Interview with Brian Ching – Ideas on Engaging Your Compliance Constituency

Last week I interviewed Brian Ching, the General Manager (GM) of the Houston Dash, which is our local entry into the US National Women’s Soccer League (NWSL). Ching is the recently retired star of the Houston Dynamos, our Major League Soccer (MLS) team. Ching had a star-studded career here in Houston, playing in MLS Championships, making numerous all-star teams and was on the American team in the 2006 World Cup. I had planned to record the interview and post it on my podcast, the FCPA Compliance and Ethics Report; however, due to the technical incompetency of my Recording and Sound Engineer (me) I did not hit the record button so it was not recorded.

But I did take notes, which was fortunate because the interview, which was intended to focus on the issue of leadership, went in a direction that I had not anticipated. I wanted to visit with Ching about his transition from being a player into management and his resulting leadership style. In preparation for the interview I sent him a list of questions to garner more detail on his playing career; who may have influenced him and how the former helped him to inform the leadership style that he might now be using in his position as Dash GM. But as I said, it went in a very different direction midway through the interview.

Ching was recognized as the “Face of the Franchise” and the state-of-the-art soccer stadium, BBVA Compass Stadium where the Dynamos play, is generally recognized as ‘The House that Ching Built’ for all his efforts to bring a fan base and support to Houston. But what I did not realize was that Ching was only one part of the effort that Dynamos management made to reach out to the Houston community to develop a strong and devoted fan base. The Dynamos not only sent its players out into the community to meet fans but also encouraged its players to adopt local charities and become involved to create greater community involvement and raise awareness. The Dynamos left it up to the individual player as to which charity they might want to be involved with. Some of the examples Ching cited were Dynamos’ players involvement with charities as diverse as honoring of veterans and their families, the Houston Zoo, Habitat for Humanity, the SPCA, Toys for Tots and other charitable programs.

I asked Ching if this was a program that had been brought over for the women’s team as well. He answered absolutely. I then asked him how the team could work to draft or sign players or prospects who are willing to engage in that type of community development. He said that in addition to the metrics and traditional scouting it involved having a frank discussion with any prospective signing about what would be expected of her as a Dash member. If getting out, meeting and interacting with the fans was not something that the prospective player was interested in doing that was taken into account in the evaluation process. This last point is assessed during face-to-face interviews with any prospect.

I thought these points raised by Ching were very interesting in the context of a compliance function and what might be needed for a compliance practitioner. The first is the concept of getting out to not only meet your constituency but also develop relationships with them. When the Dynamos moved to Houston there was very little tradition of professional soccer in this city. Yet there was a large segment of the population who were a natural interest group, having played the game growing up. So there was a built-in market ready to be tapped. But the Dynamos took it a step further by going into those areas and developing relationships with the fans and maintaining those relationships with outreach efforts. While many professional sports teams have ‘meet the team’ days, signing day and the like; the Dynamos have events where players, like Brian Ching, would help build houses or perform services for their charities. This garnered not only quite a bit of publicity for the team but also generated much goodwill with the team’s fan base. Finally, it gave ordinary people the opportunity to meet and get to know many of the players. Even if this did not turn an adults head, you can imagine the magic it worked on kids. They all became Dynamo fans.

For the compliance practitioner, the Dynamo and Dash’s approach to developing a loyal fan base can also be a guide to developing such a relationship with your institutional client base. Ching’s goals were and are clearly more than to simply get out of the office and meet people. It is to get involved with the community. Traveling to regions outside the corporate home office is a great idea but try and come up with ways of informally interacting with people. You do not have to build houses like Ching did but you can go to lunch or have a cup of coffee while you are in town for meetings or putting on training. The Dynamos and Dash make themselves accessible and I think that it is important for the compliance practitioner too. It can do wonders to help create a better relationship but getting out of the office is only the first step. You have to engage with those folks as well.

The second thing I culled from Ching was the selection process for players. Something that may not seem important for professional athletes is the ability to get out and engage with the community, however this was viewed as not only an important part of the job description with the team but a key job skill which was required. For the Dynamos and Dash, this meant that there had to be some direct conversations about not only the team’s expectations but also the prospects ability to engage in those activities.

Ching’s discussion about how they communicate their expectations was also an important point that the compliance practitioner should also consider in the interview process and compliance. Just as the Dynamos and Dash use the interview process to convey expectations, they also use the interview to directly inquire from candidates whether they would be willing to go out into the public and represent the franchise. This is important when interviewing for compliance positions and for senior management positions in companies as well.

I am continually amazed to find the numerous examples available to the compliance practitioner from other areas and other disciplines that can not only help inform an individual’s approach to the practice of compliance; but also tips to help companies do the business of compliance better and more efficiently. For myself, it was a learning experience to plan to interview Brian Ching on one thing and have the interview go down a completely separate path. And, of course, the key lesson learned is if you plan to record an interview, make sure that the recorder is turned on.

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

© Thomas R. Fox, 2014

Tales From the Crypt-Rule No. 9-Don’t let the revolving door hit you on your way in (and out)!

Ed. Note-today we continue the series from the Two Tough Cookies. Today, they have a cautionary tale about not letting that revolving door hit you …

One of the toughest things to gauge about a potential employer is the culture of the organization. While plenty of job search sites like Salary.com, Payscale, Career Builder, and Indeed all have self-help sections geared to interviewing, I have yet to come across any really helpful advice regarding the organizational culture you might be considering for your next career move.   Most Integrity and Compliance professionals would agree that the hardest part of their job is cultivating a culture of integrity at their organization, one that has teeth, and not just “for show”. When they roll out all those good deeds done over the year for various awards and honors, like “Best place to Work” etc., know that most of these metrics are self-reported, giving a self-serving sense of belle weather, and hence, should be regarded as a subjective view from the cat bird seat. Glass Door gives a better sense of what you may be facing, but comments are limited, with lower level employees vocalizing various axes to grind, and the other spectrum, leadership, being conspicuously silent. Sometimes you can get real insight by looking at the yahoo message boards about a company, and those that don’t have many posts (positive or negative) are either model citizens, or quite adept at serving up take-down notices to the site administrators. I’ll leave you to judge.

What you really, really want to get your hands on are “exit interviews” and culture surveys, such as those that Kenexa offers, which give a real sense of the health of the organization’s morality play. Fat chance of getting them, but those would provide an unfiltered view of how much work you have ahead of you. While some of our Tales talk about hostility and arrogance emanating from the highest level in the organization, this Tale from our Crypt is actually a compilation of several additional actions that should give any Integrity and Compliance professional pause to consider whether to take a new position, or jump ship….

1)     After realizing that the company was facing a potential unlawful termination charge based on biased application of discipline for similar “offenses,” the company elected to send out mandatory arbitration clauses to all employees, highly encouraging each and every one to sign the clause as part of their employment terms. Several employees, typically high performers, who refused to sign the arbitration clause were arbitrarily found to be “below target” on their next performance appraisal, thus hitting them in their raises, as well as becoming part of their permanent record. Ouch! That one hurt.

2)     You realize that “Ethics & Compliance” is in name only when you examine the history of your predecessors and find an accordion procession of qualified and experienced professionals sandwiched between unqualified and inexperienced “yes” men. Upon closer examination, you realize those experienced professionals were pushed through the revolving door after questioning “sweetheart” deals with consultants who had no defined statement of work, kept no record of hours and had no measurable deliverables for high six figure contracts, or sought substantiation of 14k gold project results that were in fact merely gold leaf.

3)     Recently, I caught wind of a covert operation to hold employees to non-compete terms. In lieu of actually calling it out in conspicuous terms as a term of employment for those in a position of trust as most companies would do, the employer put the non-compete terms in fine print that were only available on line when routing employees through the annual stock awards cycle. By accepting the ‘bonus’ of stock grants and options, the employees became bound to the non-compete terms, without advance notice, or even giving an opportunity to see who the competitors were. When a senior level employee turned in his notice, and advised his boss that he was going to work for one of these “competitors,” he was later advised by legal that he had in effect “resigned,” his stock incentives were forfeit, and he was precluded from starting to work for the competitor. To add insult to injury, the company called in outside counsel to send nasty grams to the former executive (now left without a job, and unable to claim for unemployment because he “resigned”), reminding him in strongly worded legalese of the non-compete. Even the employee’s boss was unaware of the non-compete provisions, so all were taken by surprise. Wham! The nasty revolving door strikes again with a vengeance!

4)     Reporting relationships are another red flag “culture” indicator for Ethics & Compliance professionals. While it’s hotly debated whether the function should lie in legal, audit, or somewhere else, we can all agree that it should not report to operations, since that’s akin to the fox watching the hen house. Ideally, the function should be “independent” of executive influence, with at least a dotted, if not solid, line report to the board’s audit committee. Many companies get around this by having the CECO in an executive function (such as the General Counsel, or Chief Financial Officer), but they are not the ones with their ear to the ground, relying instead on director or VP level personnel to manage the day-to-day duties, and reserving the “executive privilege” of access to the board for themselves. Given their place on the company’s “executive” committee, one could argue that’s hardly the “independence” Department of Justice was thinking of in their sentencing guidelines. It’s all well and good if the “day to day” personnel do not have executive presence, but if they do, and are still kept at arms’ length from the board? That’s a telling sign that there’s an entitlement culture afloat and you will have to swim against a very strong tide of resistance to break into the “inner circle.” The promised “free and unrestrained” access to the Board is only as good as the relationship you are able to build with them especially when the Chairman is also the CEO and you are only “allowed” to see them 4x per year in a structured (and monitored) meeting environment while executive management shares informal meals and time on “the links” with the board members. Keep your antennae up when contemplating a new environment to ply your craft.   Ask to meet with all constituents to ensure the open door is really open before you commit to a move that ends up requiring you to “share” your presentations and discussions in advance. And heaven’s sake, if the CEO describes his tenure as “his reign”, run, don’t walk, to the nearest emergency exit!

5)     Bring your own device can be the device of your undoing… I routinely refuse to use my personal cell phone for work. Of course, that means I have to juggle multiple mobile computing devices, but for me, it’s important that I don’t mix business with pleasure. Most companies nowadays encourage employees to use their own device for a multitude of reasons. Many of them are sound, such as cost savings, as well as tech support, making lots of sense if the employee is going to update their own personal phone every two years anyway. It gives the company access to the latest technology, without the investment in devices which might be obsolete a month from now. It’s also good for morale in many instances, particularly if the company agrees to pay the data charges if the employee agrees to underwrite the cost of the device – that’s where the real costs to the employee come into play, and it’s a fair trade overall. The drawback, however, is that more than 20% of companies apply an “all or nothing” rule – leveraging the tools that come standard with Microsoft Exchange servers to remote wipe these devices. You either take it all with you (by backing up your device nightly – seriously, who does that?!?) or you take nothing with you when you are terminated without notice and the company “wipes” your device clean, including those precious baby photos of your first born you took last weekend. There’s a rip tide in the cultural norms of a company that won’t buy or pay for your device or data charges, yet insists on 24/7 accessibility. One company I am aware of would not provide mobile devices for anyone but the higher ups, leaving everyone else to BYOD. Legal and HR refused to consider implementing a formal BYOD policy, notwithstanding Privacy’s urging to do so. The reasons became clear within a couple months, when several employees were terminated for accessing emails from their private accounts via their smart phones relating to job interviews with other companies. The company viewed their interest in other opportunities as a “breach of trust” and wiped their smart phones clean of everything, including their contact lists, personal photos, text messages – EVERYTHING gone in the time it took for them to say “you’re fired.” How could they get away with this? Well, the InfoSec “policy” was a clickwrap agreement that warned folks that any pairing of personal devices to company systems granted full access rights (without limit as to purpose or time. The company was surreptitiously monitoring server traffic to/from mobile devices, including personal email traffic routed through the company’s Wi-Fi. Steer clear of BYOD, my dear, because your head will spin like Linda Blair trying to recover the last two years of your phone’s life as you are ushered out that revolving door.

6)     The dilemma of wearing two hats can wear a compliance professional down. When the position sits in the general counsel’s office and is staffed by an attorney, oftentimes the professional’s time is “cannibalized” to perform “lawyer” duties in addition to running the day to day operations of the integrity and compliance function. I personally was asked to tackle more and more “lawyer” duties during my tenure at one company, to “justify” a higher rate of pay which should have been mine to start with. The tipping point came when I was tasked not only with all the legal duties of one subsidiary (which was failing miserably, so there was a lot of ‘clean up’ work to be done), all the environmental, health & safety work for the entire global manufacturing enterprise, as well as the day to day operations of the Integrity & Compliance function, but was told that I also had to assume transactional work, since I had done such a ‘good job’ that the I&C function was on “auto-pilot” and didn’t need my rapt attention any longer. That conversation resulted in “conflicting career goals” between me and the organization, and I was laid off shortly after expressing my reservations about putting the I&C function on “auto-pilot” while I tackled commercial transactions, a skill I did not confidently possess. Mice will play when the cat’s away….. Contrast that with another organization, where I became aware of an illegal activity as part of my “legal” duties to the organization while serving as Compliance officer. I raised my concerns to the general counsel, but the CEO would not back down, insisting we “find a way” to preserve that part of the business. Due to “attorney-client privilege” rules, I was duty-bound to keep my mouth shut about the illegal activities, even though we were currently under investigation for a separate, equally illegal activity. I so desperately wanted out of my relocation assistance payback obligations when the General Counsel instructed me to “find a way” to legitimize what we both knew would never be sanctioned by the government – what I really needed was unfettered access to the board to discuss my concerns openly as an “independent voice of reason.”  Luckily (or NOT), that dilemma was solved for me when I was escorted through the revolving door within hours of signing their settlement agreement with the government for the FCPA case I was hired to resolve under extremely favorable terms for the company – I later learned from a very reliable source the company had only intended for my position to be “project-based” until the case was out of their hair. There are no whistleblower protection provisions for in-house counsel, and in fact, you could lose your license to practice law should you opt to do what’s right. When the CEO insists you find a way to do the unthinkable, it’s time to head for the revolving door ….

7)     Some additional signs that the revolving door is a well-oiled machine (and that perhaps your number is up)….

1. Employees share that they will not use the hotline because they fear retaliation.
2. Severance agreements routinely put in non-disparagement clauses, but only in favor of the company, and references are not permitted “per policy.”
3. In spite of your repeated requests to have your function’s location placed somewhere convenient to all to take advantage of numerous opportunities to immerse yourself in the middle of the action, you are shunted off to the hinterlands where no one can find you, and where you will be sure to miss valuable informal communications and observe the culture in action.
4. You (and your other “compliance” colleagues) are placed in a bullpen cube that lends no privacy, thereby discouraging confidential communications (and sending a strong signal of “irrelevance” to the organization).
5. Your requests for at least a closed cube or dedicated private meeting space for confidentiality purposes is met with blank stares of incomprehension, or worse yet, the dreaded comment “we have nothing to hide here….”
6. You are not invited to key strategy meetings as part of temporary cost saving measures (and then later, held “accountable” when you aren’t aware of what was decided at the meeting).
7. Leadership establishes a new scope for your work, redefining your mission to tactical, transactional and organizationally “safe” activities, instead of viewing what you do as “strategic” to the health of the organization.

As noted by Jack Kelly, publisher of The Compliance Exchange, 60% of the Society for Corporate Compliance and Ethics (SCCE) members are women. That’s a double-edged sword, he asserts, as it means women are benefitting from a “growing and dynamic field.” The drawback? These very compliance professionals are still held at arms’ length from senior executives, stunting career growth, and blocking critical opportunities to engage as an executive peer. Companies that truly want to pursue a diverse leadership path need to permit women direct exposure to the C-suite, and placing the CECO position on the executive leadership team as an independent slot (distinct from the GC or CFO) with a dedicated mission for Integrity will go a long way to eroding that traditional barrier. Women are, by their very nature, nurturers, and will take progressive, proactive steps to preserve and protect. Battered corporate reputations can be rebuilt, trust can be restored…

If you have additional cultural “insights” to share, we’re sure everyone would love to see your comments……

Who are the Two Tough Cookies?

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

Interview with Michael Kleef on the Use of Technology in Compliance Programs

ED. Note-today we continue the series on compliance thought leadership. Today is Michael Kleef, EVP of Convercent, who has some interesting observations on understanding the uses of technology in the compliance arena.

Where did you grow up?

I’m a native Australian, born in Melbourne, Victoria and spent most of my life and technology career in Perth, Western Australia. Since the Malaysia Airlines crash everyone seems to know where Perth is now! Moved to the USA about 6 years ago along with my wife and kids. It’s a scary moment as a parent dropping off your daughter, not only to a new school, but a new school in a completely different country and wondering if she will be ok!

You are relatively new to the compliance space, what was your prior professional life?

Prior to Convercent, aside from a stint at another startup, I worked at Microsoft for 11 years.

Microsoft is what brought us to the USA – did a variety of roles there with the last one in technical marketing. So my prior life is not actually compliance, it’s enterprise IT software. The move to Convercent has been like drinking from a fire hose, learning all about compliance challenges. That said, Microsoft has a very robust compliance program so I had a good idea what I was getting into, but from the employee end, doing yearly compliance training and completing policies.

What are some of the biggest surprises you have seen since moving over into the compliance space?

The biggest surprise I’ve had since moving into the compliance world is that in most cases companies do not leverage purpose built technology to manage their processes and reduce compliance risk. Most companies still utilize paper trails, Excel, SharePoint, and non-integrated software to administer their compliance programs. Having witnessed so many other departments move past these simple tools and manual processes toward applications fit for purpose, I know it’s only a matter of time before the majority of Compliance teams do the same—the risk is simply becoming too great not to.

From your prior positions, did what similar transitions did you see take place in other disciplines?

This isn’t a new problem – the transition to purpose built technology. In the past, finance teams struggled with the challenge of transitioning from spreadsheets and word documents to finance solutions such as SAP and Oracle Financial. They struggled to build the business case for replacing manual processes that were cumbersome but appeared to work. What eventually tipped the scales toward technology was the increasing pressure on CFOs to cut organizational costs. With Enterprise finance software, finance teams were able to manage budgets more effectively and enforce areas such as purchasing and expense processes. Despite the fact that financial software is often the most expensive technology companies will buy, the overall business benefits provided have proven to make this spend nearly universal for companies of all sizes. No-one even asks to justify it. It’s a must have.

Sales teams also made the shift from using basic tools like the rolodex (yep remember those?!) to purchasing Customer Relationship Management (CRM) systems like SalesForce.com and Microsoft Dynamics CRM. By entering customer, prospect and deal data into these applications, sales managers could more effectively manage a sales team’s pipeline. By understanding average time to close, while aggregating large amounts of deal oriented data, sales executives could better predict quarterly revenue, allowing teams to plan and pivot quicker and better. By connecting this data to the previously mentioned finance systems, CFO’s could now more effectively predict overall P&L on a monthly, quarterly and annual basis.

Slightly later, marketing teams began the shift from agency based advertising and uncoordinated email spam to using technology driven techniques delivered in Marketing Automation Programs (MAP). Search engine optimization (SEO), and extremely targeted personalized advertising allowed marketing teams to target buyers with personalized, relevant and engaging content, all while leveraging data for advanced analytics to help sales teams understand how to message to high probability buyers.

Across most departments at any given company, it’s easy to see how technology now underpins how people work. Software drives increased business agility through rapid access to data, helping companies make decisions promptly, while moving into new markets to better take advantage of new business opportunities. Today though, it’s not enough to just collect data. The true value of cutting edge software is in giving teams the ability to draw conclusions from the patterns in the data—or the ability to become truly predictive. Becoming predictive also allows teams to mitigate risk a whole lot more effectively.

Departments that embrace predictive analytics and intelligent workflow software no longer ask questions about the return on investment (ROI) of respective technologies because they plainly understand the value of what these systems enable. Tech savvy executive teams see how integrated data flows from marketing to sales to finance systems, relying on the positive impact of modelling this information in real time, at a single glance.

Can you draw any parallels from these experiences to the compliance discipline?

Absolutely! Many compliance, audit, risk, and legal professionals struggle daily with spreadsheets, paper and Word documents. Those lucky enough to have a GRC technology point solution, (like an independent ethics hotline and policy management system,) often struggle to connect data sets together. This inability to connect data sets and draw meaningful conclusions in real-time hampers the likelihood companies will figure it out when “Morgan Stanleyesque” FCPA issues occur. Can your compliance program isolate a rogue employee that has been trained, signed off on policies, and still chooses to bribe officials? And even if this employee is caught is it possible to drill down into how long this went on before you knew about it and could resolve and communicate the issue?

Unfortunately most compliance management solutions can’t do this because related data is not really connected. Without the ability to link related data and functions like policy, learning, and case management, you will never get to the point of being truly predictive. But the good news is that software vendors are rapidly innovating already. Companies like Convercent (among others) have already developed integrated next generation solutions that deliver real-time reporting to support increased oversight. We believe this is just the beginning towards predictive analytics that will supercharge how you manage your compliance program.

You see, it’s all about the workflow and how you manage the data – is it working for you or against you? The moment you have to spend hours or days struggling to get information or being able to understand your true picture of risk at a glance – you have a problem begging for a solution. And I’m hearing that regulators take a dim view when you can’t clearly prove that your compliance program is measurable and that you’ve taken adequate steps to implement it consistently.

From these prior experiences, I believe purpose built technology will shortly change the way you work. Technology will be the enabler that so many of you are looking for, helping you build and scale out an effective compliance program.

How do I know this? Because it’s already happened in nearly every business unit at the company you’re working for! The patterns are the same…generic, non-specialized software supporting critical decision making, manual and disconnected processes delivering non-integrated data sets, the inability to make data-driven real time judgments, increasing risk from burgeoning regulations demanding immediate action…

I hope you’re excited at how technology will enable GRC. I’m excited to see the difference it will make for you!

Micheal Keef can be reached at michael.kleef@convercent.com

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

© Thomas R. Fox, 2014

Gifts, Travel and Entertainment under the FCPA – Part III

Now that we have reviewed all of the public record pronouncements from the Department of Justice (DOJ) and Securities and Exchange Commission (SEC), this post will try and suggest what you might need in your Foreign Corrupt Practices Act (FCPA) compliance policy and attendant procedures regarding gifts, travel and entertainment. Most generally, every company has three levels of written standards and controls around its compliance function. The first is its Code of Conduct, which every company should have to express its ethical principles. I assume your company has a Code of Conduct but if you are reading this blog post and you do not have a Code of Conduct, call me. The second is its standards and policies, which every company should use to build upon the foundation of the Code of Conduct and articulate Code-based policies, which should cover such issues as bribery, corruption and accounting practices. The third, and final component, is procedures, which every company should have to ensure that enabling procedures are implemented to confirm those policies are implemented, followed and enforced.

Rebecca Walker, writing in the Society for Corporate Compliance and Ethics Complete Compliance Manual [Second Edition], in an article entitled “Gifts and Entertainment Compliance”,said written policies around gifts, travel and entertainment typically contain the following elements:

• An introduction explaining why gifts and entertainment are acceptable and why it is important to place limits on them;
• A discussion of the types of gifts and entertainment that are acceptable (e.g., commonly accepted business courtesies);
• A discussion of the types of gifts and entertainment that are unacceptable (e.g., cash);
• Dollar limits and approval requirements;
• More stringent rules applicable to employees in particular functions, as appropriate;
• A mention or discussion of different rules applicable to government officials; and
• References to other policies.

Mike Volkov, in a blog post entitled “Safe Harbors and Gifts, Meals, Travel, and Entertainment Expenses”, gave these general guidelines about gifts:

1. Given openly and transparently;
2. Properly recorded in the company’s books and records;
3. Motivated to express esteem or gratitude (and not corrupt intent); and
4. Permitted under local law.

About travel he had the following insights:

1. Do not select the foreign officials to participate in the event, or use a systematic evaluation to identify appropriate officials to attend;
2. Pay all costs directly to vendors and do not put “cash” in the pockets of any foreign officials attending an event (as an advance or for reimbursement);
3. Ensure that stipends are reasonable estimates of expected costs and do not provide any additional compensation or money to foreign officials;
4. Ensure that payments are transparent and accurately reflected in company books and records;
5. Do not condition payments on any specific action by foreign official; and
6. Obtain written confirmation payments do not violate local law.

Below are some of my thoughts about what should go into your gifts, travel and entertainment policy.

A.     Gifts

• The gift should be provided as a token of esteem, courtesy or in return for hospitality.
• The gift should be of nominal value but in no case greater than $500.
• No gifts in cash.
• The gift shall be permitted under both local law and the guidelines of the employer/governmental agency.
• The gift should be a value which is customary for the country involved and appropriate for the occasion.
• The gift should be for official use rather than personal use.
• The gift should showcase the company’s products or contain the company logo.
• The gift should be presented openly with complete transparency.
• The expense for the gift should be correctly recorded on the company’s books and records.

B.     Entertainment

There are no Opinion Releases on the threshold that a Company can establish as a value for entertainment. I am comfortable that such a value can go up to $500 in an appropriate circumstance. However this must be tempered with clear guidelines incorporated into the business expenditure component of a FCPA compliance policy, which should include the following:

• A reasonable balance must exist for bona fide business entertainment during an official business trip.
• All business entertainment expenses must be reasonable.
• The business entertainment expenses must be permitted under (1) local law and (2) customer guidelines.
• The business entertainment expense must be commensurate with local custom and practice.
• The business entertainment expense must avoid the appearance of impropriety.
• The business entertainment expense must be supported by appropriate documentation and properly recorded on the company’s book and records.

C.     Travel

• Any reimbursement for air fare will be for economy class. However, you may be able to make exceptions for senior government officials, extremely long haul flights, or where you are contractually mandated to pay for business class travel.
• Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
• Only host the designated officials and not their spouses or family members.
• Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
• Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
• Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
• The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.

The incorporation of these concepts into a FCPA compliance policy is a good first step towards preventing potential FCPA violations from arising, but it must be emphasized that they are only a first step. They must be coupled with active training of all personnel, not only on the policy and procedures, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts, travel and entertainment. Lastly, it is imperative that all such gifts, travel and entertainment be properly recorded, as required by the books and records component of the FCPA.

I view one of the key reasons for the attendant procedure of implanting the company policy around gifts, travel and entertainment is to allow oversight by a second set of eyes. Process validation requires oversight of compliance with gifts and entertainment policies is important to ensuring consistency in policy enforcement. This helps to ensure that there is the perception of fairness in this area, particularly if there must be discipline administered. Nothing is worse for an organization if, say, a salesman from the US is disciplined via a warning letter for cheating on his expense account whereas salesmen in Brazil are fired for the same offense.

Mike Volkov, in another blog post entitled “Creating a Framework for Reviewing Gifts, Meals, Travel and Entertainment Expenses”, said that he believes “There are three basic requirements for making the review process more efficient.” They include:

1. Prospective standards – Companies need to adopt and enforce a prospective policy which carves out standards for the review and approval of such expenditures. The policy has to be clear on the standards and the procedures to be followed.
2. Documentation – Companies have to document the process, maintain records, and audit the process. Without documentation, the policy is doomed to fail, and provides no protection when government prosecutors conduct an investigation.
3. Advice of Counsel – Outside counsel should be used to review and approve any close calls. The run-of-the-mill situations can be handled by the policy. In close cases, outside counsel should review the matter, provide a short memo analyzing and approving the expenditure. The memo should be added to the file and available to auditors and the government if needed.

The final point from Walker, Volkov and myself is that whatever policy and procedures you set up and utilize, they should be designed for your company. The FCPA Guidance speaks to a well-thought out and designed system for any compliance risk and gifts, travel and entertainment is no different. Further, you must not only train but monitor and audit on your gifts, travel and entertainment. As this is one of the top areas that employees generate monies from their employers it is one of the top areas for fraud and hence corruption. And finally, Document, Document and Document.

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

© Thomas R. Fox, 2014

Gifts, Travel and Entertainment Under the FCPA – Part II

Ed. Note – I know yesterday I said this would be a two-part series but as usual I got carried away so it has become a three part series. Today I review the Opinion Releases and Enforcement Actions dealing with gifts, travel and entertainment.

A. Opinion Releases

1. Gifts

In the early 1980s the Department of Justice (DOJ) issued three Opinion Releases related to gifts under the Foreign Corrupt Practices Act (FCPA). While these Opinion Releases are clearly dated, they do remain instructive. In Opinion Release 82-01, the DOJ approved the gift of cheese samples made to Mexican governmental officials, made by the Department of Agriculture of the State of Missouri to promote the state of Missouri’s agricultural products. However the value of the cheese to be presented was not included. In Opinion Release 81-02, the DOJ approved a gift from the Iowa Beef Packers, Inc. to officials of the Soviet Ministry of Foreign Trade of its packaged beef products. The total value of all the samples presented was estimated to be less than $2,000 and the Iowa Beef Packers, Inc. averred that the individual sample packages would not exceed $250 in value. In Opinion Release 81-01, Bechtel sought approval to use the SGV Group to solicit business on behalf of Bechtel and Bechtel had proposed to reimburse the SGV Group for gift expenses incurred in this business solicitation. The DOJ approved gifts to be given by SGV in the amount of $500.00.

2. Travel and Lodging for Governmental Officials

 Prior to the FCPA Guidance, the DOJ issued three Opinion Releases which offered guidance to companies considering whether, and if so how, to incur travel and lodging expenses for government officials. These facts provided strong guidance for any company that seeks to bring such governmental officials to the US for a legitimate business purpose. In Opinion Release 07-01, the Company was desired to cover the domestic expenses for a trip to the US for a six-person delegation of the government of an Asian country for an educational and promotional tour of one of the requestor’s US operations sites. In the Release the representations made to the DOJ were as follows:

• A legal opinion from an established US law firm, with offices in the foreign country, stating that the payment of expenses by the US Company for the travel of the foreign governmental representatives did not violate the laws of the country involved;
• The US Company did not select the foreign governmental officials who would come to the US for the training program;
• The delegates who came to the US did not have direct authority over the decisions relating to the US Company’s products or services;
• The US Company would not pay the expenses of anyone other than the selected officials;
• The officials would not receive any entertainment, other than room and board from the US Company;
• All expenses incurred by the US Company would be accurately reflected in this Company’s books and records.

In Opinion Release 07-02 the Company desired to pay certain domestic expenses for a trip within the US by approximately six junior to mid-level officials of a foreign government for an educational program at the Requestor’s US headquarters prior to the delegates attendance at an annual six-week long internship program for foreign insurance regulators sponsored by the National Association of Insurance Commissioners (NAIC). In the Release the representations made to the DOJ were as follows:

• The US Company would not pay the travel expenses or fees for participation in the NAIC program.
• The US Company had no “non-routine” business in front of the foreign governmental agency.
• The routine business it did have before the foreign governmental agency was guided by administrative rules with identified standards.
• The US Company would not select the delegates for the training program.
• The US Company would only host the delegates and not their families.
• The US Company would pay all costs incurred directly to the US service providers and only a modest daily minimum to the foreign governmental officials based upon a properly presented receipt.
• Any souvenirs presented would be of modest value, with the US Company’s logo.
• There would be one four-hour sightseeing trip in the city where the US Company is located.
• The total expenses of the trip are reasonable for such a trip and the training which would be provided at the home offices of the US Company.

Lastly, is Opinion Release 12-02, in which the Requestors, 19 non-profit adoption agencies located in the US, asked the DOJ about bringing certain foreign governmental officials involved in the foreign country’s adoption process to the US. All the foreign governmental officials were involved in the process of allowing children from their country go through the adoption process with the US non-profits involved. The trips to the US would be for two days of meetings. The purpose of the visit would be to demonstrate the Requestors’ work to the government officials so that the officials can see how adopted children from the foreign country had adjusted to life in the US and to help the Requestors learn how they can provide that information to the foreign country’s government with appropriate information during the adoption process. The Requestors would allow the government officials to meet with the Requestors’ employees and to inspect the Requestors’ offices and case files from previous adoptions. The foreign country’s government officials would also meet with families who had adopted children from their country and learn more about the Requestors’ work.

The Requestors stated that they would pay for the following:

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

What can one glean from these three Opinion Releases? Based upon them, it would seem that a US company could bring foreign officials into the US for legitimate business purposes. A key component is that the guidelines are clearly articulated in a compliance policy. Based upon these Releases the following should be incorporated into a compliance policy regarding travel and lodging:

• Any reimbursement for air fare will be for economy class, unless it is a long haul international flight, high ranking foreign officials or those entitled to travel business class by contract.
• Do not select the particular officials who will travel. That decision will be made solely by the foreign government.
• Only host the designated officials and not their spouses or family members.
• Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.
• Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.
• Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.
• The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.

Incorporation of these concepts into a compliance program is a good first step towards preventing any FCPA violations from arising, but it must be emphasized that they are only a first step. These guidelines must be coupled with active training of all personnel, not only on the compliance policy, but also on the corporate and individual consequences that may arise if the FCPA is violated regarding gifts and entertainment. Lastly, it is imperative that all such gifts and entertainment are properly recorded, as required by the books and records component of the FCPA.

B. Enforcement Actions

Mike Volkov refers to the FCPA Paparazzi when he talks about those FCPA practitioners who confuse FCPA information with FCPA scare tactics and manipulate legal reasoning and practical advice with “marketing” using fear as opposed to reliable and accurate information. In a recent blog post, entitled “The So-Called Re-Emergence of Gifts, Meals and Entertainment as a Compliance Problem” Volkov bemoaned recent FCPA Paparazzi client alerts which said that the DOJ was now gunning after companies for FCPA transgressions in this area.

But one point Volkov raised for consideration by the compliance practitioner was the overall management of these risks. He asked the following questions: “Who is responsible for approving expenditures? What controls are in place for ensuring that money is used for proper purposes? How are these expenditures monitored? Who watches the person responsible for controlling the money and what controls are in place to monitor their behavior?” All good questions, and all questions that the compliance function should be able to answer going forward.

While there were three of enforcement actions in 2013 and one in 2014 where gifts, travel and entertainment were discussed. In only one of the four such enforcement actions were gifts, travel and entertainment discussed, where over a period of 15 months these actions were the primary cause of the violation. That matter was the Diebold enforcement action. In all others, HP, Weatherford and Stryker, the gifts, travel and entertainment matters were all ancillary to the primary illegal conduct at issue. This is consistent with DOJ enforcement of the FCPA so Volkov rights notes, the FCPA Paparazzi are howling at the moon once again.

Travel and Entertainment Enforcement Expense Box Score

Company	Trip Locations	Trip Costs & Perks	Company Facilities Present
Lucent Technologies	DisneyWorld, Hawaii, Las Vegas, Grand Canyon, Niagara Falls, Universal Studios, NYC	$10 million in trips for 1000 Chinese governmental officials, including $34,000 for five days of sightseeing	None of the travel destinations
Ingersoll-Rand	Trip to Florence after trip to company facility in Vignate, Italy	$1000 ‘pocket money’ per attendee	Facilities in Vignate but not in Florence
Metcaf & Eddy	First trip – Boston, Washington, D.C., Chicago and Orlando. Second trip – Paris, Boston and San Diego.	First Class Travel and trip expenses for Egyptian governmental official and his family. Cash payments prior to trips of 150% of estimated daily expenses.	Wakefield Mass., not in Washington DC, Chicago, Paris or DisneyWorld
Titan Corporation		Reference in company books and records of $20,000 for promotional travel expenses. Not clear if ever funded (Remember a promise to pay equals making a payment under the FCPA)
UTStarcom	Hawaii, Las Vegas and NYC	Up to $7 million on gifts and all expense paid trips to US	No company offices present in any of the travel destinations
Diebold	Europe, with stays in: Paris, Amsterdam, Florence, Rome In the US with visits to: Disneyland, Grand Canyon, Napa Valley, Las Vegas	$1.6MM to employees of Chinese state-owned banks; $175K to employees of Indonesian state-owned banks	No company offices present in any of the travel destinations
Weatherford	Trip to Germany for the World Cup Honeymoon for Sonatrach official’s daughter Trip to Saudi Arabia for religious holiday	Payment of $24,000 in cash advance for Algerian government officials visiting Houston	No legitimate business purpose for any of the business travel
Stryker	NYC and Aruba	$7000 for Polish gov official and wife	No company offices present in any of the travel destinations
HP	Las Vegas	$35,000 in travel expenses paid for Polish gov official	No company offices present in any of the travel destinations

Tomorrow we will tie it all together for you.

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

© Thomas R. Fox, 2014

Gifts, Travel and Entertainment under the FCPA – Part I

Ed. Note-Today’s blog post will begin a two-part review of gifts, travel and entertainment under the FCPA.

One of the first thing that many companies will try to put in place is a gifts, entertainment and travel policy when looking at an overall compliance program. I find the reality to be that not only is this one of the more easier things to implement because one of the most consistent things taught at any organization, of one person or more, is to record the even and keep receipts. The base reason is not corporate or even Foreign Corrupt Practices Act (FCPA) record keeping. It is IRS Regulations. Even lawyers know you have to keep receipts. This means getting employees to document, document and document, who they may have taken to dinner or entertained, the amount, the business purpose and if they were a foreign government official, their title, this does not seem like too much of a stretch to ask.

The part that does seem different, or new, to employees is the limit. By this I mean the amount of money which can be spent on a dinner, gift or entertainment without prior approval from the compliance function. For any expenditure above those predefined limits an employee must seek pre-approval from the compliance function prior to exceeding or incurring the expense.

An on-going debate is whether to take a hard and fast line over which all employees must come to the compliance function for pre-approval regarding any gifts and entertainment. Many sales people like this approach because they want to know precisely what the line is that they can go up to. Companies may take a more values-based approach, which looks at the overall value an employee may spend over a one year or other time period but the monitoring is at the backend of the transactions.

A rules based approach is one which generally sets a dollar threshold for gifts and entertainment in two general categories; they are gifts and entertainment for foreign governmental officials and gifts and entertainment for non-foreign governmental officials. Below the threshold, employees can provide gifts and entertainment without the need for pre-approval, above the threshold; employees have to seek pre-approval from the compliance function. Limits are typically lower for foreign governmental officials than non-governmental officials. The gift or entertainment request from the employee requires a reasonably detailed business purpose and the monetary request involved should not appear to be unreasonable.

The second approach is a more values based approach. It allowed the regions to set their own top end values to gifts and entertainment, based upon the nuances and risks of the geographic area. The responsibility of the compliance department in such a values based approach would be two-fold. The first would be to engage in more training for employees on gifts and entertainment issues. The second would be greater monitoring of employee gifts and entertainment.

Values based monitoring is more extensive than for rules based monitoring. If an employee goes above the overall company limit, the matter must be investigated through an independent review of the amount spent; who it was spent on and the business purpose. This must then be written up and the independent investigator must make a determination of whether a compliance issue violation has occurred. While this post-event work seems costly and disruptive to the business, company representatives say this works for them.

One of the interesting tangents in the area of gifts and entertainment is the issue of proportionality. Proportionality in the context of gifts and entertainment in anti-corruption compliance programs generally relates to the appropriate types of gifts or entertainment to be provided to a high-level company official. One rule of thumb is if the entertainment provided was typical for a company executive and that executive could routinely pay for it, this was indicia that it was reasonable if provided from one senior level executive to another. But you must remember about how such information will be viewed in the context of a FCPA investigation, as to what is reasonable or even ‘modest’ is usually very different than the view of a sales person.

A. The Statute

Under the FCPA, the following affirmative defense regarding the payment of expenses exists:

[it] shall be an affirmative defense [that] the payment, gift, offer or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to…the promotion, demonstration, or explanation of products or services; or…the execution or performance of a contract with a foreign government or agency thereof. 15 U.S.C. § 78dd-1(c)(2)(A)-(B).

There is no de minimis provision. The presentation of a gift or business entertainment expense can constitute a violation of the FCPA if this is coupled with the corrupt intent to obtain or retain business.

B. FCPA Guidance

There was a good discussion of gifts and entertainment in the FCPA Guidance. In it the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) made clear that “A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift-giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law…”

Just as reasonably priced gifts are appropriate to give out, the FCPA Guidance specifies that “… Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action by DOJ or SEC.” However, as the costs and value begin to rise, so does the potential FCPA risk. The FCPA Guidance states, “The larger or more extravagant the gift, however, the more likely it was given with an improper purpose. DOJ and SEC enforcement cases thus have involved single instances of large, extravagant gift-giving (such as sports cars, fur coats, and other luxury items) as well as widespread gifts of smaller items as part of a pattern of bribes. For example, in one case brought by DOJ and SEC, a defendant gave a government official a country club membership fee and a generator, as well as household maintenance expenses, payment of cell phone bills, an automobile worth $20,000, and limousine services. The same official also received $250,000 through a third-party agent.”

The FCPA Guidance does specify some types of examples of improper travel and entertainment as follows:

• $12,000 birthday trip for a government decision maker from Mexico that included visits to wineries and dinners;
• $10,000 spent on dinners, drinks, and entertainment for a government official;
• A trip to Italy for eight Iraqi government officials that consisted primarily of sightseeing and included $1,000 in “pocket money” for each official;
• A trip to Paris for a government official and his wife that consisted primarily of touring activities via a chauffeur-driven vehicle.

The FCPA Guidance points out something that is rather obvious. If a company has a culture of compliance in the area of gifts, travel and entertainment that allows violations of the FCPA, it probably is lax in other areas. We recently saw this played out in the Hewlett-Packard (HP) FCPA enforcement actions where lax internal controls allowed HP-Poland to pay over $600,000 in cash to a Polish government official; pay for his travel to Las Vegas at full HP expense and also purchase him gifts valued at over $30,000. The gifts, travel and entertainment on their own could have been stand-alone FCPA violations but they were certainly symptomatic of an entire culture at HP-Poland, which allowed such conduct to occur.

Tomorrow we will review some enforcement actions and Opinion Releases.

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

© Thomas R. Fox, 2014

Nursery Rhymes, a Chinese Proverb, the HP FCPA Enforcement and the Myth of the Rogue Employee

Hey diddle diddle,

The Cat and the fiddle,

The Cow jumped over the moon.

As my friend and colleague Jay Rosen is want to remind us, he continually learns much about compliance and ethics from his Kindergarten-aged daughters. I submit that you need only look to children’s nursery rhymes in the context of the recent Hewlett-Packard (HP) Foreign Corrupt Practices Act Enforcement (FCPA) to fully appreciate the inanity of the myth of the ‘rogue employee.’ HP has been cited as the prime example of the case where a small group of evil or ‘rogue employees’ purposely mislead their ultimate US corporate parent (HP Co) by engaging in bribery and corruption for which their US corporate parent, who did not engage in the corrupt action, were forced to pay the fines and penalties (and attendant investigative costs, remediation costs and negative publicity). For the purposes of this discussion we will leave out the millions of dollars that HP potentially benefited from via the illegal actions of its alleged ‘rogue employees’; or if there has ever been a case involving ‘rogue employees’ who, intentionally or otherwise, took a company down into FCPA grief.

I. HP-Poland – the Tale of Little Jack Horner – what a good boy I am

Little Jack Horner

Sat in the corner,

Eating a Christmas pie;

He put in his thumb,

And pulled out a plum,

And said ‘What a good boy am I!’

This is the one where commentators are having a Eureka moment. After all, the settlement documents point to one man, HP’s Poland Country Manager, and his John Le Carré-esque meetings. In this bribery scheme, the Country Manager engaged in a multi-year bribery scheme to pay bribes to one Polish government official to secure a large number of contracts. These bribes were paid surreptitiously, using a variety of techniques to evade detection but they all had one thing in common which I will ask you to figure out from the Bribery Box presented below.

HP-Poland Bribery Box Score

Bribe Amount	Method of Payment	Year Paid	Business Received
$150,000	Bag of cash, delivered to home of Polish gov official	2007	Contract valued at $15.7MM
$100,000	Bag of cash, delivered in parking lot to Polish gov official	2007
$130,000 to $140,000	Bag of cash delivered to Polish gov official	2008	Contract executed January 2008
$110,000	Bag of cash	2008	Contract executed in April 2008
$90,000	Bag of cash delivered to Polish gov official	2008	Contract executed May 2008
$30,000	Bag of cash delivered to Polish gov official	2008	Final 3 contracts totaled $32MM in value
$6,000	(offer)	2010	For contract signed in 2010 valued at $4MM
$30,000	Delivered as gifts	2007-2010	Total contracts valued at $60MM

For those of you not so quick on the draw the common element, at least until the end of the Box Score, is that all the bribes were paid in cash. For part of my in-house legal career, I did legal work for the energy industry and I have some familiarity in the amount of money that Country Manager’s made, at least the range of their salary and bonus, and it certainly was not enough to fund bribes in the amount of $600,000 in cash over a couple of years.

So let me get this straight, no one else at HP-Poland aided the Country Manager while he helped himself to the kitty? Didn’t anyone even notice, say in 2007, one of our $250,000 was missing? If not, the Country Manager had to have help in siphoning off funds from HP itself to fund these bribes? So my first question is where was HP internal audit? At the country level? At the region level? At the corporate level? Where was HP Co, when HP-Poland landed $60MM in contracts, in determining how these contracts were procured? Where were HP internal controls?

Was the Country Manager like Little Jack Horner? What a good boy I am?

II.   HP-Russia – Yes Sir, Yes Sir, Three Bags Full

Baa, baa, black sheep,

Have you any wool?

Yes, sir, yes, sir,

Three bags full.

HP-Russia seems to confuse commentators the most about the myth of the ‘rogue employee’. Here they point to the coded spreadsheets (the “Encrypted Spreadsheet”), which could only be unlocked and read by the conspirators themselves. And after all, they lied, lied, when they were asked about some of the details of the transaction in questions. I am sure Inspector Renoir is still shocked, shocked, to discover that gambling is still occurring on the premises of Rick’s Café American in Casablanca.

So why three bags full? Well, first of all, if you are from a certain university in central Texas you’ll immediately know what it means. For the less delicate among you, it would mean a large load of Col. Sherman Potter’s horse-hockey; three bags full in fact. This deal had been floating around HP for years, was well-known enough to raise multiple Red Flags inside the company and was simply internally shopped until it slid through by hook, nook or crook; or in this case, three bags full.

The initial deal was inked with the Russian government in June 2001 but as the Russian government could not fund it, they sought another foreign government to fund and that government was the US. However, to do so, it required that at least 85% of all goods and services were of US origin. To meet this requirement, the initial deal was changed to substitute a US intermediary (Intermediary 2) who replaced the Swiss intermediary on the deal (Intermediary 1). HP Co conducted due diligence on Intermediary 2 and then met with Intermediary 2 in the US to conduct additional due diligence. However, Intermediary 2 balked at answering more “pointed questions” about its expertise and financial wherewithal to handle the transaction. HP Co then told HP-Russia that they would not approve the transaction.

Not to be deterred from a good deal, the foreign government financing was switched from the US to Germany. In addition, Intermediary 2 was ditched for a one-man shop, Burwell Consulting Ltd (Burwell). Burwell and others were eventually paid nearly $21MM in bribes for the Russia government contract. There has been much discussion about how HP-Russia tricked HP-Germany’s employees through the use of “encrypted, password protected spreadsheets that tracked the deal’s financial inflows and outflows”. However, what I found more interesting was the discussion about how not only had HP-Russia shopped the deal internally and been told a resounding NO by HP Co for obvious Red Flags present but also the discussion of how HP-Russia internally funded the bribery scheme.

They did so by the classic ‘stuffing the channel’ that every software lawyer, accountant, bookkeeper, auditor, sales rep and anyone else subject to GAAP or IFSR learns on their first day of training on their first job. It goes like this: HP-Russia sold products to a channel partner; who then sold them to Intermediary 3; who then sold them back to HP with a mark-up and voila, you have a big pile of cash with which to bribe.

So what does the HP-Russia deal tell us about HP as a company? As with HP-Poland, you would have to question where was internal controls while this was playing out, at the country level, at the region level, at the anywhere level? But there is far more than simply internal controls going on here. Based on what was publicly announced in the settlement documents, HP Co had actual knowledge that the deal was rife with Red Flags as it was presented. It was so bad they shut it down. Of course, the business guys simply resurrected it in another place, in another guise. What does that say about the overall effectiveness of the compliance function at the time if HP-Russia could bring a Red Flagged deal to HP Co only to have it stopped, then to shove it through HP-Germany due to weak controls? What about the internal controls on how HP-Russia was able to generate $21MM in scammed money to pay the bribes in the first place? Think anyone else might have thought about running that scam through those robust internal controls? After all, its only three bags full…

III.   HP-Mexico – Fool Me Once…

Fool Me Once,

Shame on You;

Fool me twice,

Shame on Me.

The above did not come from George Bush (The Younger) but is purported to be an old Chinese proverb. I like that thought anyway and it certainly informs our look the claim of ‘rogue employee’ in Mexico. Here, for reasons far beyond my comprehension, HP was able to secure a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) for the actions of its subsidiary in Mexico in paying a bribe of $1.6MM to facilitate the winning of a contract worth $6MM. But the lesson learned from the ancient Chinese proverb certainly informs our look at the allegation of the ‘rogue employee’ down Mexico way.

HP-Mexico wanted to use a certain agent involving a deal with Pemex because he had a very close relationship with the Pemex official who would be making the decision on the contract. HP-Mexico even signed a contract with this agent where his description of services was an “influencer fee” for which he would receive a 25% commission. This agent could apparently neither meet HP Co’s due diligence requirements, accept HP Co’s mandatory commission rate or both but whatever the reason, they were not approved as an agent on the Pemex deal. But like all good HP business folks (beginning to see a pattern here?) HP-Mexico simply subcontracted this agent to an existing, approved HP channel partner. HP-Mexico then amazingly (or perhaps not) said that they needed to raise the commission rate of this channel partner from 1.5% to 26.5% because this channel partner was now “managing discounts with Pemex” which coincidentally, this channel partner had never done. Because this channel partner was previously approved by compliance, the request for increase in commission rate was never submitted to compliance for approval. Think an internal control or two might have been appropriate in this situation?

What do the nursery rhymes and Chinese proverb tell us about HP and the Myth of the Rogue Employee? All three of the bribery schemes involved showed that there were multiple failures of numerous systems that allowed the schemes to run rampant. But perhaps the thing that they speak to the most is the culture that existed at the company during the time frames in question. While the FCPA Professor and others have noted that some of the conduct in question began in Russia as long ago as 1999, the settlement documents speak to conduct in Poland as recently as 2010. Certainly, the NPA for HP-Mexico’s conduct was for actions in 2009. What was the tone set that not only allowed employees to think that they could get away with subverting the law but that they had to do so. That, perhaps, is the most troubling questions unanswered by the Myth of the Rogue Employee.

Whatever the answer to HP’s culture of compliance may have been at the time of the conduct which led to the enforcement action, the claim that the company does not bear responsibility for either setting that tone, facilitating the conduct by looking the other way when convenient or not having appropriate internal prevention and detection controls in place to prevent massive fraud by its own employees; the reality is that when a employees of a company can evade controls to generate multi-millions of dollars to generate pools of money to pay bribes, there is no ‘rogue employee’ or even small group of rogue employees. Or there is about as much chance as a cow jumping over the moon.

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

© Thomas R. Fox, 2014

Post Traumatic Settlement Disorder

Ed. Note-the following piece orignially appeared in the newsletter ‘The Informant’ of Artifice Forensic Financial Services LLC. and was also adapted  from two articles published by John Hanson through Corporate Compliance Insights during August 2011. It is published here with the permission of the author John Hanson. 

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The rigor and stress of an extensive corporate internal investigation is over. You’ve helped your client determine the scope of wrong-doing, take actions against wrong-doers, calculate the damages/amount of the fraud, fix and/or install internal controls, institute and/or strengthen its corporate compliance & ethics program, and negotiate a reasonable settlement with the relevant government agencies. You have helped your client survive what may well be one of the most traumatic events that it will ever face and it is now anxious to return its focus to its business.

But this is not the time to let up. That settlement agreement had requirements. In most instances, those requirements will focus on the organization’s compliance & ethics program, ethical tone and internal controls. This is not a time for relaxation, lest the organization fall into disorder and out of compliance with its settlement agreement. This is the time for vigilance.

Similar to a victim of a heart attack, who is moved from a hospital’s coronary intensive care unit to a general care unit after being stabilized, an organization could be seen as moving from an organizational intensive care unit to general care after the signing of a settlement agreement. Like the heart attack victim, the organization may be in a different place, but is not out of the hospital yet. Without the high level of attention, discipline and care necessary for a complete recovery, the organization can easily relapse back into disorder and return to organizational intensive care – or worse.

In Artifice’s role as an Independent Corporate Monitor (“Monitor”) and advisor to many other Monitors, Artifice has observed first-hand and heard about the post-traumatic settlement disorder that has occurred within numerous organizations. Because the role of a Monitor is so unique and close to an organization’s post-settlement activities, it provides unique insights into what can cause this disorder and how it can be avoided. From such a perspective, there are two key things that counsel may suggest that an organization should do to maintain order and better guarantee its timely and effective compliance with the terms of its settlement agreement: (1) assign and empower a project leader/manager and; (2) spiritual compliance.

The government likely relied on Chapter 8 of the United States Sentencing Guidelines (USSGs), which pertains to the sentencing of organizations, both for purposes of determining corporate liability and the remedial compliance measures required in the settlement agreement. In the spirit of §8B2.1(b)(1 &2) of the USSGs, the organization should designate an individual to monitor and oversee the organization’s compliance with the terms of the settlement agreement and report back to the highest levels of management of the organization regarding it. That person should be empowered to track and assure not only that the organization complies with its settlement agreement obligations, but also obtain and apply whatever resources are necessary to do so and hold people accountable for their roles in those efforts.

This should be done regardless of whether an outside Monitor is imposed as part of the settlement agreement. As part of a Monitor’s efforts to verify an organization’s compliance with the terms of a settlement agreement, a Monitor will track, test and report on an organization’s actions, but cannot participate in those efforts. A Monitor may and should provide guidance to an organization about its efforts, but it would compromise the Monitor’s independence if, for example, the Monitor drafted policies, conducted trainings or otherwise participated in designing or implementing the remedial measures that the Monitor would then be responsible for verifying the effectiveness of to the government. Compliance or non-compliance with its settlement agreement obligations rests solely upon the organization’s shoulders.

While the Compliance Officer may seem a good fit for such a project leader/manager role, because many of the remedial measures required by the settlement agreement may fall under the Compliance Officer’s responsibilities, someone more independent of those responsibilities might be considered. This is not at all to say that the Compliance Officer should never fill such a role, only that consideration should be given to whether or not the independence of the Compliance Officer in verifying to the organization’s management the timeliness and effectiveness of their own actions pursuant to the settlement agreement might be compromised, either in fact or by perception.

The presence of an outside Monitor has a significant impact in this regard and in many instances where a Monitor is imposed, the Compliance Officer is a perfectly appropriate, even preferable choice for this role. Without an imposed Monitor, as is seen in quality Compliance Programs where Internal Audit plays a role in verifying and reporting back to management on a Compliance Officer’s achievements against their yearly Compliance Plans, Internal Audit may provide the organization’s management with a more independent assessment of the organization’s timely and effective compliance with their settlement agreement obligations.

Depending on such factors as resources, level of independence sought, expertise, the requirement of an outside Monitor, etc., an organization may also consider bringing in an outside professional to track, assure and report to management on the organization’s compliance with its settlement agreement. This person may act in a capacity very similar to that of an imposed Monitor, but the organization would exercise a much greater degree of control over their scope and fees and the extent to which they could leverage the organization’s internal resources. Moreover, the organization could empower such a person to design remedial measures, affect change and take actions on behalf of the organization that an imposed Monitor cannot do because of their strict independence requirements.

This is among the greatest causes of disorder among many organizations in their post-settlement actions, who by fracturing this responsibility jeopardize their ability to timely, effectively and fully comply with their settlement agreement obligations, as well as management’s ability to exercise oversight of it. One person, appropriately empowered, enabled and accountable, brings order to the situation and minimizes these risks. In performing this role, such a person should design a workplan that identifies everything that the organization is required to do (and elects to do) and be responsible for assuring that everything is completed timely and effectively, as well as documented and appropriately reported.

Pass or Fail Another significant and common contributor to post traumatic settlement disorder is a tendency by some organizations to focus on meeting the “letter” of its settlement agreement obligations and not the “spirit.” Compliance with the terms of a settlement agreement should not be viewed as a “check the box” exercise.

The government takes a dim view of organizations that have compliance programs that “live on a shelf” and may penalize more harshly such organizations than those who have no compliance program at all. Similarly, if the efforts of an organization to comply with their settlement agreement obligations exist on paper and not in practice, the organization assumes a grave risk.

One of the primary goals of the government in requiring certain post-settlement actions by an organization is the institution of an effective Compliance and Ethics Program and internal controls aimed at reducing the risk of recurrence of the same or similar misconduct as that which led to the settlement agreement. Accordingly, how quickly the organization meets its obligations and, more importantly, the effectiveness of its efforts in doing so, are of tremendous importance.

Determining the effectiveness of an organization’s remedial measures requires much more effort than mere compliance with the letter of a settlement agreement’s obligations. Take, for example, compliance training. While a settlement agreement may require quarterly compliance training, such training is meaningless if the employees who receive the training cannot understand or apply it within the context of their roles. Accordingly, aside from assuring that the training is appropriately designed and affected to maximize such an understanding, an organization may utilize tests, surveys and/or post-training interviews to assess the training’s effectiveness. To the extent it is found not to be effective, it should be immediately remediated.

Another common post-settlement goal of the government is the strengthening or institution of a high ethical tone within an organization, commonly referred to as “tone at the top.” To successfully meet the spirit of an organization’s compliance with its settlement agreement obligations, the upper management of an organization must set the tone and take the lead. The degree to which management demands that the organization’s post-settlement efforts go beyond the letter of compliance has a great impact, in the same manner as their tone, actions and personal accountability does in affecting an ethical tone throughout an organization.

“Tone at the top” is not a compliance buzzword or catch phrase, it is real and plays a very significant role in affecting employee behavior and compliance throughout an organization. How upper management acts and holds themselves accountable sets the ethical tone and standard for how all employees are expected to conduct themselves and their accountability in doing so. While the settlement agreements used by government agencies may vary in how directly they address an organization’s ethical tone, it is generally among their chief concerns.

In living up to the spirit of a settlement agreement, an organization’s management, starting at the very highest levels, must take an active role in setting and living a tone that exemplifies ethical behavior and accountability. In the post-settlement world, this may well begin with the tone they set as it regards complying with their settlement agreement obligations. If, for example, a settlement agreement requires that all employees certify their having read and understood an organization’s compliance policies, upper management should be among the first to do so.

Another strong indicator of spiritual compliance and a positive tone is when organizations look for ways to go above and beyond the letter of their obligations as per the settlement agreement. While settlement agreements have become standardized to some extent, and in such a manner as to address compliance and ethics program issues relatively adequately, the government officials who are involved in drafting them are generally not experts in compliance and ethics programs and may, in fact, have little or no compliance knowledge and/or experience. Because of this, the obligations required in settlement agreements that pertain to corporate compliance and ethics programs may sometimes be minimal, vague and not necessarily comport with that necessary to achieve the government’s ultimate goals.

As an organization endeavors to meet its settlement agreement obligations, it should keep in mind the goals and spirit of its settlement agreement and seek ways to assure that such overarching goals are met or exceeded. One example of this occurred with an organization that Artifice served as the Monitor of, which instituted a process around business opportunities that went beyond that required in its settlement agreement and proved successful in preventing the same misconduct that gave rise to its problems. This reflected very favorably upon how seriously the organization and its management viewed compliance and the ethical tone within the organization.

There are other things that occur within organizations that contribute to post traumatic settlement disorder, but the two discussed above are two of the largest contributors to problems and/or failure that we have seen through the unique lens of an Independent Corporate Monitor.

Getting out of organizational intensive care doesn’t equate to discharge. Organizations must be vigilant, disciplined, rigorous, and take with grave seriousness its settlement agreement obligations. A focus on the spirit of the settlement agreement, together with order and accountability in assuring that all settlement obligations are met timely and effectively, significantly mitigates the risk of post traumatic settlement disorder and ultimately helps an organization become stronger and better servants of its customers, employees, shareholders/owners and the public-at-large.

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John Hanson is the founder and Executive Director of Artifice. A CPA (LA), Certified Fraud Examiner, and Certified Compliance & Ethics Professional, John has more than 23 years of fraud investigations, forensic accounting, corporate compliance & ethics, and audit experience. Though well regarded for his investigative and litigation support skills and experience, John is a thought leader in the field of Independent Corporate Monitors, having had substantial involvement in five (5) Federal Monitorships, three (3) as the named Monitor. A former Special Agent of the FBI, John spent nearly 10 years refining his white collar crime investigative skills investigating a variety of complex criminal fraud schemes and financial crimes. Prior to forming Artifice in 2010, John was a leader in the fraud investigations and forensic accounting practice of a large publicly traded international financial consulting firm. John can be reached jhanson@artificeforensic.com. s the founder and Executive Director of Artifice. A CPA (LA), Certified Fraud Examiner, and Certified Compliance & Ethics Professional, John has more than 23 years of fraud investigations, forensic accounting, corporate compliance & ethics, and audit experience. Though well regarded for his investigative and litigation support skills and experience, John is a thought leader in the field of Independent Corporate Monitors, h© John Hanson

ving had substantial involvement in five (5) Federal Monitorships, three (3) as the named Monitor. A former Special Agent of the FBI, John spent nearly 10 years refining his white collar crime investigative skills investigating a variety of complex criminal fraud schemes and financial crimes. Prior to forming Artifice in 2010, John was a leader in the fraud investigations and forensic accounting practice of a large publicly traded international financial consulting firm. Hanson is the founder and Executive Director of Artifice.  A CPA (LA), Certified Fraud Examiner, and Certified Compliance & Ethics Professional, John has more than 23 years of fraud investigations, forensic accounting, corporate compliance & ethics, and audit experience.  Though well regarded for his investigative and litigation support skills and experience, John is a thought leader in the field of Independent Corporate Monitors, having had substantial involvement in five (5) Federal Monitorships, three (3) as the named Monitor.  A former Special Agent of the FBI, John spent nearly 10 years refining his white collar crime investigative skills investigating a variety of complex criminal fraud schemes and financial crimes.  Prior to forming Artifice in 2010, John was a leader in the fraud investigations and forensic accounting practice of a large publicly traded international financial consulting firm. 

Tales from the Crypt-Rule No. 7-Actions Speak Louder Than Words

Ed. Note-I inadvertently ran Tale From The Crypt, Rule No. 8 out of order, so today we present Rule No. 7, which reminds us that Mom was right, actions do speak louder than words…

This Tale from our Crypt reminds us that over the years, you think you’ve heard it all and seen it all when it comes to abuse of expense accounts. One common thread however flows through the stories: Crime & Punishment are not always linked and often dependent on who you are as much as what you did. As we reminisced, several amusing stories came to mind…

As a young pup working in a small office of a much larger organization, I happened upon an “abuse in progress.” The employees wanted a refrigerator in their lunchroom. They put their heads together and the operations director came up with a brilliant idea. They would bring in receipts from home for personal expenditures of supplies, postage and the like, submitting them as petty cash expenses. They estimated it might take a couple of months to raise the required funds for their refrigerator. Good thing they had not actually submitted any receipts for replenishment of their petty cash fund when I caught wind of it. Their goal was admirable, keeping low paid but experienced workers warm and happy in a cold, snowy climate. But their methodology was designed to avoid possible refusal of their request because the office was a low performer. Nothing beats feet & ears on the ground.

It’s amazing what a sample can uncover. I’m personally a big proponent of statistical sampling because you can draw very powerful conclusions from relatively small investments of time. With that said, the experienced investigator or auditor has an amazing 6^th sense for judgmental sampling. There was the marketing manager who submitted receipts for a new wardrobe and a whole set of Tupperware® reported as travel expenses related to a sales meeting he was in charge of planning. And yes, his manager had signed his approval of the expense report. Even though the purchases were not large, we were curious as to why the employee believed this to be valid travel expense (motives related to small issues sometimes indicate larger problems). Rather than bypassing this, we opted to review the spending with the employee. We got directly to the issue, showed him his expense report, and asked if he had submitted it. He responded that he had. We asked him if it was accurate as we were reviewing a group of expense reports. He stated that it was. Then we pulled out the receipts that he had attached and asked if they were his. He stated that they were. Then we called attention to while his expense report stated that the spending was for travel that the receipts were for other types of spending which appeared to be personal. The employee proceeded to explain that the spending was indeed for legitimate business expenses because he had established a dress code for the upcoming sales meeting which required everyone to wear black slacks and polo shirts. With a straight face, he went on to say that he had lost weight and no longer owned the self-required clothing and had to purchase proper attire to comply with his own rule! We had to bite our tongues not to lose it right then and there. So we proceeded to call his attention to the entire set of plastic food storage containers. Amazingly, he had an answer for that as well. This spending he had recorded as miscellaneous travel because he said his team was working late hours in preparation for the meeting and he had to bring in food from home to keep the team fed and happy and he did not have anything at home to use to carry it so, he bought the storage containers. We asked him why he recorded it as travel and he replied that was the only way he knew to be reimbursed. We explained that neither expenditure was acceptable as travel and not reimbursable by the company and that we would be back with him with the company’s intended actions. Then we met with the supervisor, who admitted that he never looked at the supporting receipts submitted for expense reports of those in his charge. Further, he assumed that his employees only would submit legitimate and authorized expenses. We presented our findings to Human Resources (HR) and General Counsel (GC) who jointly opted for the employee to reimburse the company for the personal expenses and a reprimand for the supervising manager, a well-respected member of sales management.

Over the years, I’ve seen other occasions, including a member of sales management entertaining customers and recording as meals; an evening of alcohol at a strip club in Mexico; a VP providing personal holiday gifts to various members of his organization hidden in travel expenses; and salesmen dressing up their leased company cars with trucks with “farkles” like custom steps, caps, wheels, and bed liner. The sad part about the thousands of dollars spent on unauthorized vehicle add-ons, besides management’s tacit approval and hiding these on expenses as “travel”, is that these vehicle add-ons technically violate the company’s vehicle lease agreement.

Each of these occurrences was handled differently by HR & GC. While we were not asked to delve beyond interviewing the manager who thought it an acceptable practice, the Mexico affair resulted in his termination. The VP was required to reimburse the company. The sales team vehicle infractions resulted in re-education.

We also uncovered a plant level employee structuring travel to extend company travel and placing him at a casino for evenings of gambling with the company picking up the tab for the extended stay. This employee lost his job. Contrast this with a senior leader identified as falsifying airline flight options to obtain approval for upgrades which would not otherwise be approved resulting in thousands of dollars in upgrades. The employee was “counseled”. Or perhaps the entrepreneurial approach at one subsidiary of registering their admin as a “travel agent” and booking their own flights through this “agency” (in violation of our travel policy) to obtain discount rates, but keeping the sales incentives for their personal benefit. That one had us really shaking our heads for their “creative” approach to securing discount travel, and while we admired their intent and ingenious approach to thriftiness, we really couldn’t permit the fraud to continue. C-Suite members’ personal expenses continue to be periodically identified as company expenses and remedied by recording them as compensation. Can you say “catch me if you can”?

While the actions of the GC and HR in each of these situations may have been appropriate for the given facts and circumstances, the perception is one of inconsistency and tolerance which encourages continued abuse and opens the door to challenges to disciplinary actions as unfair or even discriminatory. Deception and entitlement can become pervasive, particularly if the company has a policy of not publishing, even in general terms, internal “sentencing guidelines” for workplace misconduct. Our job is hard enough as it is, constantly working against the tide of perceived bias and favoritism. Whether the C-Suite participates or not, perceived inconsistencies establish a “tone at the top,” setting precedents that challenge the legitimacy of the Integrity & Compliance function. All it takes is a firm commitment to Integrity by consistently demonstrating intolerance for actions that do not support company values to turn the tide in our favor. But then, we might be out of a job… hmm. Let us think about that a bit more…

Who are the Two Tough Cookies?

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

The Louisiana Purchase and Compliance Focus Group – Changing the Game

In 1803, the fate of the United States changed in ways that could have never been contemplated, when the French Minister Talleyrand offered to sell France’s entire Louisiana Territory in North America to stunned American negotiators, Robert Livingston and James Monroe, who were simply trying to purchase the city of New Orleans from the French Emperor Napoleon. Quickly recognizing that this was an offer of potentially immense significance for the US, Livingston and Monroe began to negotiate on France’s proposed cost for the entire territory. Several weeks later, on April 30, 1803, the American emissaries signed a treaty with France for a purchase of the vast territory for $11,250,000. With the sale of the Louisiana Territory, Napoleon abandoned his dreams of a North American empire, but he also achieved a goal that he thought more important. “The sale [of Louisiana] assures forever the power of the United States,” Napoleon later wrote, “and I have given England a rival who, sooner or later, will humble her pride.”

There are many great resources out there for the compliance practitioner. One of them I have really come to appreciate and look forward to receiving is the Red Flag Group’s bi-monthly Compliance Insider magazine, available both in print and online versions. In the most recent version there were several articles that I found very useful for the compliance practitioner but the one I want to focus on today is the compliance focus group. This provides a forum, which allows employees to raise compliance issues and concerns in “an informal environment, in small groups or in one-on-one sessions. They can be done as stand alone or as break-out sessions from larger meetings, conferences or similar events where multiple parties get together.” The article provided 10 things which you should consider before you hold your compliance focus groups.

1. Select Your Countries and Regions Carefully. You need to reflect on selecting those areas, which have “compliance issues, have been the subject of investigations or are higher risk.” Contrast that selection with one or more regions that have achieved compliance performance so that you can clearly articulate the difference. Most importantly, pick the regions that need the most support and “have the most business at risk if there is a compliance issue. You will also know from your own business those areas, business units or regions where there is more “noise” around compliance.”

2. Plan Your Locations, Times and Attendees. Think about your logistics, both higher level such as travel times and lower details such as seating. As you will usually desire to have three to four sessions per day, up to 90 minutes, you will need to make sure people have enough time to get there and register. But also think about seating, as you want to make things as informal as possible. This means a conference table or a large U shape arrangement and not classroom or lecture room seating.

3. Have Separate Management Sessions. It is important that you make attendees feel that they can give open and honest thoughts about the company and its compliance regime. This means you cannot have senior management in sessions for middle management and lower management and employees.

4. Draft an Agenda and a Short Presentation. The author believes that many times participants will need a stimulus of some sort to get things going. He advises “A good idea is to build a brief agenda before the meeting, even if it is fairly flexible – many senior employees will demand an agenda before accepting a meeting.” Also prepare a brief PowerPoint presentation for the session designed to explain the purpose and outcomes of the session, keep it to five or six slides which will act as placeholders for discussion topics.

5. Think About Some Probing Questions In Advance. Here are some of the suggested questions that you should consider asking to the group:

• Do people understand what compliance is? What does it mean to you in your daily business dealings?
• What do people think of the policies and procedures across the company?
• Is the training simple and easy to understand?
• What is the company culture around compliance? Do people really take it seriously or is there a “tick-the-box” mentality?
• Are there issues with reporting? How do people report? What is the culture regarding reporting issues?
• Does management “walk the walk” with compliance or just “talk the talk”?
• How does your company compare to its peers in the area of compliance?
• What is the competitive environment like, both externally and internally?
• Where are the areas that compliance could improve?

6. Select a Facilitator. Compliance issues can be sensitive and people can be uncomfortable talking about them. For the focus group to succeed and be of value, everyone should be made to feel comfortable; and feel that they are not being audited or reviewed or they will not be confident to speak up. The author believes that here a good facilitator can be assist in keeping “the discussion going, ensure that everyone participates, make people feel at ease and, most importantly, ensure that the discussion is lively. The facilitator might also need to be trained on some of the risk areas of the business and have a solid understanding of the business and the existing compliance program.”

7. Prepare Your Opening Disclaimer. Some participants may want to know how their comments will be used, quoted directly or generalized. This would be the time to address such concerns and invoke confidentiality of names and other identifiers.

8. Prepare Some Takeaways. The leader should be prepared to summarize what the next steps will be going forward, including when a report might be issued to management and what might included in the report.

9. Prepare a Report For All Participants. A key component of any compliance focus group is a post event report, which consolidates all sessions. This should be generated as soon as possible after the end of the last session. The report should include specific actions that will be taken based upon the input received from the focus groups. There will certainly be expectations from participants that if they have reported any circumstances which warranted responses they will want to know what the compliance team is doing about a response. Participants will also want to see whether the feedback they gave is consistent with that given in the other sessions.

10.Write a Report for Management. This report should focus on the larger issues raised in the compliance focus groups and, as the author notes, “looking at the trends, steps forward and lessons learned.”

While your compliance focus group may not be quite the game changer that the Louisiana purchase was for the US, it will certainly provide you solid information on your compliance program that you can use to move it forward; as the article notes, “From the people who use the programme everyday—your employees and partners—you can find out what the programme means, how it adds value (or doesn’t add value) and how it is seen by the management team around the world. And while you are at it, you may want to check out the Red Flag Group’s Compliance Insider magazine, it is a great resource.

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

© Thomas R. Fox, 2014