal cases premised on discrete, quarantined conduct have been (or are being) pursued via enforcement action, and where a compliance defense, if it existed, would have prevented an unjust result.  But absent examples of such, I ground my opinion in my own experiences.  I am not foreclosing the possibility that a prosecutor might blithely disregard the existence of a suitably robust compliance program in order to advance a less than meritorious FCPA enforcement action knowing that the target company would be forced to settle rather fight, but I do not see evidence that is occurring.

Nor am I moved by arguments that the lack of a compliance defense means that even those companies who install and maintain the most effective programs remain at the unchecked mercy of FCPA enforcement authorities.  David’s article makes this point by linking to an FCPA Professor post from September 1, 2011, which notes the apparent incongruity of Oracle – then recognized as one of the “World’s Most Ethical Companies” by Ethisphere – being scrutinized for FCPA violations.  In the post, Professor Koehler lists a number of other companies on that list who resolved FCPA actions or faced FCPA scrutiny, and concludes that this counterintuitive result highlights the need to revisit the compliance defense question.  But the major premise of the post – that Oracle had as sound and thorough a compliance program in place as could reasonably expected – is belied by the results of the inquiry.  While the nature and scope of Oracle’s issue were not known publicly at the time of the initial post, the SEC’s enforcement action announced August 16, 2012 revealed that it stemmed from Oracle’s failure to prevent a subsidiary from “secretly setting aside [$2.2 million] off the company’s books that was eventually used to make unauthorized payments to phony vendors in India.”  With all due respect to Ethisphere’s evaluative process, this outcome seems to suggest that while Oracle may well have gone to significant lengths in its FCPA compliance efforts, it clearly did not do enough.  I would submit that the question implicit in Professor Koehler’s post – “doesn’t something need to be done when even having a top flight compliance program is not enough to protect companies from FCPA enforcement actions?” – needs to be reformulated to ask, “can a compliance program really be deemed top flight when violations with the dimensions of Oracle’s FCPA issue are occurring?”

I do not mean to cast aspersions.  Although I am not concerned that the threat of a future epidemic of prosecutorial recklessness is so great that a compliance defense must be enacted, I appreciate that installing such a defense may serve to help level an otherwise uneven playing field.  While I believe few prosecutors set out to bring marginal cases simply because they recognize that the disparity of negotiating leverage may enable them to do so, I also understand that providing enforcement targets useful tools to defend actions can serve a vital purpose.  Even for those prosecutors who are motivated by the best of intentions, it can be difficult to write a declination memo and walk away from a case empty handed, particularly after conducting a lengthy investigation which reveals violations.  The thought of taking no action after investing years’ worth of prosecutorial and investigative resources is an unpleasant one for many if not most prosecutors, especially when there is a belief that the company bears some culpability for the violations which occurred.  While the existence of a compliance defense might deter a prosecutor pursing a weak case – by providing a clearly established legal means for the company to secure an acquittal where one might not otherwise have existed – I do not see this as a determinative factor.  I believe there are already adequate safeguards that operate as a check against marginal cases moving forward, including internally at the Department.  The process of getting indictments approved did not include any rubber stamps when I was at the Fraud Section, and I doubt very much that it has gotten easier over time.

Enough about why I do not support a compliance defense.  Here is why I oppose it:  while I am hard pressed to see the practical benefits of a compliance defense in the current environment, it is not at all difficult for me to envision the likely downside if one is enacted.  I believe the current FCPA enforcement model, in both theory and practice, reflects the government’s desire to identify a company’s genuine commitment to FCPA compliance.  Those companies able to identify tangible evidence of sincere dedication to addressing FCPA issues are well positioned to largely, if not completely, avoid the harsh consequences that might otherwise result, while those unable to do so are left to try to defend their inaction in a setting where hindsight rules the day.

While any model which relies on measuring sincerity will necessarily carry some degree of uncertainty, by most accounts, the system works.   I recognize that a statement of that type will likely bring howls of derision (or maybe worse) from some, but on the whole I believe the evidence supports my conclusion.  Have there been FCPA cases that should not have been pursued?  I am certain that is the case.  But as the saying goes, the plural is anecdote is not data.  Absent proof that the government holds companies to an unattainable standard and then punishes them when they cannot adhere to it, I am unwilling make that assumption.

By contrast, we know for a fact that the government routinely declines FCPA cases.  The Morgan Stanley declination is the highest profile example of an effective compliance program providing shelter from an FCPA enforcement action, but there can be no real doubt that countless other examples exist.  As Tom notes in his article, the recently issued Guidance listed a number of additional declinations based, at least in significant part, on the presence of suitably robust compliance defenses.  We also know – based on those companies who have reported receiving declinations, as well as the numerical disparity between the number of investigations disclosed and enforcement actions ultimately pursued – that many other declinations have occurred.  To be sure, these declinations can occur for a multitude of different reasons: including weak or no evidence of an underlying violation and lack of investigative or prosecutorial resources.  But the most common reason is the existence of a suitably sound compliance program which evidences a genuine commitment to preventing violations.

My concern is that a formalized compliance defense threatens to throw off that equilibrium, in both substance and application.  The certainty which comes with the formal enactment of a compliance defense bestows little benefit on companies if those clearly defined obligations are set so high as to render them virtually unattainable.  I had no difficulty foreseeing that the legislative compromise necessary to secure enactment of a compliance defense will necessitate that be narrow and difficult to invoke.  Moreover, companies can be sure that prosecutors who have seen their discretionary authority drastically reduced – if not entirely eliminated – will be exacting in their interpretation of whether the defense is meritorious when undertaking the enforcement decision making process.  As a result, if those who are fighting so hard for inclusion of an FCPA compliance defense are successful, they are likely to find that they much preferred the devil they knew – the de facto compliance defense already in existence and litigated over in Justice Department conference rooms – to the one they didn’t.

One final point: compliance defense supporters often tout the inclusion of a compliance defense in the UK Bribery Act and the Italian anti-corruption statute, both of which were enacted relatively recently.  Is there any evidence to suggest that the inclusion of the defense in those statutes has created a better system of enforcement in those jurisdictions?  If so, how?  If not, what is the significance to this debate of the inclusion of the defense in those statutes?  Those are not rhetorical questions – I think the answers might shed light on this debate, and I hope that some of Tom’s readers practicing in those jurisdictions will enlighten us on those issues.

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Bill Athanas can be reached via email at wcathanas@wallerlaw.com.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

Just Say Yes to the Compliance Defense

Ed. Note – this week, I am pleased to join my colleagues David Simon, partner at Foley & Lardner LLP, and William ‘Bill’ C. Athanas, partner at Waller Lansden Dortch & Davis, LLP, in a tripartite debate on the efficacy of the affirmative defense of a compliance program to the Foreign Corrupt Practices Act (FCPA). Yesterday, I presented my views, from the perspective of a former in-house counsel, on why a compliance defense would not help to create greater compliance with the FCPA. Today, Simon will discuss his views, from the perspective a white collar defense practitioner, on why a compliance defense under the FCPA would foster greater compliance with the Act. Tomorrow, Athanas will present his views as a former Department of Justice (DOJ) prosecutor. I hope that you will enjoy our debate.

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I believe the FCPA should be amended to include an affirmative defense to corporate FCPA criminal liability based on an effective corporate compliance program.  Here’s why:

1.         A compliance defense would be fair.  It would recognize the challenges faced by global companies operating in far-flung places.  Sometimes our enforcers assume a lot more control than actually exists or can exist in the real world.  Even very good, very ethical companies operating in good faith have trouble preventing, for example, a mid-level manager in Kuala Lumpur from violating company anti-bribery policies, even where those policies had been clearly and directly communicated to him.  This dynamic is perhaps best illustrated by the fact that a significant number of companies recognized as “Most Ethical” have had publicized FCPA problems.  See the FCPA Professor’s blog post entitled, “Oracle – Another World’s Most Ethical FCPA Violator?“.  By including a compliance defense to FCPA liability, we would recognize the reality that the world is a complicated and not easily navigated place and that strong compliance efforts undertaken in good faith sometimes fail.

Moreover, U.S. companies currently operate under what is effectively a strict liability regime:  they have to assume that any violation of the FCPA by any employee of any subsidiary anywhere in the world will create corporate liability.  This distinguishes the FCPA from other corporate criminal offenses that are not extra-territorial, and answers the question of why we should enact a compliance defense in just this one area of U.S. criminal law.

An effective compliance defense would represent a fair and reasonable counterbalance to those realities.  Note that the UK made a similar trade-off in its Bribery Act – both the strict liability aspect and the affirmative defense are made explicit.  Further, other OECD countries also maintain some kind of defense based upon corporate compliance.  The idea that corporate compliance should be rewarded in this way is hardly a novel one within the context of anticorruption law – for good reason.

2.         An effective corporate compliance defense would not undermine anti-corruption enforcement.  Those opposed to a compliance defense sometimes claim that it would seriously undermine the enforcement regime.  They contend that such a defense would result in a race to the bottom, where companies would do the least they could get away with to preserve the defense.

But an affirmative defense to corporate FCPA liability would not give a free pass to any company that has an anti-corruption policy.  Or to one that simply checked a training box by sending around an off-the-shelf web-based training module to employees around the world.  Instead, by explicitly making clear that only a tailored and effective compliance program qualifies, such an affirmative defense would encourage companies to work hard to implement appropriate compliance measures, thereby aiding the cause of ensuring that less bribery occurs.  Since a company invoking the defense would bear the burden of showing that it had an effective program and that any violation occurred in spite of that otherwise effective program, only companies that implemented carefully thought out and well functioning programs would qualify.

The contours of this would obviously need to be sorted out, but I would expect the standards of “effectiveness” would be similar to those articulated in the DOJ/SEC Guidance.  A company would likely bear the burden of showing adequate training and communication, incentives and discipline resulting from compliance failures, third-party due diligence, a confidential reporting system and a process for investigating red flags that arise, periodic testing and auditing, and due diligence and integration of acquisitions.  That burden would not be light; the showing required would be significant.

Some would argue that DOJ already gives credit for an effective compliance program, in that its corporate charging guidelines instruct that prosecutors should take into account the existence and adequacy of the corporation’s compliance program when deciding whether to bring charges.  But the reality is that it is only in the rarest circumstances, if at all, that the existence of even a top-of-the-line compliance program leads to a declination.  Further, once the decision is made to proceed with an investigation, or in the context of settlement discussions, it is unclear that any credit is given for compliance at all.  Putting in place an explicit affirmative defense would be consistent with the recognition in the DOJ guidelines that corporate compliance is an important factor in determining culpability and would further that goal by encouraging compliance.

It is very hard to see merit to the argument that the objectives of the FCPA will be undermined by a policy that promotes better and more effective compliance. Don’t we want to incentivize exactly that behavior?  I simply don’t see how this results in a race to the bottom.

3.         Finally, perhaps the most significant benefit to enacting a compliance defense would be to provide much clearer guidance to companies on what actually constitutes an effective compliance program. Enacting an effective compliance affirmative defense will help develop a body of law on what constitutes an effective compliance program.  As we have learned from the individual FCPA prosecutions of the past couple of years, there is no better way to develop the law than through actual litigation.  Formalizing an effective compliance program affirmative defense would create an incentive for companies to fight FCPA charges.  And by doing so, we might actually get cases assessing the effectiveness of actual corporate compliance programs.  This would be an unqualifiedly good thing:  it would help clarify what is required of companies and would give compliance practitioners specific guidance for formulating good programs.

This is how law usually develops in our system.  In my view, it is the best way to address a nuanced, fact-specific world like anti-corruption compliance.  Rather than forcing companies to try to divine the intentions of the FCPA regulator mandarins, they can compare their facts and circumstances to litigated cases, determine where they fit, and make a better judgment of what they need to do to make their compliance program one likely to be deemed effective.

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David Simon, a partner at Foley & Lardner, defends corporations in government enforcement actions, conducts internal investigations, and provides compliance advice and counseling.  He specializes in the FCPA and other anti-corruption laws. He can be reached at DSimon@foley.com

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Episode 5 of the FCPA Compliance and Ethics Report is up and available to review. In this Episode I, discuss the evolution of transaction monitoring in FCPA compliance programs. You can check it out by clicking here.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

Why a Compliance Defense Will Not Make a Compliance Program Effective

Ed. Note – this week, I am pleased to join my colleagues David Simon, partner at Foley & Lardner LLP, and William ‘Bill’ C. Athanas, partner at Waller Lansden Dortch & Davis, LLP, in a tripartite debate on the efficacy of the affirmative defense of a compliance program to the Foreign Corrupt Practices Act (FCPA). Today, I will present my views, from the perspective of a former in-house counsel, on why a compliance defense would not help to create greater compliance with the FCPA. Tomorrow, David will discuss his views, from the perspective a white collar defense practitioner, on why a compliance defense under the FCPA would foster greater compliance with the Act. And finally, on Friday, Bill will present his views as a former Department of Justice (DOJ) prosecutor. I hope that you will enjoy our debate.

My starting position is that I do not believe a compliance defense would be effective in giving companies additional clarity or comfort in the design or implementation of their anti-corruption compliance program.  I also think that a compliance defense could lead to unintended and adverse consequences that could seriously downgrade the effectiveness of anti-corruption programs.

I.                   Current Credit in Place

Currently there is credit for an effective compliance, as set out in the DOJ’s prosecution guidelines; the “Principles of Federal Prosecution of Business Organizations”, which is the DOJ’s policy on the factors it considers when instigating a prosecution of a company, it includes a requirement that prosecutors consider “the existence and effectiveness of the corporation’s pre-existing compliance program.” These factors have been borne out in the numerous Declinations to Prosecute granted over the years. While only one of these Declinations, the Morgan Stanley Declination, has been publicly announced, there were six Declinations listed in last year’s FCPA Guidance, with the company identifiers removed. All of this information makes clear that the DOJ currently takes the state and effectiveness of a compliance program into account when making a decision.

II.                Trial Lawyers v. Corporations

Both of the two gents I am debating with this week are trial lawyers and I am a recovering trial lawyer. A trial lawyer’s job is to try cases. If you do not want to go to the courthouse, you should not consider yourself to be a trial lawyer. I grew up in a litigation system where there was one lawyer per side at trail. Mano-y-Mano; the two gunslingers on Main Street at High Noon, the King’s Champion – single combat warriors sent out to do battle in the courtroom for their clients. Such is the job of the trial lawyer. Trial lawyers are risk takers and will to push the envelope in front of a judge or jury. If you claim to be a trial lawyer and never go to court it will not instill any fear or much respect from your opposition. You may even turn into a laughingstock. It does not matter how big a jerk you can be in discovery and pre-trial pleading practice, if you are afraid to go to trial, you are useless as a trail lawyer.

Just as trial lawyers are made for trials corporations are not. Corporations do not and will not go to trial in FCPA cases because it is not in their interest to do so. So if a corporation will not go to trial, a compliance defense has as much use as a trail lawyer afraid of the courtroom, in other words it is useless. There are a myriad of reasons that it is not the job of a company to go to trial but I will focus on two: (1) certainty; and (2) the “Arthur Anderson” effect.

A.     Certainty

The primary reason for a company, which violates the FCPA, entering into a settlement via a Deferred Prosecution Agreement (DPA), Non-Prosecution Agreement (NPA) or other vehicle, is certainty. The one thing I learned in almost 20 years of trying cases in the US (civil side only) is that nothing is certain when you leave the final decision to an ultimate trier of fact who is not yourself, whether that trier of fact be a jury, judge or arbitrator. The most important thing for a company is certainty and that is even more paramount when a potential criminal conviction looms over its corporate head. Certainty is equally critical for the prosecution. No matter how ‘slam dunk’ the facts are, or appear to be, once a prosecutor turns over the final decision to another trier of fact; the prosecution has also lost certainty in the final decision. Every corporate defendant that goes to trial can, and should, raise all procedural and factual defenses available to it. No prosecutor can ever be 100% certain that it will win every court ruling or that a guilty conviction will be upheld on appeal. However, a settlement brings certainty and for a company that certainty is in its rights and obligations and for the prosecution the same is true.

B.     The Arthur Anderson Effect

Arthur Anderson was the auditor for Enron Corporation (Enron). Neither Enron nor Arthur Anderson exists today. The reason that Enron no longer exists is that it was guilty of unsustainable fraud. The reason Arthur Anderson no longer exists is that it destroyed documents relating to its auditing services for that unsustainable fraud – Enron; primarily for countenancing in and/or not detecting the fraud. Arthur Anderson was convicted for these actions. It is of no matter that the verdict was overturned on appeal.

My former This Week in FCPA podcast partner, Howard Sklar, wrote in a piece for forbes.com entitled “Against a FCPA Compliance Defense”, that “Corporations cannot afford to fight these cases through to the stage where an affirmative defense becomes relevant.” He quoted Doug Bain, the former General Counsel (GC) of Boeing Co., for the effect on Boeing if it were to be indicted:

So what’s the impact if we get indicted or convicted?

Besides the normal fines and that kind of stuff, there’s a presumed denial of export licenses, and that would be both on the commercial and the government side. In a moment, I’ll give you an idea of why we are concerned about that one.

We can get re-suspended or all of IDS (Integrated Defense Systems) can be debarred.

We can lose our security clearances.

And one nasty little thing is that the Bureau of Alcohol, Tobacco and Firearms, which has an almost explicit prohibition on possessing explosives. For those of you who are at BCA [Boeing Commercial Airplanes], you might remember that every single door on an airplane has actuators that are triggered by explosives.

Other commentators have attempted to demonstrate quantitatively that the Arthur Anderson effect is not correct. While I do not agree with their analysis, even if I did, simply running the numbers misses the point. Corporate counsel are not trial lawyers, they are in-house corporate counsel. Their job is not to be gunslingers but to protect and preserve the corporation for its stakeholders. So, by their nature, they tend to be less of a risk-taker than trial lawyers and can be more conservative. This difference in philosophy plays out in the following question: Do you want to be the first GC to go to trial and find that the Arthur Anderson effect is real? Or do you want to settle and play it safe? And, of course, as Sklar notes “Even if a company wins eventually, oftentimes the damage is done: see, e.g., Arthur Andersen.”

The value of a compliance defense is suggested in the name, ‘defense’. It is only useful if it is raised as an affirmative defense at trial. If a company says, ‘we have a compliance defense, you cannot get to us’ a rational response from the prosecutors might be, ‘OK, let’s go to trial.’ There would be no credit for an effective compliance program in any settlement discussion because there would not be any settlement. More pointedly, it might make the DOJ even more aggressive in negotiations because they could simply take the position that a company must now prove it had a compliance program and that the compliance program was effective. How many compliance programs could stand the detailed scrutiny which would occur in a criminal case or in civil pretrial discovery? Every company has documents which discuss the areas in which the program is not fully effective. They would certainly be found in discovery. Lastly, no honest compliance officer could ever say that a program is fully “effective.”

Moreover, how would a company prove to a jury that it had an effective compliance program? Bring in an expert to say that simply because a rogue employee, group of rogue employees or entire country sales team paid out multi-million dollars in bribes that we did not detect, we still have an effective compliance program. Remember, both GlaxoSmithKline PLC (GSK) and Wal-Mart claimed to have world class, best practices compliance programs.

III.             Two Recent Examples – GSK and Wal-Mart

 A.     GSK

Consider the following about GSK, a little over one year ago, in July of 2012; GSK pled guilty and paid $3 billion to resolve fraud allegations and failure to report safety data in what the DOJ called the “largest health care fraud settlement in U.S. history”. You would think that any company which has paid $3 billion in fines and penalties for fraudulent actions would take all steps possible not to engage in bribery and corruption. Indeed, as part of the settlement GSK agreed to a Corporate Integrity Agreement (CIA). This CIA not only applied to the specific pharmaceutical regulations that GSK violated but all of the GSK compliance obligations, including the FCPA.

In addition to requiring a full and complete compliance program, the CIA specified that the company would have a Compliance Committee, inclusive of the Compliance Officer and other members of senior management necessary to meet the requirements of this CIA, whose job was to oversee full implementation of the CIA and all compliance functions at the company. These additional functions required Deputy Compliance Officers for each commercial business unit, Integrity Champions within each business unit and management accountability and certifications from each business unit. Training of GSK employees was specified. Further, there was detail down to specifically state that all compliance obligations applied to “contractors, subcontractors, agents and other persons (including, but not limited to, third party vendors)”. How would you say all of the above helped GSK make its anti-corruption compliance program effective?

B.    Wal-Mart

Wal-Mart prided itself on its world-wide FCPA anti-corruption compliance program. Its ethics policy offered this clear direction, “Never cover up or ignore an ethics problem”.  What do you think a compliance defense would do for Wal-Mart about now? Do these facts seem like a rogue employee or even junta of rogue Mexican employees going off on their own? And what if Wal-Mart’s corporate headquarters in Bentonville AR was not involved in any illegal conduct or even kept in the dark by Wal-Mart de Mexico? What does that say about having an effective compliance program?

How do these two investigations portend the end of efforts to add a compliance defense to the FCPA? As stated in its Code of Conduct, “The GSK attitude towards corruption in all its forms is simple: it is one of zero tolerance.” and Wal-Mart stated “Never cover up or ignore an ethics problem.” What do you think a compliance defense would do for these two companies in trial? The claim that companies would act more ethically and in compliance if they could rely on a compliance defense would seem to be negated by facts reported about GSK and Wal-Mart. It certainly appears that having a best practice compliance program did not lead to either company doing business more ethically.

IV.              False Sense of Security

I also think that the compliance defense would give companies a false sense of security that, combined with other recent regulations, can seriously degrade internal risk management. In an article in the summer 2013 issue of the MIT Sloan Management Review, entitled “Designing Trustworthy Organizations”, by the quartet of authors: Robert F. Hurley, Nicole Gillespie, Donald L. Ferrin and Graham Dietz; they addressed this issue. Their comments seem directly on point for our debate when they intone that that external government regulation, such as a as compliance program required under the FCPA, could be a helpful starting point; but it is not the complete answer in the construction of an ethical organization and one which does business in compliance with relevant anti-corruption legislation, such as the FCPA. That is because such legal requirements can only set a minimum standard. Further, such a reliance on a paper program of compliance could well give organizations “a false sense of security that can lull them and their stakeholders into complacency.” This is the current position of the DOJ in giving credit to companies which have an effective compliance program, rather than simply a paper compliance program.

I think that the DOJ gives credit when a compliance program is effective. While the best practices have clearly evolved, it is not difficult to fully understand what the DOJ considers best practices. But, at the end of the day, the compliance defense will not help a company because no company will go to trial and face a fraud finding from a jury. It is always better to settle and obtain certainty than to risk everything.

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, 2013

The Red Baron and Leading in Compliance

For anyone who grew up in the 60s or 70s; the comic strip adventures of Snoopy vs. the Red Baron were legendary. ‘Curse You Red Baron’ was a routine line from Snoopy as he was foiled time and time again by the Red Baron. Anyone who has seen “Charlie Brown and The Great Pumpkin” will remember the scene were Snoopy was shot down behind enemy lines, but survived his crash landing and escaping back to his own lines. Today is the 98^th anniversary of the first time the real-life Red Baron, Manfred von Richthofen, shot down his first plane on the Western Front in World War I (WWI). One of the things that the Red Baron always did was lead from the front.

I thought about those fanciful flights of Snoopy vs. The Red Baron when I considered the compliance implications found in this past weekend’s Corner Office Section of the New York Times (NYT), where Adam Bryant interviewed Bob Moritz, chairman and senior partner of PricewaterhouseCoopers LLP (PwC), in an article entitled “Want to Learn about Diversity? Become a Foreigner”. In this article Bryant detailed several leadership lessons that Moritz had experienced over the years which I thought had quite a bit of application to the compliance practitioner.

Lead from the Front

The first was that leaders are more respected if they lead from the front. Moritz talked about one of his initial role models who was in his first job in a clothing store. Moritz said, “He was in charge of the stockroom, and I admired him because he knew it all. He had a sense of what had to be done, and how you get it done. He had a great balance — he didn’t seem to go through tremendous highs or tremendous lows. He was dependable, and he was the go-to guy.” This means to me, you will have more appreciation for your role if you lead from the front. Moreover, if you demonstrate a commitment to the discipline, suit up, show up and understand the legal and process requirements of your profession, I think you will become model a role that others in the company respect.

Learning (and Living) Diversity

One of the seminal events in Moritz’s professional career came when he accepted a transfer to Japan. He did this even though it took him far out of his comfort zone. Moritz said that there were three key lessons he learned from his time in Japan. The first was diversity. He said, “I was the minority. I was the guy outside of the circle. I couldn’t speak the language. I was the guy who was discriminated against. So it gave me a different perspective of diversity, and it influenced the diversity agenda we have now.”

The second thing it taught Moritz was the “diversity of thought and cultural diversity.” The Japanese respect job titles and age to a greater degree than in the west. As it appears unseemly to directly challenge authority, Moritz had to learn how to ask challenging questions “to get the right answers without making people feel threatened.” This has led to a greater understanding of engaging in a global business practice in a way that makes employees feel appreciated and not threatened.

The final piece of this diversity puzzle was bonding. For Moritz the question was “how do you bond with people personally enough so that they trust you, but in a way that you can work with them professionally?” Moritz described a martial arts class where clearly he was used as the tackling dummy. But he took the punishment and garnered the respect of his peers for it. It was not simply that he took his beating like a man; it was more that he made himself vulnerable. Moritz said, “What was good, though, was that the people I was working with saw me taking a chance, and they opened themselves up a bit more, and that allowed for that trust to be built.”

For the compliance practitioner, I think that the first message is that you have to get out of the office. Nothing engenders respect more than face-to-face meetings. But, more importantly, you can obtain a greater understanding of what is going on in parts of the world other than the US. For example, China is currently on the forefront of everyone’s mind in the compliance world now. But Moritz’s comments about asking questions without challenging authority should make US and Western Europe compliance practitioners understand the pragmatic differences in the way that internal hotlines are viewed by different cultures.

Consensus

Moritz said the biggest ‘leadership’ lesson he has been taught after taking up leadership roles in the firm is around the concept of consensus. He admitted that he is a self-styled ‘consensus-builder’. But that brings up a set of challenges; the primary one being how much consensus is enough? He phrased it as “how much time do you want to spend building consensus versus “let’s just move on”?”  The building of consensus led him to another leadership lesson, where he would use the building of consensus as a way to test his leadership team to see who would be willing to step up. He said that “I’m willing to let things go for a period and see how they play out.”

For the compliance practitioner I think this point ties all of Moritz’s concepts together fairly well. Or, to quote my colleague Michael Volkov, do not be Dr. No from the Land of No. Compliance works with the business units of a company to make sure there are not violations of anti-corruption and anti-bribery laws. That does not mean saying no all the time. It means determining the risk and then managing the level of risk. If you are going to now ask something along the lines of “What about doing a deal in ‘X’ high risk country, with a government official or known fraudster”, my response is simply how do you look in an orange jumpsuit? (See picture of Frederick Bourke). The point is that you can build consensus with the business team on how to do a deal, construct a transaction or join a business partner which meets the requirements of the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. But you have to work at it and have your network set up beforehand so that you can build the requisite consensus.

Compliance Brand

Moritz had some interesting advice for students. He said that “you’ve got to think about your personal brand differently. You have to take some risks.” To take risks, you have to be willing to go outside your comfort zone, such as Moritz did when he transferred to Japan. You also need to be willing to ask for advice and take coaching. Use the feedback that you receive and be willing to do something about it. He ended with the following, “And make sure you’ve got your elevator speech because you never know who you might see. How are you going to make the best first impression?”

For the compliance practitioner in a corporation, I think that many of us not only do not think of our personal brand, but also the compliance brand. So, personally and for your discipline, you should build up your network within an organization. Lastly, you should consider the effect of what you say and what you put out to the organization in the context of a compliance officer. If you travel, consider the effect of what you say outside the US in the context of you being a compliance officer. People will be listening to not only what you say but how you say it. If it’s the first time you meet someone, what will that person’s impression be not only of you but of compliance in your organization?

The leadership lessons that Bryant wrote about regarding Bob Moritz are some excellent ideas for the compliance practitioner to put into place. While you are contemplating the above, check out this YouTube clip of the Royal Guardsmen’s song Snoopy vs. The Red Baron.

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, 2013