FCPA Compliance and Ethics Blog

May 1, 2015

King Arthur Week – The Quest for the Holy Grail and Compliance Defense – Part V

Holy GrailWe conclude our Arthurian themed week with the Holy Grail, which has fired the imagination of artists for millennia. What was the Holy Grail? According to Professor Dorsey Armstrong in her Teaching Company lecture series, entitled “King Arthur: History and Legend”, the Holy Grail has taken various forms over the years. For Chrétien de Troyes, it was a fancy serving dish; for Wolfram von Eschenbach, it is a magical stone; for Robert de Boron, it is the cup that Christ drank from at the Last Supper; for the comedy troupe Monty Python, it is a cartoon sketch that no one ever finds; and for the modern day author Dan Brown, it is both a person, who is a descendant of Mary Magdalene, and a bloodline which leads to the Merovingian kings of France. In other words, it means many things to many people.

One of the articulated reasons for the creation of King Arthur’s Round Table was tied to the Holy Grail, since it was allegedly used at the Last Supper, it seems only natural that Arthur would seek it from his table as well. Indeed in Robert de Boron’s account of Arthur, the wizard Merlin tells Arthur the Round Table was established to identify the one Knight, who was pure of heart, who could find the Holy Grail. Only after the great quest for and locating of the Holy Grail was achieved could Arthur’s other ambitions come to pass.

Another interesting twist on the Grail legend is that it was in Britain. Curiously it was first ‘discovered’ by some enterprising Monks in Glastonbury, England in the late 12th century. They just happened to come across a well that ‘bled’ water around the time of an annual pilgrimage. Going viral in the Middle Ages was tough but the Monks built upon their initial find by claiming that both King Arthur and his Queen Guinevere were also buried at their abbey. Do you believe any of the above? Are you on your own Grail Quest, however dreamy that quest might be?

I thought about the quest for the Holy Grail in the context of the renewed call for a compliance defense addition to the Foreign Corrupt Practices Act (FCPA), which would give companies a pass if they had sustained a FCPA violation. In a recent blog post, entitled “Wal-Mart’s Recent Disclosures, the FCPA Professor renewed his clarion call for a compliance defense for FCPA violators, using Wal-Mart’s last three-year spend on compliance resources as a starting point. He wrote, “Wal-Mart disclosed spending approximately $220 million over the past three years in global compliance program and organizational enhancements.” He went on to note, “The key policy issue is this. Wal-Mart has engaged in FCPA compliance enhancements in reaction to its high-profile FCPA scrutiny. Perhaps if there was a compliance defense more companies would be incentivized to engage in compliance enhancements pro-actively. A compliance defense is thus not a “race to the bottom” it is a “race to the top” (see here for the prior post) and it is surprising how compliance defense detractors are unable or incapable of grasping this point.”

Leaving aside the issue of whether I am “unable or incapable” to grasp these issues I raised, I see this quest for (or ‘race’ as the FCPA Professor calls it) for a compliance defense for companies that violate the FCPA to be as quixotic as the quest for the Holy Grail. As there were two requirements for the Knight who was destined to find the Grail, we will begin pureness of heart. Recognizing that it might be difficult to find a corporation that is ‘pure of heart’, the appropriate analogy might be more than simply spending what may appear to be a large dollar amount on a compliance program. This is because it is not the amount of money you spend that informs the effectiveness of your compliance program. In three years Wal-Mart has reported it spent $220MM. The FCPA was enacted into existence in 1977. What do you get if you divide $220MM total spend into 38 years? My (recovering) trial lawyer math shows that to be approximately $5.78MM per year. How many billions of dollars per year was the annual revenue of Wal-Mart during that time? (Hint – a lot)

Moving our quest time frame to the modern era of FCPA enforcement, to say 2005. That would give an annual compliance spend of $20MM per year. If one looks at the company’s revenue from the middle of the last 10 years, for the fiscal year ending January 31, 2011, Wal-Mart reported net income of $15.4 billion on $422 billion in gross sales. Now what do you think about Wal-Mart’s quest for an effective compliance program based upon three year’s spending of $220 being significant? Indeed what is the percent of its revenues over the past three years that Wal-Mart spent creating its compliance program? Alas my trial lawyer math skills do not allow me to calculate a number so small.

How about the second part of the Grail quest that requires a ‘chaste’ Knight? Once again it is somewhat difficult to understand how a corporation could be chaste but I think the appropriate analogy is the doing of compliance. Put another way, it is not having a compliance program in place but having an effective compliance program. So not only does the amount of money a company spends become immaterial to our quest but also the same can be said to the claim that having a written program should entitle you some type of defense to any FCPA violations. Just as questing for the Holy Grail is seeking something that does not exist, affording companies a defense from their own FCPA violations by having a written program in place is not a temporal reality.

Under the FCPA Ten Hallmarks of an Effective Compliance Program, that it is an interplay of the right compliance message, tools in place to communicate and enforce the compliance message and then oversight to ensure compliance with the entire compliance regime. Such things as monitoring are recognized as a key element so your company should establish a regular monitoring system to spot issues and address them. Effective monitoring means applying a consistent set of protocols, checks and controls tailored to your company’s risks to detect and remediate compliance problems on an ongoing basis. To address this, your compliance team should be checking in routinely with the finance departments in your foreign offices to ask if they have noticed recent accounting irregularities. Regional directors should be required to keep tabs on potential improper activity in the countries they manage. Additionally, the global compliance committee should meet or communicate as often as every month to discuss issues as they arise. These ongoing efforts demonstrate your company is serious about compliance.

In addition to monitoring, structural controls are recognized as an important element. It has been said that large companies “must use structural means to maintain control.” One of the best explanations of the use of internal controls as a structural component of any best practices compliance program comes from Aaron Murphy, a partner at Foley and Lardner in San Francisco, in his book entitled “Foreign Corrupt Practices Act”, where he said, “Internal controls are policies, procedures, monitoring and training that are designed to ensure that company assets are used properly, with proper approval and that transactions are properly recorded in the books and records. While it is theoretically possible to have good controls but bad books and records (and vice versa), the two generally go hand in hand – where there are record-keeping violations, an internal controls failure is almost presumed because the records would have been accurate had the controls been adequate.” These two parts are but a sampling but it is in the doing of compliance that any anti-corruption compliance program becomes effective; it is not simply having one in place.

Finally, as with all quests, what will it bring you if you actually achieve it? As with the Holy Grail, it is a good story but that is about it. I find this view best articulated by Matthew Stephenson, in a blog post entitled “The Irrelevance of an FCPA Compliance Defense”, where he gave three reasons why a compliance defense is not warranted. First (and perhaps almost too obvious to state) is that if your company is invoking a compliance defense, there has been a FCPA violation. The second is “The U.S. Department of Justice (DOJ) already takes into account a corporation’s good-faith efforts to implement a meaningful compliance program when the DOJ decides whether to pursue an FCPA action against the corporation, and what penalties or other remedies to impose. Indeed, the adequacy of the corporation’s compliance program is a standard subject of negotiation between the DOJ and corporate defendants.” Third is that “An FCPA compliance defense would only alter the DOJ’s bargaining position if a corporation unhappy with the DOJ’s position could either (1) convince the DOJ lawyers that the DOJ’s position is unreasonable in light of the corporation’s compliance program, or (2) credibly threaten to go to court and defeat the DOJ’s enforcement action altogether by successfully invoking the compliance defense before a federal judge.” Stephenson discounts subpart 1 because DOJ lawyers already take a company’s compliance program into account. But his second subpart is even more important because no company will go to trial against the government using a compliance defense to a demonstrable FCPA violation. Leaving aside the Arthur Anderson effect, no company is going to risk losing at trial when they can control their own fate through settlement. The modern day Knights seeking the Holy Grail of a compliance defense will never find it because of this last fact. Moreover, just as there were no real Knights who could meet the requirements to actually find the Holy Grail after their quest, there are no companies which can meet the same criteria; that being that a compliance defense could or even should trump a FCPA violation.

So we leave our King Arthur themed week with our quest intact, bringing message I hope that you have ascertained in these five posts about some of the things you need to do around the ‘nuts and bolts’ of anti-corruption compliance. I also hope that you might be able to look at the tales surrounding the King Arthur myth for your own inspiration.

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, 2015

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