FCPA Compliance and Ethics Blog

August 27, 2014

Risk Assessments-the Cornerstone of Your Compliance Program, Part II

7K0A0501Ed. Note-Today, I continue my three-part posts on risk assessments. Today I take a look at some different ideas on how you might go about assessing your risks.

One of the questions that I hear most often is how does one actually perform a risk assessment? Mike Volkov has suggested a couple of different approaches in his article “Practical Suggestions for Conducting Risk Assessments.” In it Volkov differentiates between smaller companies which might use some basic tools such as “personal or telephone interviews of key employees; surveys and questionnaires of employees; and review of historical compliance information such as due diligence files for third parties and mergers and acquisitions, as well as internal audits of key offices” from larger companies. Such larger companies may use these basic techniques but may also include a deeper dive into high risk countries or high risk business areas. If your company’s sales model uses third party representatives, you may also wish to visit with those parties or persons to help evaluate their risks for bribery and corruption that might well be attributed to your company.

Another noted compliance practitioner, William Athanas, in an article entitled “Rethinking FCPA Compliance Strategies in a New Era of Enforcement”, took a different look at risk assessments when he posited that companies assume that FCPA violations follow a “bell-curve distribution, where the majority of employees are responsible for the majority of violations.” However Athanas believed that the distribution pattern more closely follows a “hockey-stick distribution, where a select few…commit virtually all violations.” Athanas suggests assessing those individuals with the opportunity to interact with foreign officials have the greatest chance to commit FCPA violations. Diving down from that group, certain individuals also possess the necessary inclination, whether a personal financial incentive linked to the transaction or the inability to recognize the significant risks attendant to bribery.

To assess these risks, Athanas suggested an initial determination of the touch-points where the operations of manufacturing companies “intersect with foreign officials vested with discretionary authority.” This will lead to an understanding of the individuals who hold these roles within a company. This means that a simple geographic analysis is but a first step in a risk analysis. Thereafter companies should also focus on “those who authorize and record disbursements, as well as those who represent the company in situations where they may be solicited for payments.” The next step is to determine those company employees who may have the incentive “to pay bribes on the Company’s behalf.” This incentive can come from a variety of forms; such as a company compensation plan, which rewards high producers; employees who do not understand the risk they place the company (and themselves) in by engaging in tactics which violate the FCPA; and, finally, those employees who seek to place their individual interests above those of the company.

Athanas concludes by noting that this limited group of employees, or what he terms the “shaft of the hockey-stick”, is where a company should devote the majority of its compliance resources. With a proper risk assessment, a company can then focus its compliance efforts on “intensive training sessions or focused analysis of key financial transactions — on those individuals with the opportunity and potential inclination to violate the statute.” This focus will provide companies the greatest “financial value and practical worth of compliance efforts.”

Lawler suggests that you combine the scores or analysis you obtain from the corruption markers you review; whether it is the DOJ list or those markers under the UK Bribery Act. From there, create a “rudimentary risk-scoring system that ranks the things to review using risk indicators of potential bribery.” This ensures that high-risk exposures are done first and/or given more time. As with all populations of this type, there is likely to be a normal or ‘bell curve’ distribution of risks around the mean. So 10-15% of exposure falls into the relative low-risk category; the vast majority (70-80%) into the moderate-risk category; and the final 10-15% would be high risk.

Earlier this week I wrote a piece about the Desktop Risk Assessment. I will not repeat the entire blog post here but only use some of the areas you could assess as a starting point for discussion. If you do not have the time, resources or support to conduct a worldwide risk assessment annually, you can take a different approach. You might try assessing other areas annually through a more limited focused risk assessment, which a colleague of mine calls the Desktop Risk Assessment. Some of the areas that such a Desktop Risk Assessment could inquire into might be the following:

  • Are resources adequate to sustain a culture of compliance?
  • How are the risks in the C-Suite and the Boardroom being addressed?
  • What are the FCPA risks related to the supply chain?
  • How is risk being examined and due diligence performed at the vendor/agent level? How is such risk being managed?
  • Is the documentation adequate to support the program for regulatory purposes?
  • Is culture, attitude (tone from the top), and knowledge measured? If yes, can we use the information enhance the program?
  • Disciplinary guidelines – Do they exist and has anyone been terminated or disciplined for a violating policy?
  • Communication of information and findings – Are escalation protocols appropriate?
  • What are the opportunities to improve compliance?

There are a variety of materials that you can review from or at a company that can facilitate such a Desktop Risk Assessment. You can review your company’s policies and written guidelines by reviewing anti-corruption compliance policies, guidelines, and procedures to ensure that compliance programs are tailored to address specific risks such as gifts, hospitality and entertainment, travel, political and charitable donations, and promotional activities.

This list is not intended to be a complete list of items, you can pick and choose to form some type of Desktop Risk Assessment but hopefully you can see some of the things areas you can assess and deliver any remedial action which may be warranted. Further, if you aim to perform an annual Desktop Risk Assessment with a full worldwide risk assessment every two years or so, you should be in a good position to keep abreast of compliance issues that may change and need more or greater risk management. And do not forget the that the FCPA Guidance ends its section on risk with, “When assessing a company’s compliance program, DOJ and SEC take into account whether and to what degree a company analyzes and addresses the particular risks it faces.”

A completely different approach was articulated by Leonard Shen, Vice President (VP) and Chief Compliance Officer (CCO) at PayPal, in a presentation to Compliance Week. His approach is not the right approach for every company but for those initiating their compliance journey, or a company considering a significant upgrade due to some systemic issue; this approach may be a more effective approach than the traditional risk assessment where a team of lawyers, CPAs and internal auditors assess a company’s compliance environment.

In a company which is initiating its compliance program, it can be perceived as a sea change of culture. However, Shen indicated that he had used an approach which worked to alleviate those types of concerns which also provided enough information to perform a robust assessment which could be used to form the basis of an effective compliance program. He termed this type of approach as one to “engage and educate.” While the approach had a two word name, it actually had three purposes; (1) to engage the employees in what would form the basis for an enhanced compliance program; (2) to educate the employees generally in compliance and ethical behavior; and (3) through the engagement of employees, to gather information which could be used to form the basis of a risk assessment.

Shen and his compliance team traveled to multiple company locations, across the globe, to meet with as many employees as possible. A large number these meetings were town hall settings, and key employee leaders, key stakeholders and employees identified as high risk, due to interaction with foreign governmental official touch-points, were met with individually or in smaller groups. Shen and his team listened to their compliance concerns and more importantly took their compliance ideas back to the home office.

From this engagement, the team received several thousand-employee suggestions regarding enhancements to the company’s compliance program. After returning to the US, Shen and his team winnowed down this large number to a more manageable number, somewhere in the range of a couple of hundred. These formed the basis of a large core of the enhancements to the existing company compliance program. After the enhanced compliance program was rolled out formal training began. During the training, the team was able to give specific examples of how employee input led to the changes in the enhanced program. This engaged the employees and made them feel like they were a part of, and had a vested interest in, the company’s compliance program. This employee engagement led to employee buy-in.

During the town hall meetings, and the smaller more informal group meetings, Shen and his team were doing more than simply listening, they were also training. However, the training was not on specific compliance provisions; it was more generally on overall ethics and how the employees could use compliance as a business tool. Most ethical standards of a company are not found in an existing compliance program, they are found in the general anti-discrimination guidelines and ethical business practices such anti-competitiveness and use of customer confidential information prohibitions. Often these general concepts can be found in a company’s overall Code of Conduct or similar statement of business ethics; workplace anti-discrimination and anti-harassment guidelines can be found in Human Resource policies and procedures.

Concepts such as anti-competitiveness and use of customer and competitor’s illegally obtained confidential information may be found in anti-trust or other business practice focused guidelines.

Shen and his team’s aim on the education component of “engage and educate” was to have the company employee’s start thinking about doing business the ethical way. It was ethical concept based training designed to be in contrast to a rules based approach, where employees believe they are taught the rules, and then try to see how close they can get to the line of violating the compliance rule without actually stepping over the line. Moreover, by having this general ethical business training, it laid the groundwork for the enhancement of the company’s compliance program and the training that would occur when the enhancement was rolled out.

A third key component of the “engage and educate” program is the risk assessment component. Shen’s approach here was not the traditional control-testing model, where documents are pulled and tested against a standard. Shen and his team listened, listened and listened. They listened to their employees concerns and they listened to the compliance issues they raised. As they were listening they began to ask questions about what was done and why. The questioning was not in an adversarial, interrogation mode but ferreting out the employees concerns while having the employees educate the team on the actual procedures that were used in several areas identified as key high risk areas.

Shen emphasized that this was an assessment and not an audit so no detailed forensic work was needed or used. However, by listening, and gently questioning, Shen and his team were able to garner enough information to create a risk assessment profile which informed and became the basis of their compliance program enhancement. Shen and his team did not identify to the company employees that they were engaged in a formal risk assessment. He believed that in many ways, he and his team were able to garner more useful information with which to inform their compliance program enhancement.

Shen’s “engage and educate” approach worked for his company at that point in time. It may not work for other companies as a traditional risk assessment but it does provide a different model if your company is beginning to create their compliance program, or is looking into a major enhancement.

Tomorrow, I will look at how you might use a risk assessment going forward.

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

© Thomas R. Fox, 2014


September 20, 2013

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

Filed under: Best Practices,Bill Athanas,compliance programs,FCPA — tfoxlaw @ 6:16 am

IMG_3289Ed. Note – this week, I am pleased to join my colleagues David Simon, partner at Foley & Lardner LLP, and William ‘Bill’ C. Athanas, partner at Waller Lansden Dortch & Davis, LLP, in a tripartite debate on the efficacy of the affirmative defense of a compliance program to the Foreign Corrupt Practices Act (FCPA). Previously, I presented my views, from the perspective of a former in-house counsel, on why a compliance defense would not help to create greater compliance with the FCPA. Yesterday, Simon discussed his views, from the perspective a white collar defense practitioner, on why a compliance defense under the FCPA would foster greater compliance with the Act. In the concluding post today, Athanas presents his views as a former Department of Justice (DOJ) prosecutor. I hope that you have enjoyed our debate.


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

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

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

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

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

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

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

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

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

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

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


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


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

September 18, 2013

Why a Compliance Defense Will Not Make a Compliance Program Effective

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

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

I.                   Current Credit in Place

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

II.                Trial Lawyers v. Corporations

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

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

A.     Certainty

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

B.     The Arthur Anderson Effect

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

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

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

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

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

We can lose our security clearances.

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

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

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

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

III.             Two Recent Examples – GSK and Wal-Mart

 A.     GSK

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

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

B.    Wal-Mart

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

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

IV.              False Sense of Security

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

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

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

© Thomas R. Fox, 2013

September 3, 2013

From New Hampshire to Birmingham: Bill Athanas and the Fight Against Fraud and Corruption

Filed under: Bill Athanas,compliance programs,Department of Justice,FCPA — tfoxlaw @ 1:01 am

Lawyer ImageEd. Note-I continue my series of profiling thought leaders in the area of anti-corruption. Today, I post an interview with Bill Athanas, partner in the firm of Waller Law.

1.         Where did you grow up and what were your interests as a youngster?

I grew up in a small town in central New Hampshire.  I spent most of my time playing sports, and was a diehard fan of Red Sox, Patriots and Celtics.  While the 1980s were great times for Celtics fans, the Patriots were pretty much irrelevant then and cheering on the Red Sox was pure torture.  I can still remember the pain I felt after Game 6, but recognize that I never would have appreciated 2004 and 2007 anywhere near as much if I hadn’t lived through the hard times.

2.         Where did you go to college and what experiences there led to your current profession?

I attended the University of New Hampshire.  While I always had an interest in becoming a lawyer, one incident in particular really pushed me in that direction.  I was taking a marketing class and the professor directed us to answer a particular question in our text.  I wrote down the wrong question number, and when I turned in my answer, the professor (whose name I still remember, almost 25 years later) gave me a zero (not just an F, but an actual zero).  I remember thinking that the result was incredibly unfair and disproportionate to the mistake I made, and I pleaded with her to reconsider.  She refused.

3.         Describe your early legal career in Boston.

During law school, I worked at a firm where I met Bruce Singal, a former AUSA in Boston, who had a  white collar practice.  I joined the firm after graduating and worked with Bruce for about five years, until I decided to leave to join the Justice Department’s Fraud Section in Washington.  I had  numerous opportunities that few young lawyers get.  Those included spending the better part of year representing indigent defendants in Boston Municipal Court and second chairing Bruce’s federal criminal cases.

4.         How did you come to join the DOJ? What areas did you focus on and what types of cases did you try?

Working on white collar cases quickly made me realize how much I wanted to be a federal prosecutor, and I decided to apply to the Fraud Section in 2001 after seeing a posting on the DOJ website.  Fraud Section interviews back then were conducted in a room with about 15 people firing questions, and I managed to make it through despite having only recently filed a Hyde Amendment claim against two Fraud Section lawyers (one of whom was in the room).

When I arrived, Peter Clark was assigned to be my supervisor.  While Peter was the FCPA Deputy Chief then, my initial focus was financial institution fraud.  I very much wanted to try cases, and in 2001, handling FCPA cases was not the path to trial experience.

I spent my first couple of years investigating and trying Ponzi scheme and bank fraud cases.  In 2004, I was assigned to the ongoing HealthSouth accounting fraud investigation in Birmingham and asked to take over a spin-off investigation of foreign bribery in Saudi Arabia.  We eventually charged four HealthSouth executives in that case, and after two pled the others went to trial.  Both were acquitted, and I got my first real tough lesson as a prosecutor:  sometimes when you try a case poorly, you still win – but not always.  That defeat still stings, but the experience has helped me every day since.    

5.         What took you to Birmingham, AL from DC?

Like pretty much everyone who works in the Fraud Section, my service involved a tremendous amount of travel (220+ days a year on the road).  In early 2002, while working a Ponzi scheme case in Springfield, Missouri, I was having dinner with Ed Slagle, an agent from Atlanta who then with FDIC-OIG who was also assigned to the case.  Ed and I were the primary individuals heading up the investigation, and spent virtually every week working in Springfield or Kansas City for almost a year.

We got to be great friends and one night over dinner Ed told me about a bank fraud case he was working in Birmingham which he believed was not getting the attention it needed.  I came down to Birmingham in the summer of 2002. I spent the better part of the next 2 ½ years handling that bank fraud case and the HealthSouth foreign bribery prosecution.  The people that I met during that time – including, most importantly, my future wife – led me to conclude that I should make my home in Birmingham permanently.  While I enjoyed my time at Fraud immensely, and relish the opportunity it provided me to work with some very smart people, after four years I decided that dedicating a quarter or more of my time to travel was not something I wished to do any longer.  Former U.S. Attorney Alice Martin (another mentor to whom I’ll always be indebted) offered me a job as an AUSA and I moved to Birmingham in January 2006.  I first handled terrorism cases  but quickly moved to economic crime cases with a focus on public corruption.  I left the office in 2009 with mixed emotions, and joined Waller soon thereafter.  While my journey from New Hampshire to Birmingham was hardly a conventional path, coming here is easily the best decision I ever made.

6.         What changes have you seen in FCPA enforcement over the years?

Obviously, the most notable is the dramatic increase in the number of enforcement actions.  When I got to the Fraud Section in late 2001, the FCPA team was pretty much Peter Clark and Philip Urofsky; now it seems there are more people doing FCPA work at Fraud than not.  The people who helped to bring about that result (particularly Mark Mendelsohn, the hardest working public servant I’ve ever seen) deserve tremendous credit, in my view.

But from my current perspective, the increase in the volume of enforcement actions is less significant than the manner in which the government has carried them out.  While some would suggest that the spike in volume is indicative of the government enforcing the statute in an indiscriminate fashion without regard for anything but driving up the numbers, I see a more purposeful approach on the government’s part: an attempt to leverage the relatively small number of cases it is able to prosecute to effect FCPA compliance on a far broader scale via the carrot and stick method.

The stick is obvious:  the substantial financial penalty the government typically seeks in the form of fines and disgorgement, as well as the sizeable legal and investigative fees that are often a byproduct fulfilling the government’s expectation that the company under scrutiny will conduct and provide the results of its own review.  For some, the carrot is less apparent:  the prospect of substantial reductions both in penalties and legal fees, particularly when the company is able to secure an early declination.  Much concern has been voiced about the impact of the stick – from the efforts of the Chamber of Commerce to commentators to law firm alerts – and a fair amount of it is justified, in my view.  But those who limit their focus to the magnitude of the direct and collateral consequences which result when companies face FCPA enforcement actions fall short in their analysis, sometimes deliberately so.

Whenever illegal activity is particularly difficult to detect and the government faces an acute shortage of investigative and prosecutorial resources, the government must maximize the deterrent value of those cases it is able to prosecute in order to have any hope of carrying out its enforcement initiatives.  Whenever deterrence plays a major role in enforcement strategy, it is common to have penalties which may appear disproportionate to the offense.  But simply calibrating the perceived imbalance between crime and punishment leads to faulty conclusions if no accounting is made for the opportunities that exist to avoid negative outcomes.

In my view, the most significant change in FCPA enforcement is the government’s attempt to make clear these opportunities.  In just the past eighteen months, we have seen this message communicated in several different forms, including the release of the Guidance, the Morgan Stanley declination and various statements by key enforcement personnel.  Regardless of the channel used, the core message is consistent:  the government does not expect perfection in FCPA compliance, and companies whose compliance efforts reflect a genuine commitment to FCPA compliance can avoid draconian sanctions even if violations occur.

The question then rightly becomes: “how does a company do that?”  Sometimes, the answer is easy.  For large companies operating in high-risk industries in high-risk locations, anything short of a gold standard compliance program suggests, at best, a failure to treat FCPA concerns with the requisite seriousness.  The government uses the “stick” to punish that failure.
At the same time, the government seeks to convey a different message to mid-market companies about what is expected of them.  Those companies who are not attuned to that message (frequently because they have been subject to repeated omens that the sky is falling) often incorrectly conclude that the only way to avoid those draconian punishments is to spend money at the level the behemoths spend.  This mistaken conclusion typically causes a mid-market company to react in one of two ways:  an earnest but horribly misguided expenditure of money in an attempt to replicate a gold standard compliance program or simply throwing up its collective hands because of the seemingly enormous cost of doing so.

Over the past couple of years – whether though the Guidance, the Morgan Stanley declination, or the expressed views of key personnel – in order to avoid the latter reaction, the government has tried to counter some of the misinformation suggesting that the former is required.  And the message that emerges from these efforts is clear, to those who are really listening: companies can demonstrate a genuine commitment to FCPA compliance without spending a fortune.  The government’s effort is designed to help companies – particularly those at the mid-market level – understand that simply by paying close attention to and working to effectuate these pronouncements in a sincere manner, they can mitigate the overwhelming percentage of the risk at a fraction of what the large companies spend.  This attempt to inform while enforcing is to me the most dramatic and significant change in FCPA enforcement.

================================================================================================The Inaugural Episode of the FCPA Compliance and Ethics Report podcast is up on my new blog site, The FCPA Compliance and Ethics Report. To view Episode 1, 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, 2013

Blog at WordPress.com.