FCPA Compliance and Ethics Blog

March 31, 2015

Do Your Executives Have (Compensation) Skin in the Game?

Whymper and MatterhornThis year marks the 150th anniversary of the ascent of the most famous mountain in Europe, the Matterhorn. On Bastille Day, in 1865, four British climbers and three guides were the first climbers to reach the summit. In an article in the Financial Times (FT), entitled “In Whymper’s steps”, Edward Douglas wrote, “It was a defining moment in the history of mountaineering, arguably as pivotal as the first ascent of Everest. Before this calamity climbing was a quirky minority pastime and Zermatt an indigent and obscure village. All that changed on July 14, 1865. As locals cheerfully acknowledge, the Matterhorn disaster enthralled the public around the world and sparked an unprecedented tourist boom.”

The disaster had befallen the climbing team on its descent after having scaled the summit. The team was led by Edward Whymper. As they were coming back down, they were all tied together with rope. When one of the team slipped, he knocked over his guide and “their weight on the rope pulled off the next man…and a fourth climber as well.” Only expedition leader Whymper and two Swiss guides, a father and son duo from Zermott, survived the disaster when “they dug in and the rope tightened – then snapped – leaving them to watch in horror as the bodies of their companions cartwheeled thousands of feet down the mountain.” The depiction of the disaster by the French artist Gustave Doré captures for me the full horror of the tragedy.

Yesterday I wrote about the role of compensation in your best practices compliance program. Today I want to focus on the same issue but looking at senior management and compensation. I thought about this inter-connectedness of compensation in a compliance program, focusing up the corporate ladder when I read a recent article in the New York Times (NYT) by Gretchen Morgenson, in her Fair Game column, entitled “Ways to Put the Boss’s Skin In the Game”. Her piece dealt with a long-standing question about how to make senior executives more responsible for corporate malfeasance? Her article had some direct application to anti-corruption compliance programs such as those based on the US Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Morgenson said the issue was “Whenever a big corporation settles an enforcement matter with prosecutors, penalties levied in the case – and they can be enormous – are usually paid by the company’s shareholders. Yet the people who actually did the deeds or oversaw the operations rarely so much as open their wallets.”

She went on to explain that it is an economic phenomenon called “perverse incentive” which is one where “corporate executives are encouraged to take outsized risks because they can earn princely amounts from their actions. At the same time, they know that they rarely have to pay any fines or face other costly consequences from their actions.” To help remedy this situation, the idea has come to the fore about senior managers putting some ‘skin in the game’. Her article discussed three different sources for this initiative.

The first is a current proxy proposal in front of Citigroup shareholders which “would require that top executives at the company contribute a substantial portion of their compensation each year to a pool of money that would be available to pay penalties if legal violations were uncovered at the bank.” Further, “To ensure that the money would be available for a long enough period – investigations into wrongdoing take years to develop – the proposal would require that the executives keep their pay in the pool for 10 years.”

The second came from William Dudley, the President of the Federal Reserve Bank of New York, who made a similar suggestion in a speech last fall. His proscription involved a performance bond for the actions of bank executives. Morgenson quoted Dudley from his speech, “In the case of a large fine, the senior management and material risk takes would forfeit their performance bond. Not only would this deferred debt compensation discipline individual behavior and decision-making, but it would provide strong incentives for individuals to flag issues when problems develop.”

Morgenson reported on a third approach which was delineated in an article in the Michigan State Journal of Business and Securities Law by Greg Zipes, “a trial lawyer for the Office of the United States Trustee, the nation’s watchdog over the bankruptcy system, who also teaches at the New York University School for Professional Studies.” The article is entitled, “Ties that Bind: Codes of Conduct That Require Automatic Reductions to the Pay of Directors, Officers and Their Advisors for Failures of Corporate Governance”. Zipes proposal is to create a “contract to be signed by a company’s top executives that could be enforced after a significant corporate governance failure. Executives would agree to pay back 25 percent of their gross compensation for the three years before the beginning of improprieties. The agreement would be in effect whether or not the executives knew about the misdeeds inside their company.”

As you might guess, corporate leaders are somewhat less than thrilled at the prospect of being held accountable. Zipes was cited for the following, “Corporate executives are unlikely to sign such codes of conduct of their own volition.” Indeed Citibank went so far as to petition the Securities and Exchange Commission (SEC) “for permission to exclude the policy from its 2015 shareholder proxy.” But the SEC declined to do and at least Citibank shareholders will have the chance to vote on the proposal.

In the FCPA compliance context, these types of proposals seem to me to be exactly the type of response that a company or its Board of Directors should want to put in place. Moreover, they all have the benefit of a business solution to a legal problem. In an interview for her piece, Morgenson quoted Zipes as noting, “This idea doesn’t require regulation and its doesn’t require new laws. Executives can sign the binding code of conduct or not, but the idea is that the marketplace would reward those who do.” For those who might argue that senior executives can not or should not be responsible for the nefarious actions of other; they readily take credit for “positive corporate activities in which they had little role or knew nothing about.” Moreover, under Sarbanes-Oxley (SOX), corporate executives must make certain certifications about financial statement and reporting so there is currently some obligations along these lines.

Finally, perhaps shareholders will simply become tired of senior executives claiming they could not know what was happening in their businesses; have their fill of hearing about some rogue employee(s) who went off the rails by engaging in bribery and corruption to obtain or retain business; and not accept that leaders should not be held responsible.

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

March 30, 2015

Compensation Incentives in a Best Practices Compliance Program

Compensation IncentivesOne of the areas that many companies have not paid as much attention to in their Foreign Corrupt Practices Act (FCPA) anti-corruption compliance programs is compensation. However the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have long made clear that they view incentives, rewarding those employees who do business in compliance with their employer’s compliance program, as one of the ways to reinforce the compliance program and the message of compliance. As far back as 2004, the then SEC Director of Enforcement, Stephen M. Cutler, said “[M]ake integrity, ethics and compliance part of the promotion, compensation and evaluation processes as well. For at the end of the day, the most effective way to communicate that “doing the right thing” is a priority, is to reward it.” The FCPA Guidance states the “DOJ and SEC recognize that positive incentives can also drive compliant behavior. These incentives can take many forms such as personnel evaluations and promotions, rewards for improving and developing a company’s compliance pro­gram, and rewards for ethics and compliance leadership.”

In a Harvard Business Review (HBR) article, entitled “The Right Way to Use Compensation, Mark Roberge, Chief Revenue Officer of HubSpot, wrote about his company’s design and redesign of its employee’s compensation system to help drive certain behaviors. The piece’s subtitle indicated how the company fared in this technique as it read, “To shift strategy, change how you pay your team.” Several interesting ideas were presented, which I thought could be applicable for the Chief Compliance Officer (CCO) or compliance practitioner when thinking about compensation as a mechanism in a best practices compliance program.

Obviously Roberge and HubSpot were focused on creating and retaining a customer base for a start-up company. However because the company was a start-up, I found many of their lessons to be applicable for the compliance practitioner. As your compliance program matures and your strategy shifts, “it’s critical that the employees who bring in the revenue-the sales force-understand and behave in ways that support the new strategy. The sales compensation system can help ventures achieve that compliance.” The prescription for you as the compliance practitioner is to revise the incentive system to focus your employees on the goals of your compliance program. This may mean that you need to change the incentives as the compliance programs matures; from installing the building blocks of compliance to burning anti-corruption compliance into the DNA of your company.

Roberge wrote that there were three key questions you should ask yourself in modifying your compensation incentive structure. First, is the change simple? Second, is the changed aligned with your company values? Third, is the effective on behavior immediate due to the change?

Simplicity

Your employees should not need “a spreadsheet to calculate their earnings.” This is because if “too many variables are included, they may become confused about which behaviors” you are rewarding. Keep the plan simple and even employee KISS, Keep it simple sir, when designing your program. If you do not do so, your employees might fall back on old behaviors that worked in the past. Roberge notes, “It should be extraordinarily clear which outcomes you are rewarding.”

The simplest way to incentive employees is to create metrics that they readily understand and are achievable in the context of the compliance program that you are trying to implement or enhance. This can start with attending Code of Conduct and compliance program training. Next might be a test to determine how much of that training was retained. It could be follow up, online training. It could mean instances of being a compliance champion in certain areas, whether with your employee base or third party sales force.

Alignment

As the CCO or compliance practitioner, you need to posit the most important compliance goal your entity needs to achieve. From there you should determine how your compensation program can be aligned with that goal. Roberge cautions what the DOJ and SEC both seem to understand, that you should not “underestimate the power of your compensation plan.” You can tweak your compliance communication, be it training, compliance videos, compliance reminders or other forms of compliance messaging but it is incumbent to remember that “if the majority of your company’s revenue is generated by salespeople, properly aligning their compensation plan will have greater impact than anything else.”

The beauty of this alignment prong is that it works with your sales force throughout the entire sales channel. So if your sales channel is employee based then their direct compensation can be used for alignment. However such alignment also works with a third party sales force such as agents, representatives, channel ops partners and even distributors. Here Roberge had another suggestion regarding compensation that I thought had interesting concepts for third parties, the holdback or even clawback. This would come into place at some point in the future for these third parties who might meet certain compliance metrics that you design into your third party management program.

Immediacy

Finally, under immediacy, it is important that such structures be put in place “immediately” but in a way that incentives employees. Roberge believes that “any delay in the good (or bad) behavior and the related financial outcome will decrease the impact of the plan.” As a part of immediacy, I would add there must be sufficient communication with your employee or other third party sales base. Roberge suggested a town hall meeting or other similar event where you can communicate to a large number of people.

Even in the world of employee compensation incentives, there should be transparency. He cautioned that transparency does not mean the design of the incentive system is a “democratic process. It was critical that the salespeople did not confuse transparency and involvement with an invitation to selfishly design the plan around their own needs.” However, he did believe that the employee base “appreciated the openness, even when the changes were not favorable to their individual situations.” Finally, he concluded, “Because of this involvement, when a new plan was rolled out, the sales team would understand why the final structure was chosen.”

So just as Roberge, working with HubSpot as a start-up, learned through this experience “the power of a compensation plan to motivate salespeople not only to sell more but to act in ways that support a start-up’s evolving business model and overall strategy”; you can also use your compensation program as such an incentive. For the compliance practitioner one of the biggest reasons is to first change a company’s culture to make compliance more important but to then burn it into the fabric of your organization. But you must be able to evolve in your thinking and professionalism as a compliance practitioner to recognize the opportunities to change and then adapt your incentive program to make the doing of compliance part of your company’s everyday business process.

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

March 26, 2015

The Power of Positive Thinking

Tough CookieEd. Note-I am on Spring Break this week and the Two Tough Cookies graciously agreed to provide a week of guest posts.

Wrapping up this week’s communication series, I am reminded of my own personal flaws… and I can be my own worst enemy. Nothing you’ve read these past few days should be surprising to you, but I hope they have served as a reminder on some easy things you can do to improve your communications within your organization. You need to be a “trusted resource” within your organization to be an effective change agent. Even if you aren’t leading the change efforts, just reinforcing the concepts for your organizational leaders makes you an important part of the change underway. How you present yourself to the larger organization goes a long way to reinforcing your credentials as a “trusted resource” and gives you the staying power to ride the tide of change.

Take this short quiz, and recognize your thought patterns from your answers:

  • You’ve been dieting for a while and you just lost 10 pounds. You think:
    1. This diet is taking so long I’m never going to look good in that suit for my brother’s wedding
    2. I’m proud of the self-control I’ve had so far
  • You miss your flight, and have to wait for a later one. You think:
    1. No matter what I do, something always makes me late
    2. I should have looked at the gap between connecting flights and given myself more time to change gates
  • Work rolls out a new computer app for you to use, and you are still struggling to get the hang of it. You think:
    1. I’ll embarrass myself if I ask for help
    2. I’m going to ask for help with this

In all three scenarios above, answer B is “positive thinking” because they

  • Give credit for positive outcomes
  • Identify strengths that make success possible
  • “Failures” are “foot faults” and not a personal flaw

Answer A, on the other hand, demonstrates negative thinking because

  • Success is due to luck or external factors
  • Success is random and had nothing to do with hard work
  • There’s assumption of failure and not success, and
  • Failure comes as no surprise

Circling back to Appreciative Inquiry, we already know to focus on what success looks like to you and your organization. Emotional Intelligence has you presenting yourself in the most positive way possible through the use of understanding and working with your emotions, knowing that the power to control your reactions goes a long way to controlling the outcome of your interactions with others in the workplace. Both these disciplines focus on the positives, and the Power of Positive Thinking takes it to the next level. As Gandhi is quoted as saying:

Watch your thoughts, for they become your words… Watch your words, for they become your actions…. Watch your actions, for they become your habits… Watch your habits, for they become your values…. And understand your values, for they become your destiny.

Positive thinkers are better at coping with workplace challenges. They are more resilient, they look to be part of the solution and not the problem, are more likely to ask for help, and function better in a crisis. They also tend to have an increased capacity for joy, are kinder, and less likely to feel the negative effects of stress, because they focus on what they can change. As compliance professionals, we work in a world ripe with stress of all kinds.     So how does positive thinking help us cope with workplace challenges? Here’s an example that I hope you can derive some useful tips from….

I was faced with a situation in a manufacturing plant where one worker hated another with a vengeance, and the Helpline had multiple calls from her over the course of a couple weeks, precipitating an “intervention.” The HR manager, new to the plant (but not new to HR), had thrown his hands up and said “I can’t deal with these two!” so I offered to personally come, hear them out, and help him work through a solution.

We sat the two down in a joint session, and I set some simple ground rules. Each would get 10 minutes to “present” their case and “air” their concerns, with another 5 minutes to rebut once the other had finished talking. First instance of interruption would take a minute off their “air time,” second interruption, two minutes, third interruption would and so on. Both agreed to the terms, and I tossed a coin for who would go first. The first, who had “seniority” in the plant, argued her case, and insisted that the other be reassigned to second shift so she wouldn’t have to see her face every day. The other worker stated she’d been given a hard time since day one, and learned it was because the complainant wanted her friend (who worked second shift) to get the job on first shift instead so they could have more friend time together. She then told us that first shift was important to her, because her husband worked second shift, and this meant they didn’t have to worry about day care for their kids. What was critical was that neither party had a performance issue, nor an attendance issue. It was clear to both myself and the HR manager it simply a matter of the complainant wanting her friend to get the first shift slot instead.

We “recessed” before rebuttal, and I told the HR manager that I had an idea, if he wouldn’t mind me trying something. So, using the power of positive thinking, I invited the complainant to speak with us privately, to rebut what the other employee had to say. Giving us no new “evidence” of misbehavior, after she finished speaking the “dialogue” ensued as follows:

Q: So, you’re unhappy about Employee X working the day shift, correct?
A: Yes
Q: So, you want to have a different shift than Employee X, correct?
A: Yes
Q: And you are suggesting that we move Employee X to second shift, correct?
A: Yes
Q: Are you willing to pay for day care for Employee X’s kids while she works?
A: What?
Q: I asked, are you willing to pay for day care for Employee X to have her kids watched while she works second shift?
A: You crazy or what? That’s not my responsibility! That’s her problem!
Q: Okay, but it wasn’t her problem until you insisted we change her shift. We need help figuring out how to solve this new problem if we do as you ask. Ultimately, you want her to work a different shift than you, right? That’s what you want?
A: That’s right! So she needs to be moved to second shift!
Q: Or, you can be moved to second shift, right? I mean, that will do as you ask, won’t it? You don’t have any kids at home (focus on her “strength”), so it’s what will create the least hardship for everyone, isn’t it (focus on success)? She won’t have to get day care, you won’t have to pay for her day care (win-win), you’ll get to be with your friend, you’ll have what you want (another win-win), right? So, the way I see it we have three choices in front of us: 1) we leave things alone and you leave her alone (best choice), 2) we move her to second shift and you pay her day care (worst choice for complainant and definitely not what she anticipated), or 3) you move to second shift to be with your friend (unlikely, but “accountable” choice). What do you suggest we do from those three options? The choice is yours, all you have to do is tell us what you want us to do, and there’s really no wrong answer here from those three options (all options = success) ….

The silence in the room was deafening. The HR manager later pulled me aside and told me it took everything he had to keep a straight face, and he never in his life saw such an awestruck look on a factory worker’s face. He then thanked me for helping “document” the real issue, and giving him the insight to deal with that worker going forward. I was an instant hero for Employee X, too, as a result, and the HR manager confirmed that there were no more complaints coming from the complainant.

By simply shifting the focus of the problem a little bit, I “helped” the HR manager deal with the stressful complainant, and helped each focus on what they could change and resolve the conflict at work. By intervening on his behalf, I also took on the role of “bad cop” and he was able to preserve his “good cop” image at the plant while also successfully resolving the conflict. Further more, he was able to point to the experience any time other personal conflicts arose, and offered to bring me back anytime to work through the conflicts with the employees. No one took him up on the offer, and I still chuckle when I think back on that episode.

Our brains mimic what we see, so when we spread positivity, and show people alternative ways of thinking through problems, magic happens. I had fun with the exercise above, because it gave me the opportunity to show the complainant how her negative thinking was bringing everyone around her down, when the solution to her “problem” was really simple – I empowered her to think in terms of the hardships she was presenting to others (negativity) and gave her the tools to arrive at a positive outcome, if she was willing to take on some personal accountability in the process. Instead of thinking to myself “this woman is impossible to deal with” I thought instead “how can I empower her to solve this problem herself?” Another priceless leadership moment that I will take with me forever.

So how do you manage your thoughts to ensure positive outcomes? Like any leadership exercise, it’s a marathon, not a sprint. You have to be aware of what you’re doing (that’s where EQ comes in), and examine the triggers that send you into negativity. Change the critical thoughts into goals. Think about your values, and determine what it is you want to be. You don’t have to be positive all the time, nor should you – negative thinking can help you prepare, can also help you see the lighter side of things… It’s the yin to your yang, and helps you aim for balance. But practice your positivity, ask for help (go ahead, guys, ask for directions, it won’t hurt you), have a sense of humor, and enjoy yourself. And remember one thing if nothing else: You cannot be what you cannot see.

The Two Tough Cookies will be publishing a book of their tales shortly, under the title “You Can Not Be What You Can Not See” – look for it from Corporate Compliance Insights, coming soon. 

This publication contains general information only and is based on the experiences and research of the authors. The authors are 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. 

March 25, 2015

Emotional Intelligence and Mindfulness

Tough CookieEd. Note-I am on Spring Break this week. The Two Tough Cookies graciously agreed to once again provide a week of guest posts. 

Remember when I said many “leaders” either aren’t aware, or don’t care, to take a few extra precautions to communicate authentically and in a manner that is meaningful, relevant, and targeted for specific results? That’s where emotional intelligence plays a big part in how you communicate. First and foremost, understand the root origin of the word “Emotion” is “to motivate.” So consider the following: When asked, how do you respond to questions like “How are you” or “How’s Things?” If you answer anything other than “fine” or “great” (or any quirky response you might deploy to illicit a chuckle), know that your response will adversely impact your effectiveness and trust in the organization. People really don’t want to know how sick your kids are, or how awful your commute was. They don’t want facts. They want nice. Drawing from what we just wrote about Appreciative Inquiry, people with a high EQ understand the importance of positivity in getting results. You must understand how your emotional state drives your performance in terms of being effective, being “trusted” and being well-received by others. So learn well how to distance yourself a bit from your reaction “in the moment,” and pay attention to what emotion group your reactions tend to fall into: Pleasant (caring, upbeat, happy), Neutral (anticipation, real interest, surprise), or Unpleasant (anger, disgust, fear). Once you master this, you will be demonstrating effective levels of “Professional Intimacy.

The truth is, our emotions provide a wealth of information about our state of mind in any given situation. It’s our “feedback loop” which we can’t, and shouldn’t, ignore. That sinking pit in your stomach when advised of a pending issue is something that is hard-wired into your brain? You can try to hide your reservations about proceeding, but emotions show even in the most seasoned communicator – we each have our little ‘tells.’ Yale University even has developed a mood meter for your iPhone, and I frequently fondle a “Tensometer” that I have at my desk, a token given to me by a former HR colleague as a joke that tells me, much like a mood ring, if I am tense, or chilled out. I take immense satisfaction knowing that I register most often in the blue and green scales (chilled) and only rarely register in the black and red scales (freaked out). The very act of checking my mood would make me testy if it registered otherwise!

Our emotions serve to motivate us, yes indeed they do. Fight or flight responses are served up based on our emotions. Are we afraid (negative emotion) of the outcome? If so, we might go into avoidance mode (flight). If we are interested in something (neutral emotion) we might try to engage others to explore and learn more. If we are happy about something (like being told you just did a great job on a project), we will strive to repeat that performance (fight), because we like to feel good about ourselves (as we just demonstrated, AI focuses on the positive changes the “pleasant” emotions can elicit).

So what happens when we feel emotions? The brain has two minds – the emotional mind and the rational mind – and unfortunately for many of us (myself included, thanks to my “latin” heritage), the emotional mind responds more quickly than the rational mind. Emotional Intelligence is an exercise in impulse control in favor of the thinking/rational mind to ensure that we don’t allow the emotional mind to hijack the rational mind.  So slow down, step back, when you notice a strong impulse taking over. Pause, be mindful of the moment, take your time. Recognize the effects your emotions may have on your effectiveness as a leader and communicator. A common tip people recommend is to count to 10, but darn, that can be awkward in a meeting. Instead, reach for a glass of water, and take a long, slow draught. While you are swallowing, you can reset the pace of your beating heart, collect your thoughts and emotions, and formulate your response. And remember too – you cannot cry and drink at the same time (just try it, and I promise you won’t be disappointed). That trusty glass of water has saved me on many occasions, and I never go to a meeting without something to drink, just in case I have to check my emotions at the door.

EQ as a communication tool helps you develop the emotional and social skills to establish how well we

  • Perceive and express ourselves
  • Perceive others reactions to ourselves
  • Develop and maintain appropriate social relationships
  • Cope with challenges
  • And use emotional information in an effective and meaningful way.

When deployed successfully, EQ can aid you in self-perception – understanding your emotional triggers and developing coping skills to let the rational mind emerge triumphant. By doing so, you develop adaptive behaviors that aid you in properly expressing your emotions, develop and maintain better personal relationships, and make better decisions as a result. With a strong sense of identity, you begin to develop the tools to accept and respect yourself, which helps you appreciate perceived positives, as well as develop inner strength, self-assuredness, and self-confidence. And it will glow off of you…

Please don’t confuse emotional control with emotional intelligence, however. People with strong emotional control but without EQ often come across as uncaring, cold, unfeeling. Conversely, people with little emotional control come across as too “touchy feely,” or “unstable” or, my personal favorite, a “loose cannon.” Neither extreme make for leaders worth following when trying to effect a positive organizational shift in culture, because neither comes across as trustworthy or authentic. What’s prescribed is a balance of appropriate distance paired with professional intimacy.   People with a high EQ have mastered the art of instilling a sense of caring, while motivating others to act in ways that suit their purpose, never crossing the line of familiarity that breeds contempt.

Another trap to avoid at all costs is passive aggressiveness. I am ashamed to admit I have been guilty of it on many occasions, and didn’t even know it, until someone used the term describing someone else and I had the temerity to finally look it up. To my surprise, I saw myself described, writ large and crystal clear on the pages of Wikipedia. I was decidedly NOT guilty of passive resistance to expected work requirements, opposition, stubbornness, and negative attitudes in response to requirements for normal performance levels expected of others. Definitely not me. I am a renowned overachiever, and but for my one run-in at my previous employer, I have always received high performance ratings. What I was guilty of, however, was conflict avoidance, rarely saying what I truly felt whenever I felt a disservice had been done to me, or my colleagues. I had a hard time asking for what I felt was right, and as a result, did not come across as powerfully as I could have or should have, given my role. I have since learned my lesson that you can’t get what you want if you don’t ask for it, and there is a proper way to express your feelings and not alienate the world, but boy, it took me a LONG time to get there.

So how does one get started with EQ? There are gobs of resources on the internet – just search ‘emotional intelligence’ (with quotes to narrow your results), and you are on your way. Take this EQ test to determine your EQ at home. But while you are at it, I suggest you look at “mindfulness” as well, as an EQ companion primer to help you practice impulse control, which will serve you well when you want your rational mind to speak first.

Worksheet in Two Tough Cookies Guest Posts-Spring Break 2015

This publication contains general information only and is based on the experiences and research of the authors. The authors are 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. 

March 19, 2015

Ingots of Gold & SEC FCPA Enforcement – Communication – Part IV

Ingots of GoldToday I want to use the Christie’s story Ingots of Gold as an introduction to some of the regular communications that the Securities and Exchange Commission (SEC) representatives frequently provide in public forums, regarding their views on Foreign Corrupt Practices Act (FCPA) enforcement and, more importantly for the compliance practitioner, FCPA compliance. In this story, told by Miss Marple’s friend, he was spending a holiday in Cornwall with an acquaintance called John Newman. It involved a shipwreck and, as the title foretold, valuable cargo. After a stormy night Newman was missing but was later found bound and gagged in a ditch. It is revealed that Newman used this as ruse to cover his tracks from a theft of gold, which, of course, Miss Marple resolves when no one else can do so.

It was the language of this story that struck me. For as famous as Agatha Christie is for her puzzles, she had a great facility for language. At one point Miss Marple said, “You wouldn’t like my opinion, dear. Young people never do, I notice.” Later she describes the antagonist with the following, “his mind might run in strange, unrecognized channels”. Fortunately for the compliance community, one of the significant ways that the SEC communicates with compliance practitioners is through public speeches. We were recently treated to another such example when Andrew Ceresney, the SEC Director, Division of Enforcement, spoke at CBI’s Pharmaceutical Compliance Congress in Washington DC. Ceresney provided some clear guidelines for the compliance practitioner about what the SEC expects from companies in the area of FCPA compliance. More specifically he talked about some specific bribery schemes the SEC has seen in FCPA enforcement actions involving the pharmaceutical industry. These examples provided scenarios that any compliance practitioner in the pharmaceutical space can investigate for their organization.

Pharmaceutical Industry Bribery Schemes

Ceresney discussed ‘Pay-to-Prescribe’ bribery schemes where physicians and hospitals are paid bribes in “exchange for prescribing certain medication, or other products such as medical devices.” These schemes can involve payments of cash or other forms of non-cash benefits such as gifts, travel and entertainment. He described an example where a company “invited “high-prescribing doctors” in the Chinese government to club-like meetings that included extensive recreational and entertainment activities to reward doctors’ past product sales or prescriptions.” Another such scheme involved a running total of points for doctors who prescribed a company’s products, which could later be cashed in for items of value. Another involved a rebate of part of a hospitals overall purchase to certain doctors or hospital administrators.

Another form of bribery was seen where a company would direct charitable donations to the decision-makers “pet” charity. In a couple of FCPA enforcement actions, the charity had nothing to do with the pharmaceutical industry but in one case there was “a purported donation of nearly $200,000 to a public university to fund a laboratory that was the pet project of a public hospital doctor. In return, the doctor agreed to provide business to” the company in question. The point of all of these examples is that “that bribes come in many shapes and sizes, and those made under the guise of charitable giving are of particular risk in the pharmaceutical industry. So it is critical that we carefully scrutinize a wide range of unfair benefits to foreign officials when assessing compliance with the FCPA – whether it is cash, gifts, travel, entertainment, or charitable contributions.”

Compliance Programs

I certainly agree with Ceresney, only adding that I do not think you can say it too loud or too often, when he stated, “The best way for a company to avoid some of the violations that I have just described is a robust FCPA compliance program.” It all begins with a risk assessment so that you will understand what your company’s risks are and you can manage them accordingly through your compliance program. From there Ceresney said, “The best companies have adopted strong FCPA compliance programs that include compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance.” He also specifically mentioned third parties, as they are still perceived to be the highest risk in any FCPA risk matrix. He stated, “To properly combat against these abuses, a compliance program must thoroughly vet its third-party agents to include an understanding of the business rationale for contracting with the agent. Appropriate expense controls must also be in place to ensure that payments to third-parties are legitimate business expenses and not being used to funnel bribes to foreign officials.”

Self-Reporting and Cooperation

Next Ceresney turned to self-reporting and cooperation. After initially noting that the current enforcement environment is greatly aided by self-reporting, he went on to explain why it is in a company’s interest to do so. Beyond the simple credit a company receives for self-reporting, by doing so “parties are positioned to also help themselves by aggressively policing their own conduct”. The SEC will also “continue to find ways to enhance our cooperation program to encourage issuers, regulated entities, and individuals to promptly report suspected misconduct. The Division has a wide spectrum of tools to facilitate and reward meaningful cooperation, from reduced charges and penalties, to non-prosecution or deferred prosecution agreements in instances of outstanding cooperation.” He ended this section of his remarks with a couple of thoughts that I believe succinctly provided the SEC’s position on self-reporting and cooperation. First he said “When I was a defense lawyer, I would explain to clients that by the time you become aware of the misconduct, there are only two things that you can do to improve your plight – remediate the misconduct and cooperate in the investigation.” He then ended with the following, “Companies that choose not to self-report are thus taking a huge gamble because if we learn of the misconduct through other means, including through a whistleblower, the result will be far worse. “

Internal Controls 

Ceresney had some interesting remarks around internal controls. He said they were in the “context of financial reporting”; however I found that they might well have significant implications for the compliance practitioner. I thought his money line was “Internal control problems have been prominently featured in recent enforcement cases we have brought in the financial reporting area, even in cases without accompanying charges of fraud.  This reflects our view that adequate internal controls are the building blocks for accurate financial reporting and can prevent fraudulent activity.” While the specified area of these remarks was around SOX §§302 and 404, I think this portends directly to internal controls under the FCPA.

He went on to state, “my key takeaway is that senior leadership of companies should place strong emphasis on the importance of designing and implementing strong internal controls. Senior officers need to ask questions about what they are being told about their internal controls – but perhaps more importantly, ask questions about the things that are not being reported to them. Dropping those occasional inquiries into conversations where they won’t be expected sends a powerful message that you want these issues to be on your employees’ minds. And what is needed is not just involvement from senior leadership but also from the audit committee. Instead of a check-the-box mentality, it is important to use careful thought at the outset to how controls should be designed in light of a firm’s business operations. This entails an up-front assessment of financial reporting risks, designing controls that address those risks, and ensuring that the resulting controls are well documented and communicated. And, as the company’s business evolves and changes, management must consider whether the existing internal controls are appropriate, or need to be enhanced or changed. Appropriate resources and attention also need to be devoted to monitoring those controls for effectiveness and making changes as needed.” Every time you see the words ‘financial’ simply substitute compliance and I think you will see where the SEC is headed in its internal controls enforcement of the FCPA.

Just as Agatha Christie communicated with her audience in ways broader than simply puzzles, through her great facility for delicious language, the SEC communicates in substantive ways with the compliance community through its speeches. You really do not have to read the tea leaves when you have such a clear message as was delivered by Ceresney at the CBI conference. Moreover, with all the sites that reported on it, talked about it and even linked to the printed text, you did not have to pay to attend. It is all there for you to read and to read for free.

For a copy of the text of Ceresney’s remarks, click here.

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

 

 

March 12, 2015

Protections for CCOs from Wrongful Termination

Wrongful TerminationThis week the Houston Texans unceremoniously cut the franchise’s greatest player in its short history, receiver Andre Johnson. This was after his being hauled into the office of the head coach and being told that he would only need to work half as hard next year. As reported by Jerome Solomon in the Houston Chronicle article entitled “Move inevitable, but team bungles its handling”, Head Coach Bill O’Brien told Johnson that his catch total would drop from the 84 he has averaged in his 12 year career with the Texans down to “around 40 passes next season.” But O’Brien went on to add the team’s certain Hall of Fame receiver “wasn’t likely to be a starter next season, definitely not for all of the games.” So much for playing your best player at his position on a full-time basis, but hey, at least the information was made public.

Now imagine you are a Chief Compliance Officer (CCO) and have been one of your company’s senior management for the better part of the past 12 years. While you may not have been the most important member of the management team you certainly have helped navigate the company through rough compliance waters. Now imagine the company Chief Executive Officer (CEO) who tells you that although he has no one in mind to replace you (other than a less experienced and a smaller-salaried compliance specialist) your services will only be needed half the time in the coming year. What if this is in response to advice the head of the company did not like? What should the response be?

You can consider the departure from MF Global of its Chief Risk Officer, the financial services equivalent of a CCO. As reported in a New York Times (NYT) article entitled “MF Global’s Risk Officer Said to Lack Authority” Ben Protess and Azam Ahmed reported that the company replaced its Chief Risk Officer, Michael Roseman, after he “repeatedly clashed with Mr. Corzine [the CEO] over the firm’s purchase of European sovereign debt.” He was given a large severance package and left the company. When he left, there was no public reason given. His replacement was brought into the position with reduced authority.

If you are a public company, you may well need to heed the advice of fraud and compliance expert Jonathan Marks, a partner at Crowe Horwath LLP, who advocates that any time a CCO, a key executive, is dismissed it should be an 8K reporting event because the departure may be a signal of a change in the company’s attitude towards compliance or an alleged ethical breach had taken place. A similar view was expressed by Michael W. Peregrine in a NYT article entitled “Another View: MF Global’s Corporate Governance Lesson”, where he wrote that a “compliance officer is the equivalent of a “protected class” for governance purposes, and the sooner leadership gets that, the better.” Particularly in the post Sarbanes-Oxley world, a company’s CCO is a “linchpin in organizational efforts to comply with applicable law.” When a company fires (or asks him/her to resign), it is a significance decision for all involved in corporate governance and should not be solely done at the discretion of the CEO alone.

In its Code of Ethics for Compliance and Ethics Professionals, the Society for Corporate Compliance and Ethics (SCCE) has postulated Rule 1.4, which reads, “If, in the course of their work, CEPs become aware of any decision by their employing organization which, if implemented, would constitute misconduct, the professional shall: (a) refuse to consent to the decision; (b) escalate the matter, including to the highest governing body, as appropriate; (c) if serious issues remain unresolved after exercising “a” and “b”, consider resignation; and (d) report the decision to public officials when required by law.” As commentary to this rule, the SCCE said, “The duty of a compliance and ethics professional goes beyond a duty to the employing organization, inasmuch as his/her duty to the public and to the profession includes prevention of organizational misconduct. The CEP should exhaust all internal means available to deter his/her employing organization, its employees and agents from engaging in misconduct. The CEP should escalate matters to the highest governing body as appropriate, including whenever: a) directed to do so by that body, e.g., by a board resolution; b) escalation to management has proved ineffective; or c) the CEP believes escalation to management would be futile. CEPs should consider resignation only as a last resort, since CEPs may be the only remaining barrier to misconduct. A letter of resignation should set forth to senior management and the highest governing body of the employing organization in full detail and with complete candor all of the conditions that necessitate his/her action. In complex organizations, the highest governing body may be the highest governing body of a parent corporation.”

What about compensation? The Department of Justice (DOJ) has made clear that it expects a CCO to resign if the company refuses advice and violates the Foreign Corrupt Practices Act (FCPA). The former head of the DOJ-FCPA unit Chuck Duross went so far as to compare CCOs and compliance practitioners to the Texans at the Alamo. To be fair to Duross, I think he was focusing more on the line in the sand part of the story, while I took that to mean they were all slaughtered for what they believed in. But whichever interpretation you may choose to put on it, the DOJ clearly expects a CCO to stand up and if a CEO does not like what they say, he or she must resign. This puts CCOs and compliance practitioners in a very difficult position, particularly if there is no exit compensation for doing the right thing by standing up.

I think the next step should be for the DOJ and Securities and Exchange Commission (SEC) to begin to discuss the need for contractual protection of CCOs and other compliance practitioners against retaliation for standing up against corruption and bribery. The standard could simply be one that protects a CCO and other compliance practitioners against termination without cause. Just as the SEC is investigating whether companies are trying to muzzle whistleblowers through post-employment Confidentiality Agreements, I think they should consider whether CCOs and other compliance practitioners need more employment protection. I think the SEC should also consider the proposals of Marks regarding the required 8K or other public reporting of the dismissal or resignation of any CCO. Finally, I would expand on Peregrine’s suggestion and require that a company Board of Directors approve any dismissal of a CCO. With these protections in place, a CCO or compliance practitioner would have the ability to confront management who might take business decisions that violate the FCPA.

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

 

 

March 10, 2015

Taking the Rolls Out for a Spin? Maybe You Should Avoid Brazil

Rolls RoyceJust as the GlaxoSmithKline PLC (GSK) case in China heralded a new day in international anti-corruption enforcement, the Petrobras case may be equally important going forward. The scope and breadth of the investigation is truly becoming worldwide. Last fall, one of the first questions raised was why was the US Securities and Exchange Commission (SEC) was investigating the company as it is headquartered in Brazil. While there is subsidiary Petrobras USA, which is a publicly listed company, it was not immediately apparent what role the US entity might have had in the bribery scandal, which was apparently centered in Brazil. However some recent revelations from across the pond may shed some light on the topic.

As with any corruption scandal there are both bribe payors and bribe receivers. The Petrobras corruption scandal initially focused on the bribe receivers in Petrobras. But last month one of the key bribe receivers, who is now cooperating with the Brazilian authorities, Pedro Barusco has identified the UK Company Rolls-Royce Group PLC as a bribe payor. As reported in the Financial Times (FT) by Samantha Pearson and Joe Leahy, in an article entitled “Rolls-Royce accused in Petrobras scandal”, Barusco has “told police he personally received at least $200,000 from Rolls-Royce — only part of the bribes he alleged were paid to a ring of politicians and other executives at the oil company.”

However the allegations moved far beyond simply Rolls-Royce. The article also reported, “Brazil’s authorities are already investigating allegations that Petrobras officials accepted bribes from SBM Offshore, a Netherlands-based supplier of offshore oil vessels. SBM has said it is co-operating with the investigation. Units of two Singaporean companies, Keppel Corporation and Sembcorp Marine, along with three Brazilian shipbuilders with large Japanese shareholders, have also been accused of participating in the bribes-for-contracts scheme.” Finally, they reported that “Mr Barusco alleged that his friend Luiz Eduardo Barbosa, a former executive of Swiss engineering group ABB, was responsible for organising bribes from Rolls-Royce, SBM and Alusa, a Brazilian construction company.”

Rolls-Royce is currently under investigation by the UK Serious Fraud Office (SFO) and Department of Justice (DOJ) for allegations of corruption in several countries. Katherine Rushton, reporting in The Telegraph in an article entitled “Rolls-Royce investigated in US over bribery claims”, said “Rolls-Royce is being investigated by the US Department of Justice (DoJ), following allegations that its executives bribed officials in Indonesia, China and India in order to win lucrative contracts.” She cited to the company’s annual report for the following, ““The group is currently under investigation by law enforcement agencies, primarily the Serious Fraud Office in the UK and the US Department of Justice. Breaches of laws and regulations in this area can lead to fines, penalties, criminal prosecution, commercial litigation and restrictions on future business.””

But more than simply Rolls-Royce, readers will recognize several names from a rogue gallery of companies either implicated with corruption violations or under investigation. SBM Offshore was a poster child last year for the DOJ deferring to foreign authorities to prosecute claims of bribery and corruption. I wonder if SBM Offshore attested in its settlement documents with the relevant Netherlands authorities that it had not engaged in any other bribery and corruption beyond that which was the basis of its settlement? I wonder if the company made any such averments to the DOJ? I wonder if the DOJ will make any such deferments again given the SBM Offshore settlement with the Dutch authorities? What about ABB?

In addition to the above, SBM Offshore may be the most relevant example in the debate of an international double jeopardy standard. Jordan Moran, writing in the Global Anti-Corruption Blog, has consistently argued that international double jeopardy is a bad idea. Most recently, in an article entitled “Why International Double Jeopardy Is a Bad Idea”, he said, “when it comes to the global fight against transnational bribery, double jeopardy probably isn’t all it’s cracked up to be. To begin, most arguments calling for the U.S. and other OECD member countries to recognize international double jeopardy are nonstarters.”

Also interesting was the reference to ABB as the company went through its own Foreign Corrupt Practices Act (FCPA) enforcement action. As reported by Dick Cassin, in a 2010 FCPA Blog post entitled “ABB Reaches $58 Million Settlement (Updated)”, the company “reached a settlement Wednesday with the DOJ of criminal FCPA charges and will pay a fine $19 million. And in resolving civil charges with the SEC, the company will disgorge $22.8 million and pay a $16.5 million civil penalty. ABB Ltd’s U.S. subsidiary, ABB Inc., pleaded guilty to a criminal information charging it with one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violate the FCPA. The court imposed a sentence that included a criminal fine of $17.1 million.” There was no information at that time as to whether the individual that Barusco named as the bribe payment facilitator, one Luiz Eduardo Barbosa, was involved in the prior ABB enforcement action in any way.

We have one or more companies, who are under current DOJ investigations, now being investigated in connection with the Petrobras bribery scandal. There are also companies that have gone through prior bribery and corruption enforcement actions now identified in the scandal. All of this now leads me to have some type of understanding of why the SEC might be investigating Petrobras USA. First, and most probably, it would be to see if the US entity was involved in the apparent decade long bribery scheme that the Brazilian parent now finds itself embroiled in. What if the US subsidiary was paying bribes to its parent to obtain or retain a benefit? Next would be any evidence of violations of the accounting provisions or internal controls requirements found in the FCPA. Finally, the SEC might be looking at Petrobras USA to see who its suppliers might be and if those companies merited investigation. Similar to looking that the Panalpina customer lists the SEC could review the Petrobras USA contractor list.

Just as GSK heralded the first time the Chinese government prosecuted a western company for violation of Chinese law, I believe the Petrobras bribery scandal will be a watershed. The outpouring of information and allegations at this time point to a multi-year, truly worldwide, bribery scheme. While it may in part have been Petrobras officials shaking down contractors for payments, it really does not matter under the FCPA or UK Bribery Act. If any company subject to either or both of those laws paid monies to Petrobras I expect they will be fully prosecuted. Further, given the arguments against an international double jeopardy standard made by Moran and others AND the apparent recidivism of prior bribery offenders, some companies may be in for a long and expensive ride.

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

© Thomas R. Fox, 2015

March 9, 2015

Who is Responsible for Complying with the FCPA?

7K0A0014-2The Department of Justice (DOJ) still faces criticism over its Foreign Corrupt Practices Act (FCPA) enforcement strategy. Some decry that it is too aggressive, that the DOJ has moved into waters Congress never intended the DOJ to navigate into regarding the FCPA. Others worry that the DOJ, through its use of settlement mechanisms such as Deferred Prosecution and Non-Prosecution Agreements (DPAs and NPAs), let corporations off to easily with fines and other monetary penalties being the equivalent of a slap on the wrist. Yet another school of thought says that it is up to the DOJ to tell companies how not to engage in bribery and corruption by specifying precisely what type of anti-corruption compliance program to put into effect.

One thing these commentariat all have in common is that they generally do not look to those responsible for obeying the law, i.e. companies and persons who are subject to the FCPA, for their responsibility of complying with the law. Such failure seems to me to be sadly misplaced. But it is not simply Mike Volkov’s FCPA Paparazzi who fail to assess a corporation’s role in their failure to comply with the law; unfortunately it is also company leaders themselves.

We recently were treated to another such display of ‘What Me Worry?’ mentality by HSBC Chief Executive Officer (CEO) Stuart Gulliver when he said, “Can I know what every one of 257,000 people is doing?” Leaving aside the issue of whether a corporate CEO who has signed one of the largest DPAs in the history of the world (for money-laundering, not FCPA violations); should admit he (1) he doesn’t care or (2) his company is too unwieldy for it to obey the laws that you and I follow everyday; Gulliver inadvertently hit upon one of the key concepts of a best practices compliance program. That concept is a well-rounded program that assures compliance, not some all knowing, all seeing narcissist at the top.

In a Financial Times (FT) article entitled “Too big to manage”, Andrew Hill blasted Gulliver’s statement as “disingenuous” but went on to state, “Knowing what every employee is doing is not the leader’s responsibility. But by using a combination of the right structure, the latest technology and, above all, by imbuing a company with the correct culture and reinforcing regular communication with visits to the shop floor, he or she should be able to limit the chance of a major scandal.” Hill quoted management thinker Henry Mintzberg for the following, ““You can’t excuse [scandals] by saying we have so many employees. You . . . have got to be on the ground to have a sense of what your organisation is all about.””

This means a CEO is not required to know everything but he does need to have an overall sense of whether his company is moving in a direction to do things such as follow the law. I would say this is even truer when you have promised (yet again) in a DPA that your company will follow the law. It also means that the leader sets the tone. If your leader takes the position that he or she cannot know what everyone is doing; that tone will be communicated down to the field troops but the message will be that said maximum leader does not care what the middle and lower levels are doing. Hence the DOJ would say that it all starts with Tone at the Top. Sadly Gulliver does not seem to acknowledge, let alone understand, that issue.

But more than simply having a leader that cares and is engaged; Gulliver’s statement belies other aspects of a best practices compliance program. Technology provides a mechanism for oversight of a compliance regime. Under the FCPA Ten Hallmarks of an Effective Compliance Program, monitor is 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’ve 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. Hill 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.”

I would advocate that it is the interplay of the right message, tools in place to communicate and enforce the message and then oversight to ensure compliance with the message that allows a 250,000 plus employee base company to have a chance to operate in compliance with their legal obligations. Echoing this maxim, Hill quoted Rick Goings, Chairman and CEO of Tupperware Brands Corporation, for the following, “Wars are won not by generals, but by non-commissioned officers. If you have the right kind of structure…and behind that a value system, I think you can do it.”

HSBC continues to be the poster child for compliance lessons learned, whether intentional or not. Hill concluded his piece with the following, “The lesson may be that, irrespective of the size of the company, executives who lose touch with how their staff are using the culture they preach are courting embarrassment and scandal. The trend towards large companies operating through smaller units, with more autonomy and accountability for their actions, does not absolve leaders from meeting their traditional responsibilities to know what is happening on the frontline. As Prof Fischer suggests, they should manage according to the old Russian proverb that Ronald Reagan adopted when dealing with the Soviet Union in the 1980s: trust, but verify.”

There is a plethora of compliance regimes that companies can look to in order to create a best practices compliance program. Simply put, it is a relatively straightforward exercise; perhaps not easy but certainly there are well-articulated compliance programs that companies can follow. To continue to criticize the DOJ (and Securities and Exchange Commission) for failing to communicate what they wish to see in a best practices compliance program, simply fails to take into account the responsibility that corporations have in complying with US laws. The information is out there in abundance. Even a weekend article in the FT lays it out 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, 2015

March 4, 2015

Minnie Minoso Broke Barriers; Goodyear Pushes Compliance Forward

Minnie MinosoYesterday we celebrated the hard-nosed playing style of Anthony Mason, who recently passed away. Today we honor a true pioneer in professional baseball, Minnie Minoso, or Mr. White Sox. Minoso was the first black Cuban to play in Major League Baseball (MLB) when he debuted for the Cleveland Indians in 1949. In 1951, he was traded to the Chicago White Sox and he became a southside fixture for the rest of the decade. While his numbers were less than 2000 hits and 200 home runs, he was a fearless and speedy base runner and a nine-time All Star. Similarly to Mr. Cub, Ernie Banks, the Chicago White Sox erected a statue in tribute to Mr. White Sox outside their ballpark. Even President Obama was moved to release a statement about Minoso saying in part, “Minnie may have been passed over by the Baseball Hall of Fame during his lifetime, but for me and for generations of black and Latino young people, Minnie’s quintessentially American story embodies far more than a plaque ever could.”

The contribution of Minoso in the exorable march of MLB towards integration informed part of my reading of the recent Goodyear Tire & Rubber Company (Goodyear) Foreign Corrupt Practices Act (FCPA) enforcement strategy of the Securities and Exchange Commission (SEC). This enforcement action was a solo effort by the SEC; there was no corresponding Department of Justice (DOJ) criminal enforcement action. So following this past fall’s triumvirate of SEC enforcement actions involving Smith & Wesson, Layne Christenen and Bio-Rad, the SEC continues to bring enforcement actions based upon the books and records and internal controls civil requirements of the FCPA. Therefore the Goodyear enforcement action is one which provides many lessons to be learned by the Chief Compliance Officer (CCO) or compliance practitioner going forward and should be studied quite carefully by anyone in the compliance field.

The Bribery Schemes

As set out in the SEC Cease and Desist Order (the Order), Goodyear used several different bribery schemes in different countries, all violating the FCPA. In Kenya, Goodyear became a minority owner in a locally owned business which apparently paid bribes the old-fashioned way, in cash to the tune of over $1.5MM, yet falsely recorded the cash bribe payments as “promotional expenses.” In Angola, a wholly-owned subsidiary of the company paid approximately $1.6MM in bribes by falsely marking up invoices with “phony freight and customs clearing costs.” The subsidiary made the payments in cash and through wire transfers to various government officials. Finally, the subsidiary apparently cross-referenced the bribes it paid as follows, “As bribes were paid, the amounts were debited from the balance sheet account, and falsely recorded as payments to vendors for freight and clearing costs.” In other words a complete, total and utter failure of internal controls to forestall any of the foregoing.

Internal Controls Violations

The Order set out the section of the FCPA that the company violated. Regarding the internal controls, the Order stated, “Under Section 13(b)(2)(B) of the Exchange Act issuers are required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.”

The Comeback

Equally important for the CCO or compliance practitioner are the specific steps that Goodyear took to remediate the situation it found itself in through these illegal payments. When the company received the initial reports about “the bribes, Goodyear promptly halted the improper payments and reported the matter to Commission staff.” Moreover, the company also cooperated extensively with the SEC. As noted in the Order, “Goodyear also provided significant cooperation with the Commission’s investigation. This included voluntarily producing documents and reports and other information from the company’s internal investigation, and promptly responding to Commission staff’s requests for information and documents. These efforts assisted the Commission in efficiently collecting evidence including information that may not have been otherwise available to the staff.”

In the area of internal remediation, regarding the entity in Kenya, where Goodyear was a minority owner in a local business, the company got rid of its from its corrupt partners by divesting its interest and ceasing all business dealings with the company. Goodyear is also divesting itself of its Angolan subsidiary. The Order also noted that Goodyear had lost its largest customer in Angola when it halted its illegal payment scheme. The company also took decisive disciplinary action against company employees “including executives of its Europe, Middle East and Africa region who had oversight responsibility, for failing to ensure adequate FCPA compliance training and controls were in place at the company’s subsidiaries in sub-Saharan Africa.”

Finally, in a long paragraph, the SEC detailed some of the more specific steps Goodyear took in the area of remediation. These steps included:

  • Improvements to the company’s compliance function not only in sub-Saharan Africa but also world-wide;
  • In Africa, both online and in person training was beefed up for “subsidiary management, sales and finance personnel”;
  • Regular audits were instituted by the company’s internal audit function, which “specifically focused on corruption risks”;
  • Quarterly self-assessment questionnaires were required of each subsidiary regarding business with government-affiliated customers;
  • For each subsidiary, there were management certifications required on a quarterly basis that required, “among other things controls over financial reporting; and annual testing of internal controls”;
  • Goodyear put in a “new regional management structure, and added new compliance, accounting, and audit positions”;
  • The company made technological improvements to allow the company to “electronically link subsidiaries in sub-Saharan Africa to its global network”;

However these changes were not limited to improvement of Goodyear’s compliance function in Africa only. At the corporate headquarters, Goodyear created the new position of “Vice President of Compliance and Ethics, which further elevated the compliance function within the company”. There was expanded online and in-person training at the corporate headquarters and other company subsidiaries. Finally, the company instituted a new “Integrity Hotline Web Portal, which enhanced users’ ability to file anonymous online reports to its hotline system. With that system, Goodyear is also implementing a new case management system for legal, compliance and internal audit to document and track complaints, investigations and remediation.”

The specific listing of the compliance initiatives or enhancements that Goodyear pushed after its illegal conduct came to light is certainly a welcomed addition to SEC advice about what it might consider some of the best practices a company may engage in around its compliance function. Moreover, this specific information can provide audit and information to the compliance practitioner of strategies that he or she might use to measure a company’s compliance program going forward. The continued message of cooperation and remediation as a way to lessen your overall fine and penalty continues to resonate from the SEC. Finally, just as Minoso helped move forward the integration of baseball and civil rights in general, the Goodyear FCPA enforcement action demonstrates that the SEC will continue to prosecute cases around the failure of or lack of internal controls. The clear import is that a company must have an appropriate compliance internal control regime in place. We are moving towards a strict liability standard under the FCPA around internal controls, which I will have much more to say about later but for now – you have been warned.

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

March 2, 2015

Farewell to Mr. Spock and Risk Assessment Under COSO

Mr. SpockLeonard Nimoy died last Friday. He will be forever associated with the role of Mr. Spock in the original Star Trek television show which premiered in 1966. The original series ran for only three years but had a full life in syndication up through this day. He also reprised the role in six movies featuring the crew of the original series and in the recent reboot.

Mr. Spock was about a personal character for me as I ever saw on television. For a boy going through the insanity of adolescence and the early teen years, I found Mr. Spock and his focus on logic as a way to think about things. He pursued this path while dealing with his half human side, which compelled emotions. This focus also led me to explore Mediations by Marcus Aurelius. But more than simply logic and being a tortured soul, Mr. Spock and his way looking at things and Star Trek with its reach for the stars ethos inspired me when it came out and still does to this day.

Mr. Spock and his pursuit of logic inform today’s blog post. Every compliance practitioner is aware of the need for a risk assessment in any best practices compliance program; whether that program is based on the US Foreign Corrupt Practices Act (FCPA), UK Bribery Act or some other compliance law or regime. While the category of risk assessment is listed as Number 3 in the Ten Hallmarks of an Effective Compliance Program in the FCPA Guidance, both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) intone that your compliance journey begins with a risk assessment for two basic reasons. The first is that you must know the corruption risks your company faces and second, a risk assessment is your road map going forward to manage those risks.

Interestingly Risk Assessment is the second objective in the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Cube. In its volume entitled “Internal Control – Integrated Framework”, herein ‘the Framework Volume’, it recognizes that “every entity faces a variety of risks from external and internal sources.” This objective is designed to provide a company with a “dynamic and iterative process for identifying and assessing risks.” For the compliance practitioner none of this will sound new or even insightful, however the COSO Framework requires a component of management input and oversight that was perhaps not as well understood. The Framework Volume says that “Management specifies objectives within the category relating to operations, reporting and compliance with such clarity to be able to identify and analyze risks to those objectives.” But management’s role continues throughout the process as it must consider both internal and external changes which can effect or change risk “that may render internal controls ineffective.” This final requirement is also important for any anti-corruption compliance internal control. Changes are coming quite quickly in the realm of anti-corruption laws and their enforcement. Management needs to be cognizant of these changes and changes that its business model may make in the delivery of goods or services which could increase risk of running afoul of these laws.

The objective of Risk Assessment consists of four principles. They are:

Principle 6 – “The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to the objectives.”

Principle 7 – “The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed.”

Principle 8 – “The organization considers the potential for fraud in assessment risks to the achievement of objectives.”

Principle 9 – “The organization identifies and assesses changes that could significantly impact the system of internal control.”

Principle 6 – Suitable Objectives 

Your risk analysis should always relate to stated objectives. As noted in the Framework Volume, it is management who is responsible for setting the objectives. Rittenberg explained, “Too often, an organization starts with a list of risks instead of considering what objectives are threatened by the risk, and then what control activities or other actions it needs to take.” In other words your objectives should form the basis on which your risk assessments are approached.

Principle 7 – Identifies and Analyzes Risk 

Risk identification should be an ongoing process. While it should begin at senior management, Rittenberg believes that even though a risk assessment may originate at the top of an organization or even in an operating function, “the key is that an overall process exists to determine how risks are identified and managed across the entity.” You need to avoid siloed risks at all costs. The Framework Volume cautions that “Risk identification must be comprehensive.”

Principle 8 – Fraud Risk 

Every compliance practitioner should understand that fraud exists in every organization. Moreover, the monies that must be generated to pay bribes can come from what may be characterized as traditional fraud schemes, such as employee expense account fraud, fraudulent third party contracting and payments and even fraudulent over-charging and pocketing of the differences in sales price. This means that is should be considered as an important risk analysis. It is important that any company follow the flow of money and if the Fraud Triangle is present, management be placed around such risk.

Principle 9 – Identifies and Analyzes Significant Change

It really is true that if there is one constant in business, it is that there will always be change. The Framework Volume states, “every entity will require a process to identify and assess those internal and external factors that significantly affect its ability to achieve its objectives. Rittenberg intones that companies “should have a formal process to identify significant changes, both internal and external, and assess the risks and approaches to mitigate the risk” in a timely manner.

Today’s blog post is a tribute to Mr. Spock as he, Star Trek and its characters continue to teach us lessons which we can apply in business going forward. It is the process of compliance which informs your program going forward. A risk assessment is recognized by sources as diverse as the DOJ, SEC and COSO as a necessary step. Just as Mr. Spock, the Science Officer onboard the Enterprise, was required to assess the risk to the ship and crew from a scientific perspective, a risk assessment can give you the tools to not only assess the corruption compliance risk to your company but a road map to managing that risk. So farewell to my long time friend Mr. Spock, you gave to me more than I ever gave back to you. I can think of no more fitting tribute to Spock than to say Live Long and Prosper.

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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