Will the UK Let the Light of Day Shine Into Its Regulatory Process?

Should the regulators process be shrouded in mystery or should there be disclosure into the light of day? That is a question currently before authorities in London. As reported in the Financial Times (FT) column Inside Business, in a piece entitled “UK regulators must judge the right time to go public”, Brooke Masters reported that the UK Financial Services Authority (FSA) cannot provide the public details about a matter under investigation “until its internal decision maker, the Regulatory Decisions Committee, has heard the allegations and the defence of the accused and come down in favour of enforcement action.” There is currently legislation in front of Parliament which would allow a newly constituted financial regulatory agency, the Financial Conduct Authority, to go public with “warning notices” before a case gets to the Regulatory Decisions Committee. Masters cites advocates of this legislation who “say this would make the UK more like the US, where the Securities and Exchange Commission [SEC] can make public charges it has filed with a judge or administrative proceeding.” Apparently representatives of British banking interests are desperately fighting to keep such proceeds secret.

The Con

Master’s presents several arguments why regulatory investigations should remain secret. She quoted Lord Flight who claims that “allegations can blacken reputations and harm innocent investors.” He even pointed an accusatory finger at the head of the state of New York’s Department of Financial Services’ (DFS) Benjamin Lawsky who made allegations that Standard Chartered “hid $250 billion of transactions with Iran in breach of US sanctions, a charge that caused a one-day 16 per cent fall in the bank’s share price.” The bank insisted that they were “blindsided” by the allegations and indeed there were only $14 million in transactions which violated either US or New York state law. Of course we all now know that Standard Chartered also settled with the DFS for $340 million within days of these accusations being made public.

The Pro

Masters cites to un-named British Ministers who argue that “the public deserves to know when government regulators believe a major institution or prominent figure has committed wrongdoing. Further, timely announcements by the FSA or other appropriate regulators would “allow investors to move their money or protect themselves from similar misdeeds.” She poses the question of “Wouldn’t you want to know that a broker was facing charges of selling unsuitable investments before you – or even more pointedly, an elderly relative – gave him money?” Next she notes that “Quick enforcement also helps restore faith in the financial system. It is quite frankly a joke that nearly four years after HBOS failed, we still don’t know whether the FSA thinks anyone there did anything improper.”

Masters concludes her piece with a look at the SEC “Wells Notice” procedure, which is a private warning by the SEC to companies and individuals that the SEC wants to bring a case against them and this document invites the company or individual to respond directly to the SEC. This process allows the party or parties in question to respond or to work out a settlement. Masters believes that “the practice has worked well, especially for investors, who often get an early heads up about potential problems because most public companies disclose when they have received such a notice.” She believes that this interim step would be useful to give companies “a private right of reply before throwing open the doors.” But Masters makes clear her final position by concluding that she does not believe the UK government should “give in to the City’s efforts to keep the disciplinary process shrouded in mystery.” In other words, the light of day should shine into these dark crevices of nefarious activity.

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, 2012

NYPD Community Policing as Model for Your FCPA Compliance Program

For those of you who do not know Scott Moritz, you should take an opportunity to do so. I first met Moritz (virtually) through his article in the FCPA Blog, entitled “Risk-Based Compliance”. In this post, Moritz looked at the language of Opinion Release 08-02 (the “Halliburton Opinion Release”) in the context of the risk based approach of which the Department of Justice (DOJ) approved Halliburton’s proposed acquisition of Expro. These risk based concepts were used by the UK Financial Services Authority (FSA) in its January, 2009, settlement with Aon. Moritz is a retired FBI special agent, with over 25 years of complex investigative, forensic accounting, regulatory compliance and law enforcement experience. He is now a Managing Director for Global Investigations & Compliance at Navigant Consulting.

I have had the opportunity to speak with Moritz on a couple of webinars, jointly author papers with him and hear him speak at leading Foreign Corrupt Practices Act (FCPA) conferences. I can assure you that he knows his stuff. Recently Moritz published yet another piece in his continuing education for the rest of us compliance practitioners in the area of risk based assessments. In an article entitled “Walking a Beat to Reduce Corruption”, Moritz analogized  “the concept of community policing that has been used to reduce crime in many major cities across the world” in his innovative approach of “a growing corporate culture of mutual transparency that is having a very positive effect on overall awareness regarding anti-corruption” for third party due diligence under both the FCPA and UK Bribery Act.

Moritz talked about community policing in the context of new thinking which holds that more “successful third-party anti-corruption programs depend upon effective two-way communication between the company and its third parties.” He advocates that companies “engage directly with third parties to build trust” and to communicate a company’s ethical values to both those third parties in its Sale and Supply Chains. The starting point for any trust is communications. He believes that for a compliance program to be truly effective, “it must create communication channels between compliance, its internal clients within the organization and the third parties whose actions could lead to corruption liability.” This communication should begin by making a company’s key employees, whose responsibilities include engagement with third parties i.e. business sponsors, “to the potential risks of these commercial relationships, how to recognize them, what they may mean in terms of their continuing compliance obligations and how to convey this information to the third parties in a way that is not construed to be offensive in any way.”

One of the most important roles of these business sponsors is to take the message of compliance to the company’s third party representatives. Many companies will have this first message be the company’s FCPA compliance questionnaire but Moritz advocates it is “the business sponsor’s responsibility to explain the company’s third-party anti-corruption program, the rationale behind it, to emphasize the mutual benefits of the relationship and to serve as the company liaison going forward. That initial conversation should also highlight the fact that the vast majority of such steps result in a strengthening of the relationship between the company and its third parties.”

This business sponsor should stress at least three key factors. The first is that the company lives by its anti-corruption values and those are embedded in its anti-corruption, FCPA Compliance Program and the questionnaire is a necessary part of that Compliance Program. Second, that your company’s Compliance Program is similar “to those in place at an increased number of organizations and it would be reasonable to expect it to be part of the process whenever their company engages with a global company.” Third, that by asking for what may seem as unusually sensitive information, it is not a lack of trust but that the request “actually signals the importance of the relationship and the company’s willingness to make a substantial investment in it to ensure that any issues that may be out there are put to rest at the outset thereby eliminating any future barriers to the relationship between the parties.” Concluding this section Moritz opines that by “Spending a fair amount of time setting the tone will provide a solid foundation for the relationship going forward.”

So how does this relate to a community policing program? At least as the theory is practiced by the New York Police Department (NYPD) it is based upon the precept of the “broken window theory” whereby if a window is allowed to be broken and stay broken it sends a signal that no one in the neighborhood cares about crime and this in turn leads to more crime. The NYPD took to having more foot patrols so that the officers could build trust in the neighborhoods which they were assigned, rather than driving around in squad cars. This signaled to the community that the police cared and many neighborhoods responded with actions, such as fixing broken windows, which showed they cared as well.

Moritz concludes his article by noting that “business sponsors act as the cops on your beat”. Just as community policing fosters two-way communication between the NYPD and the community; the business sponsor can effectively take the place of these police officers who are walking a beat in a community. The “business sponsors are on the front lines of your anti-corruption program building long-term relationships that are critically important components of your anti-corruption program and your commercial success as a whole.”

I found the Moritz piece quite interesting and continued his long line of thoughtful, best practices and leading edge commentary. I would add that a key is the business sponsor, your selection and training of this employee is a critical element. I commend the full Moritz piece to 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, 2012

Aon Nets an NPA

In December, 2011, the insurance giant Aon received a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) in settling enforcement actions against it by the DOJ and Securities and Exchange Commission (SEC). Aon agreed to total fines and penalties in an amount of $16.3 MM. This is in addition to a fine previously paid to the UK Financial Services Authority (FSA) in January, 2009 of £5.25 MM (approximately $8.2 MM at today’s exchange rate). The Aon resolution has several factors which are of interest and should be noted by the compliance practitioner.

Aon’s Remedial Actions Which Led to the NPA

The DOJ stated that it entered into the NPA based “in part, on the following factors: (a) Aon’s extraordinary cooperation with the Department and the U.S. Securities and Exchange Commission (“SEC”); (b) Aon’s timely and complete disclosure of the facts described in Appendix A as well as facts relating to Aon’s improper payments in Bangladesh, Bulgaria, Egypt, Indonesia, Myanmar, Panama, the United Arab Emirates and Vietnam that it discovered during its thorough investigation of its global operations; (c) the early and extensive remedial efforts undertaken by Aon, including the substantial improvements the company has made to its anti-corruption compliance procedures; (d) the prior financial penalty of £5.25 million paid to the United Kingdom’s Financial Services Authority (“FSA”) by Aon Limited, a U.K. subsidiary of Aon, in 2009, covering the conduct in, Bangladesh, Bulgaria, Indonesia, Myanmar, the United Arab Emirates and Vietnam; and (c) the FSA’s close and continuous supervisory oversight over Aon Limited.”

Non-Bona Fide Travel and Educational Expenses

The primary activity for which Aon was sanctioned was a travel and education fund which was initially designed to provide funds for foreign government employees involved with insurance to travel to educational conferences. However, the funds were also used for personal entertainment of such officials, their wives and families. In one instance, involving a fund in Costa Rica, travel was booked through a travel agency which was owned or managed by the Costa Rican officials who were entertained with monies from the educational and training funds. This was not, as former UCLA student Kyle Sheahen said in his paper, entitled “I’m Not Going to Disneyland: Illusory Affirmative Defenses under the Foreign Corrupt Practices Act”, an instance of the bona fide travel and promotional defense being disregarded. In the Aon enforcement matter, there was either no bona fide educational expense or not one which could be documented from Aon’s internal records.

Books and Records

The largest portion of the Aon fine involved violations of the Foreign Corrupt Practices Act’s (FCPA) books and records requirements. The NPA noted, “With respect to the Costa Rican training funds, although Aon Limited maintained accounting records for the payments that it made from both the Brokerage Fund and the 3% Fund, these records did not accurately and fairly reflect, in reasonable detail, the purpose for which the expenses were incurred. A significant portion of the records associated with payments made through tourist agencies gave the name of the tourist agency with only generic descriptions such as “various airfares and hotel.” Additionally, to the extent that the accounting records did provide the location or purported educational seminar associated with travel expenses, in many instances they did not disclose or itemize the disproportionate amount of leisure and non-business related activities that were also included in the costs.

International Cooperation

This enforcement action was one of the earliest which revealed the level of cooperation on anti-corruption issues by the US and UK governments. In the NPA there was a discussion about how the insurance and reinsurance industry work, particularly with regards to brokers, who are agents. However, there did not appear to be a penalty assessed for Aon’s actions regarding its agent. Nevertheless, this agent issue was the focus of the FSA action, which at the time, was the largest penalty levied by the FSA for overseas corruption. In its Final Notice, dated January 9, 2009, the FSA stated, in part:

(3) The systems and controls failings existed in a number of Aon Ltd.’s major business units and for a period of years. In particular, the failure to monitor payments to Overseas Third Parties allowed a number of suspicious payments to continue to be made for a number of years. Over the course of the Relevant Period, 66 suspicious payments amounting to approximately US$2.5 million and €3.4 million were paid to nine Overseas Third Parties. In addition, a number of other suspicious payments to those Overseas Third Parties were made prior to the Relevant Period (before Aon Ltd became regulated by the FSA).

(4) In failing to have properly assessed the risks involved in its dealings with Overseas Third Parties and to implement effective controls to mitigate those risks, Aon Ltd may have profited from its breach. The commission or brokerage earned by Aon Ltd over the course of the Relevant Period from business that may have been secured or retained as a result of suspicious payments amounted to approximately US$7.2 million and €1 million.

FSA Enforcement Action

It is noteworthy that the DOJ did not bring heavier sanctions against Aon for such conduct but noted in the NPA “(d) the prior financial penalty of £5.25 million paid to the United Kingdom’s Financial Services Authority (“FSA”) by Aon Limited, a U.K. subsidiary of Aon, in 2009, covering the conduct in, Bangladesh, Bulgaria, Indonesia, Myanmar, the United Arab Emirates, and Vietnam; and the FSA’s close and continuous supervisory oversight over Aon Limited.”

There are several key takeaways from the Aon enforcement action. Travel and entertainment are fields for the unwary. There must be a clear and DOCUMENTED business purpose in travel and payment of educational expenses. Remember the three most important things are DOCUMENT, DOCUMENT and DOCUMENT. Beyond that your books and records need to reflect accurate payments for travel, as in who, what, when, where and how; not “various airfare and hotels.” Next, if a government official directs you to use a service provider such as a travel agency, you must perform due diligence on the service provider to ensure that it is not controlled by the government official you are dealing with in your business.

Lastly we offer recognition to the DOJ for taking into account not only the work done by the FSA but also the fine assessed and continuing oversight of Aon by the FSA. This could be an important portent of things to come in ever increasing internationalization of anti-corruption enforcement actions.

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, 2012