Tribute to John David Crow and an Innovation Strategy for Your Compliance Program

John David Crow died Wednesday. Until Johnny Football, he was the only football player from Texas A&M University to win the Heisman Trophy. He played under the legendary Paul ‘Bear’ Bryant at A&M and for all of Bryant’s success, Crow was the his only player to win the award given annually to the nation’s best collegiate football player. Crow had a productive professional football career making the Pro-Bowl four times. He was also the Athletic Director at A&M from 1989 to 1993. So here’s to John David Crow, one of the Junction Boys and one of the greatest players in the history of Texas A&M. Finally, let me say something I almost never say, Gig ‘Em, John David.

I thought about John David Crow and his legacy of greatness when I read an article in the June issue of the Harvard Business Review (HBR), entitled “You Need an Innovation Strategy”, by Gary P. Pisano. While Pisano’s article dealt more generally with innovation in marketing, I found it highly relevant for the Chief Compliance Officer (CCO) or compliance practitioner, particularly in the context a Foreign Corrupt Practices Act (FCPA) compliance program. Earlier this week, the Department of Justice (DOJ) announced the resolution of a FCPA investigation involving IAP Worldwide Services, Inc. (IAP) via a Non-Prosecution Agreement (NPA). In the NPA, the company committed to implementing and enhancing a best practices FCPA compliance program. Listed at element 18 of its compliance program is the following: “The Company will conduct periodic reviews and testing of its anti-corruption compliance code, policies, and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of anti-corruption laws and the Company’s anti-corruption code, policies, and procedures, taking into account relevant developments in the field and evolving international and industry standards.”[Emphasis supplied]

This means that the DOJ expects innovation in your compliance program to keep up with evolving international and industry standards. This requires you to implement an innovation strategy. While Pisano’s article does not specifically focus on compliance, I found that its concepts would help a CCO or compliance practitioner sustain the mandate for innovation in a compliance regime. Pisano’s article begins by stating the problem that many companies face is that “innovation remains a frustrating pursuit.” While acknowledging that failure to execute is an issue, Pisano believes the issue is deeper than simply a failure to execute, he believes there is a “lack of an innovation strategy.”

I found some of his basic definitions most useful for the compliance practitioner to think through innovation in the compliance function. Pisano wrote, “A strategy is nothing more than a commitment to a set of coherent, mutually reinforcing policies or behaviors aimed at achieving a specific competitive goal. Good strategies promote alignment among diverse groups within an organization, clarify objectives and priorities, and help focus efforts around them. Companies regularly define their overall business strategy (their scope and positioning) and specify how various functions – such as marketing, operations, finance, and R&D – will support it. But during my more than two decades studying and consulting for companies in a broad range of industries, I have found that firms rarely articulate strategies to align their innovation efforts with their business strategies.”

The key to success is something that every CCO or compliance practitioner should take to heart. Paraphrasing Pisano for the compliance practitioner is that the compliance function “should articulate an innovation strategy that stipulates how their [compliance] innovation efforts will support the overall business strategy.” Moreover, “creating an innovation strategy involves determining how innovation will create value for customers [of compliance, i.e. Employees], how the company will capture that [compliance] value, and which types of [compliance] innovation to pursue.”

Pisano posed several questions around this key area of connecting innovation to strategy. Initially he asked, “How will innovation create value for potential customers?” In my formula, customers become employees or others who will make use of your compliance innovation going forward. Here you should focus on the benefit for your end-using customer. Your innovation can make compliance faster, easier, quicker, more nimble and so on. But focus on that creation of value going forward. Pisano’s next question was “How will the company capture a shore of the value its innovations generate?” He suggests companies think through how to “keep their own position in the [compliance] ecosystem strong” through innovation. Pisano next asked, “What types of innovation will allow the company to create and capture value, and what resources should each type receive?” Here Pisano notes two major forms of innovation equally applicable to the CCO or compliance practitioner. They are a change in technology and a change in a business process. Both are equally valid.

Another problem that Pisano addresses is termed “overcoming prevailing winds” and this means that innovation can be driven downward or backward if there is not sufficient management support. This means not only must there be sufficient resource allocations but management must also incentivize the business units to proceed with implementing the innovations, particularly “when an organization needs to change its prevailing patterns.”

Another area Pisano addresses is “managing trade-offs” because it is inherent in any innovation strategy that there will be trade-offs. Here he terms the two key differences as “supply-push” and “demand-pull”. The supply-push approach comes when your innovation is focused on something that does not yet exist, for example if you are initially implementing a FCPA compliance regime. The demand-pull approach works more closely with your existing customer base to determine what they might need and work to implement innovation around those needs.

Interestingly Pisano ends his article with a discussion about “the leadership challenge”. I say interestingly because I would have thought that was required up front as it is the function of senior management to create the capacity for innovation in the first instance. Pisano writes, “There are four essential tasks in creating and implementing an innovation strategy.” Task 1 is to “answer the question “How are we expecting innovation to create value for customers and for our company?” and then explain that to the organization.” Task 2 “is to create a high-level plan for allocating resources to the different kinds of innovation.” Task 3 is “to manage trade-offs. Because every function will naturally want to serve its own interests, only senior leaders can make the choices that are best for the whole company.” Finally, task 4 dovetails with what almost every DOJ/SEC speaker I have ever heard say when they talk about the basics of any best practices compliance program. It is that “innovation strategies must evolve. Any strategy represents a hypothesis that is tested against the unfolding realities of markets, technologies, regulations, and competitors. Just as product designs must evolve to stay competitive, so too must innovation strategies. Like the process of innovation itself, an innovation strategy involves continual experimentation, learning, and adaptation.”

Pisano’s article provides the CCO or compliance practitioner with a framework to think through to help bring the innovation to a compliance program. I would have put leadership first, both in the compliance department and at senior management level. But however you go about it, you must recognize that your compliance program will have to evolve. That is one of the key differences between those who advocate static compliance standards embodied in a written compliance program and those who advocate that it is Doing Compliance that creates an active, vibrant and effect compliance program.

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

© Thomas R. Fox, 2015

The War of 1812 and the IAP Worldwide Services Non-Prosecution Agreement

On this day, 203 years ago, President James Madison signed a Declaration of War against Great Britain inaugurating the War of 1812. The cause of the war was multi-faceted; the formal reason given was the British impressment of American sailors and the economic blockade of Europe. But the real reason may have simply been the warmongers who had been agitating for war against Britain for several years as an excuse to attack (and hopefully take over) Canada. For those of you who did not study geography too closely, that latter hope was forlorn as Canadians twice repulsed American invasions during the war.

That does not mean the War of 1812 was ultimately unsuccessful for the ‘War Hawks’. America got two great songs out of the war. The first was our National Anthem, the Star Spangled Banner, which celebrated victory over the British at Baltimore. The second was the top hit single of 1959, The Battle of New Orleans, which celebrated Andrew Jackson’s defeat of the British in the Battle of New Orleans, which was fought after the signing of the peace treaty that ended the war. Also that peace treaty, which America and Great Britain signed has remained unbroken to this day.

I thought about this view of the results of the War of 1812 when I read the Foreign Corrupt Practices Act (FCPA) enforcement action involving IAP Worldwide Services, Inc. (“IAP” or “the company”) and its former Vice President (VP), James Rama. The company received a Non-Prosecution Agreement (NPA) as a result of the enforcement action but agreed to a fine of $7.1MM. Rama pled guilty to a single count of conspiracy to violate the FCPA and is awaiting sentencing but his sentence will be capped out at “five years of imprisonment, a fine of the greater of $250,000 or twice the gross gain or loss, full restitution, a special assessment, and three years of supervised release” according to his Plea Agreement.

What it is difficult to determine from the company NPA and Rama Plea Agreement is what conduct the company engaged in which led to the NPA because clearly both the company and Rama engaged in conduct that violated the FCPA. In its Press Release the Department of Justice (DOJ) said, “Based on a variety of factors, including but not limited to IAP’s cooperation, the Criminal Division entered into a non-prosecution agreement with the company.” In the NPA these factors were given some meat with the following boilerplate language, “(a) the Company has cooperated with the Offices, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Offices; (b) the Company has engaged in remediation, including disciplining the officers and employees responsible for the corrupt payments or terminating their employment, enhancing its due diligence protocol for third-party agents and consultants, and instituting heightened review of proposals and other transactional documents for relevant Company contracts; (c) the Company has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement; and (d) the Company has agreed to continue to cooperate with the Offices in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to possible violations under investigation by the Offices.”

Since I cannot determine from beyond the above description what the company did to achieve its NPA, I will use the same analysis that I did in ascertaining what we Americans got out of the War of 1812. For the NPA did go into detail about the bribery scheme used by the company and Rama, which were clearly violative of the FCPA. Rama was a VP of the company until he signed and became an independent contractor to the organization, through his consulting entity, Ramaco. Ramaco was created, in part, to hide the involvement of IAP in the bidding process with the Kuwaiti Ministry of the Interior to provide nationwide surveillance for the country.

The bid for this project had two phases. In Phase I, a consultant would assist the Kuwaiti government to select the final contractor who would implement the nationwide surveillance for the country in Phase II. By hiding its involvement through Ramaco, IAP could reap the benefits of winning both phases, which it did. However the illegals acts of IAP and Ramaco did not end with this subterfuge but were in fact just beginning.

The Phase I contract awarded to Ramaco was worth $4MM. IAP and Ramaco agreed to rebate one-half of the amount, through a Kuwaiti third party agent back to certain representatives of the Kuwaiti government as bribe payments. In addition to this 50% figure of the contract price, IAP and Ramaco understood that this Kuwaiti third party contractor would “inflate its invoices to IAP by charging IAP for the total amount of both the legitimate services that Kuwaiti Company was providing and the payments that Kuwaiti Company was funneling to Kuwaiti Consultant without listing or otherwise disclosing the payments that were funneled to Kuwaiti Consultant.” According to the NPA, these monies were specifically “provided as bribes to Kuwaiti government officials to assist IAP in obtaining and retaining the KSP Phase I contract and to obtain the Phase II contract.”

The NPA also specified meetings which were held in the company’s headquarters in Arlington VA and that monies to be paid as bribes were wired out of a company bank account in the US to Kuwait.

All of these facts would lead me to opine that this case was egregious. There was a US company, setting up a scheme to pay bribes through both a US person, who was a former employee, and a foreign third party agent. Meetings to facilitate the scheme were held in the US and monies to fund bribes were wired out of a US bank account. There was nothing reported in the NPA which indicated that the company self-disclosed this FCPA violation. While there were statements of cooperation and remediation going forward, there was nothing other than the standard boilerplate language generally seen in NPAs.

So while the NPA does provide the Chief Compliance Officer (CCO) or compliance practitioner a good set of facts to test against in their organization, that would appear to be about it. Other than, of course, it is always better to cooperate than not. So much like what we Americans got out of the War of 1812, not much substance can be ascertained from the company’s NPA and Rama’s Plea Agreement.

For a YouTube clip of Johnny Horton singing The Battle of New Orleans, on the Ed Sullivan Show, 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