Georgia On My Mind – How Does Compliance Enhance Shareholder Value?

Can you get a sense of place from listening to a song? In an article in the Financial Times (FT), entitled “The Life of a Song – Georgia On My Mind”, Mike Hobart wrote that when you “combine Stuart Gorrell’s lyrics with Hoagy Carmichael’s music… the sense of place becomes palpable.” While that may be true, the piece attributed to Frank Trumbauer who said, “Nobody ever lost money writing songs about the South”. The song did not become the well-known standard it is today until Ray Charles recorded it in 1960, some 30 years after Carmichael wrote it. Hobart believes that the song works so well “not the least because ‘Georgia On My Mind’ is a brilliant piece of imaginative fiction that captures the yearnings of a homesick soul. That fact and fantasy are so out of step only adds to the pathos.”

That ultimate line from Hobart’s piece struck me around an issue that I have thought about for some time. How many Chief Compliance Officers (CCOs) and compliance practitioners out there have faced the following question from the General Counsel (GC), Chief Executive Officer (CEO), Chief Financial Officer (CFO) What does it do to enhance shareholder value? This is the question that is posed when senior management wants to deny resources to or even cut back the compliance function. At best the question is disingenuous and at worst it is simply a dodge by someone wanting to denude a corporate compliance function for their own nefarious reasons.

Michael Skapinker raised this second point, in another FT article entitled “Shareholder value is a cover for over-mighty chief executives”. Skapinker further opines that this question also presages an inquiry into whether CCOs “are using the cover of shareholder primacy to put themselves first?” While he also condemned the disparity in the growth of senior executives salaries and true shareholder value, Skapinker worries about the lack of accountability of CCOs and how their actions can damage a company’s reputation.

So how do you respond to this query? I think there is an answer with which you can always respond when faced with a clearly hostile CEO or other senior manager. It is the following. A best practices anti-corruption compliance program, whether based on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-bribery law always enhances shareholder value. The reason is quite simple. It is all about tightening up the internal controls to prevent bribery and corruption.

However the part that such CEOs or other senior management may not understand is that FCPA internal controls are largely financial controls. Such controls are in place not only to comply with laws but also to provide internal oversight on how money flows out from an organization. The better the internal financial controls the better run a company will be in both the short and long term.

Most readers are familiar with Ethisphere’s annual designation of the World’s Most Ethical Companies. Many commentators deride this list because many of the companies on the list have gone through a FCPA investigation or enforcement action. Even with that factor, one of the things that Ethisphere touts about this list is that the companies on it routinely outperform the Standard & Poor’s (S&P) Index in annual performance. I thought about this seeming anomaly for a long time, wondering how ethical companies could be in the midst of FCPA investigations and be on a most ethical list.

The reason these companies are on the list is that they have better financial controls and by having better financial controls, these companies are more generally better run. Think about financial controls around employee expense reimbursement as an example. These are in place to satisfy Internal Revenue Service (IRS) rules to demonstrate the business purpose of employee travel, entertainment of customers, hospitality for potential customers and similar business expenses. Now consider this IRS requirement overlaid with a FCPA compliance requirement. Not only do you need to record the foreign government officials (or not) that you entertain, you need to document the expense incurred and the business purpose. If the expenses were predetermined to be over the amount set in your compliance policy, you may require compliance department pre-approval. When an employee submits an expense reimbursement form, there is usually a signature or self-attestation required. Then the employee’s supervisor, and perhaps one level above, must approve the reimbursement request before it even gets to Accounts Payable (AP) for a financial and procedure focused review.

All of these steps are financial controls yet they operate as internal compliance controls as well. If the controls are enforced the compliance function would have a searchable database to test employee expense reimbursement requests to see if any anomalies appear which should be set aside for further investigation. Imagine how GlaxoSmithKline PLC (GSK) might have fared if it had properly assessed its Chinese employee reimbursement requests to determine if the employees had actually put on the events for which they claimed reimbursement.

The same financial control analogy is true for the other key steps in any best practices compliance program. Management must communicate the message regarding doing business in compliance down to the troops. This message should be formalized in policies and procedures to set expectations of behavior. Then there should training on these educations and a person or function sufficiently resourced to run it. Next there should be incentives to do business in compliance and sanctions for those who fail to meet the set expectations and an appropriate reporting mechanism for internal reporting of compliance violations. Any best practices FCPA compliance program would also have a risk assessment, management of third parties and a mergers and acquisition (M&A) component. Finally, all of these concepts should be memorialized through internal controls that are designed, implemented and tested for effectiveness.

So the next time one of those senior management types asks you what the compliance function does or even what an expenditure that you want to incur will do to increase shareholder value, you can not only point him (or her) to the Ethisphere Most Ethical Company list but you can dive down to the specific level of your company and point directly to one of the above concepts around internal controls, which are really financial controls, to make your company not only run more efficiently but also provide appropriate levels of oversight.

So just as Hoagy Carmichael may indeed have written Georgia On My Mind because no one “ever lost money writing songs about the South”; no company was worse run because it had effective internal controls. Quite the contrary, the more effective your compliance controls are the better run your company will be and that will most certainly enhance shareholder value.

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 Fifth Letter and Expansion of the Brazilian Corruption Scandal into the Private Sector

I recently received a review copy of the book The Fifth Letter by fellow University of Michigan grad Vivian L. Carpenter. It is a rollicking good read which touches on areas of constitutional law, inalienable rights in the US, the complexities of racial relations in the South up to this day, an all-knowing/all seeing cabal which runs things from behind the scenes all wrapped up in the politics of modern day Washington DC. As a lawyer I greatly enjoyed the scenes that occurred in, around and about the US Supreme Court, the Senate’s advise and consent process for Supreme Court nominees and even a civics lesson in amending the Constitution. As a maven of thrillers I enjoyed the non-stop ride lead by the all-knowing/all-seeing cabal (who I like to call the Omnipotent ‘they’) who the protagonist, Katherine Ross, must face down and defeat. If you enjoy any of this, I would suggest you check out The Fifth Letter on Amazon.com or at your local bookstore. It is one of those rare books that is a great read, a roller coaster of a good ride and one from which you will learn quite a bit, all wrapped up into one book.

I thought about how well Carpenter tied all these seemingly disparate events, strands and concepts together in her work of fiction as I was reading a recent article in the Financial Times (FT) about the ever-increasing scope of the Petrobras corruption investigation in Brazil. In an article entitled “Petrobras scandal turns spotlight on Odebrecht” Joe Leahy, John Paul Rathbone and Andres Schipani reported on the arrest of Marcelo Odebrecht in the wake of the ongoing Brazilian corruption investigation dubbed “Operation Car Wash”.

The reporters noted that the investigation has shifted “in the latest sign of how Brazilian business and politics is being reconfigured by the Petrobras scandal, Mr Odebrecht is being held without bail in a sparse cell in the southern city of Curitiba. There, the billionaire member of a class that traditionally considers itself above the law, reportedly has to sleep on a concrete bunk and share a communal shower.” They quoted Professor Sérgio Lazzarini of São Paulo’s Insper business university who said, ““We are in a kind of different story now,” It [the investigation] is changing the perspective of many businessmen.”

Odebrecht is “president and chief executive of Odebrecht — the Brazilian multinational that is Latin America’s largest construction company but also, because it is privately held, one of the world’s biggest companies that most people have never heard of.” “With $41bn in revenues, 181,000 employees and businesses that include building football stadiums and nuclear submarines, his company operates in 23 countries, from Angola to the UK and most of Latin America.” Moreover, it “almost acted as the corporate handmaiden of Brazilian foreign policy, managing complex infrastructure projects in strategic locations that had caught the eye of former president Luiz Inácio Lula da Silva.”

This confluence of public influence for private benefit, a hallmark of Carpenter’s novel, is also present in the Odebrecht investigation as former President da Silva is “being investigated on separate allegations that he improperly used his connections to help Odebrecht win international contracts. Mr Lula da Silva and Odebrecht vehemently deny any wrongdoing. The yearlong probe, now aided by the Swiss attorney-general’s office and Portuguese and Latin American prosecutors, promises to illuminate the shadier side of Latin American business practices.”

As a company Odebrecht is privately held yet has $61bn in assets, which the article notes are largely held in joint venture (JV) with Petrobras. In 2014 the company had sales of $41bn but only profits of $210MM. The company says that it is due to its “razor thin margins” but it seems to me the money could be running out to others with profits that slim on such revenues. Unfortunately for the company, the arrest of its President has led to concerns from financial analysts. The article noted, “Moody’s, the rating agency, has warned the case could jeopardise some of Odebrecht’s $34bn backlog of construction contracts, including $3bn of Colombian projects.” Luis Fernando Andrade, head of Colombia’s infrastructure agency, said, “[If] proven guilty in Brazil, that could generate inabilities [for the company] in Colombia.”

Odebrecht is well known as an international construction company, with a particularly strong reputation for the “ability to operate successfully and manage relationships in countries with “significant levels of political risk”, as it noted in a recent bond prospectus. That includes building Tripoli’s airport — until work was disrupted by the 2011 Libyan military intervention — and Panama, where Odebrecht won $8.5bn of projects under former President Ricardo Martinelli, who is currently being investigated for corruption. A 2.8km viaduct built around Panama City’s old town for $782m had a cost per kilometre surpassed in the US only by Boston’s infamous “big dig”, according to official US statistics cited by local environmentalists.”

Such kudos would seem to indicate that the company plays in a very high-risk market. When you have high-risk, it is incumbent that you manage that risk appropriately. With the well-known proclivity for corruption in the international construction business perhaps the imbroglio that the company now finds itself is not too surprising. Yet the article noted “Many say that even if Mr Odebrecht proves his innocence, the scandal marks a watershed for Brazil’s construction companies, much like the partial humbling of banks after the global financial crisis.”

The article also details the trail of alleged money payments made by the company to Petrobras officials. It shows payment through known money laundering havens on its way to the bank accounts of Petrobras officials in Switzerland. The officials alleged to have received these monies are Renato Duque, Pedro Barusco and Paulo Roberto Costa. It is further alleged that some of this money was passed onto officials from Brazilian political parties.

I think Carpenter’s book portends today’s lesson for the compliance practitioner; which is re-emphasized by the FT article. For any US or UK company which has been doing business in Brazil for at least the last 10 years, you need to look very hard at who you did business with and how you did business with them. You need to see if there were any suspicious payments that could tie your company to not only Petrobras but also other Brazilian companies caught up in this scandal. You can be certain if the Brazilian prosecutors turn up evidence of involvement by a US company, they will turn it over to US prosecutors. You definitely want to a head off any letter from the Securities and Exchange Commission (SEC) about your accounting provisions or any raids by the Federal Bureau of Investigation (FBI) or Department of Justice (DOJ) looking for evidence of corrupt payments.

You can purchase a copy of the book The Fifth Letter on amazon.com by clicking 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

Hemingway and Trust and Respect for Compliance Leadership

On this day in 1899, Ernest Hemingway was born. To me, he was the greatest Man of Letters the US has produced. Probably like most of you all, I was introduced to Hemingway in high school through The Son Also Rises. It remains my favorite of his works but I have enjoyed many more of his novels, short stories and non-fiction work. I particularly enjoyed his Nick Adams short stories as I found them crisply written and with a conciseness of language that is not often found today, or perhaps in any other time. Hemingway was awarded the Pulitzer Prize in 1953 and the Nobel Prize for Literature in 1954. He died via suicide in 1962.

I thought about Hemingway and his writing style when reading the most recent Corner Office column by Adam Bryant in the New York Times (NYT), entitled “To Work Here, Win the ‘Nice’ Vote”, where he profiled Peter Miller, the Chief Executive Officer (CEO) of Optinose, a pharmaceutical company. Miller has some interesting leadership concepts that are applicable to the position of Chief Compliance Officer (CCO) 2.0 and how a CCO 2.0 could use influence to lead, not only in the compliance function but also across an organization.

Miller talked about one thing you rarely hear in the corporate world, which is to be nice. He garnered this concept because as a “young sales manager at Procter & Gamble. I had five salespeople working for me, and one of the guys was 55 and another guy was 48. They were really successful salespeople, so I realized that I couldn’t teach these guys anything about selling. Since I couldn’t teach them anything, I tried to cultivate trust and respect by working really hard at figuring out how I could help them in a meaningful way.”

Yet this apparent inability to lead in precisely the area he was tasked in leading led Miller to formulate “a very important core value of mine, which is that you can and should try to create friends at your company.” But more than simply becoming friends, Miller came to the understanding that underlying the friendship “is this concept of trust and respect. When you get that as a team, that’s when great things happen. And that comes from creating a culture of openness, of authenticity, of being willing to have fearless conversations. It’s about being yourself, not being afraid to say what’s on your mind.”

As a CCO, you need to be able to have that type of conversation with those both up and down your chain of command. Certainly it is always beneficial to have type of relationship with your team that allows the full flow of communication. Miller said, “Think about how people are with their best friends. You want them to succeed. And sometimes that means having really hard conversations. If that’s what’s motivating you — and you’re really trying to help everybody around you in a company as if they were great friends of yours — that’s really powerful.”

I was interested in using some of Miller’s insights in the managing up role for any CCO. You have to be able to have some very frank conversations with your CEO and Board members about your compliance program and any issues that may arise under it. As CCO if you “cultivate trust and respect by working really hard at figuring out how I could help them in a meaningful way” as Miller used with his more senior sales team members, it should certainly help you going forward when you have to manage up your chain.

I also thought about this somewhat enlightened approach as contrasted with another style that I read about in a recent On Work column by Lucy Kellaway in the Financial Times (FT) entitled, “Wrong skillset excuse masks coup at the top of Barclays”, where she discussed the recent termination of Antony Jenkins from Barclays Bank. The newly installed chairman of the company’s Board, John McFarlane, who simultaneously promoted himself to CEO, Jenkins former position, fired Jenkins. The reason Jenkins was fired; he no longer had the right “set of skills” for the organization. Chairman McFarlane explained to Kellaway that there were four skills going forward which (apparently) were lacking in Jenkins: “a) strategic vision; b) charisma; c) the ability to put plans in place that deliver shareholder value; and d) ability to ensure results were delivered.” Ironically, Kellaway noted that lawyers for Kleiner Perkins had said that Ellen Pao “was an employee who never had a skillset.”

Kellaway noted the obvious when she wrote “To invoke skillsets in hiring is not only ugly, but dangerous. Find the right person to run a very big bank is very hard, and having a list of skills that you are matching an applicant against is not necessarily the best way of going about it.” More ominously, she noted that the head of such bank would have to be able to reign in the traders and investment banker types who brought Barclays its unwanted regulatory scrutiny. More critically from the compliance perspective, I think it says much more about Chairman McFarlane that he did not say anything about a new CEO running the business ethically, in compliance or in any other manner which could help to prevent Barclays from another very large fine or penalty from the regulators.

McFarlane’s dictum is one that will certainly be noted by regulators on both sides of the Atlantic going forward. After the disastrous run by former Barclays’ head Bob Diamond, the bank was moving in the direction of regulatory compliance while securing the profits demanded by shareholders. However, McFarlane’s sacking of Jenkins could well derail the bank’s focus on ethics and compliance and engender the former attitude which led to the bank’s fine in the LIBOR scandal.

Unlike Peter Miller at Optinose, it does not appear that Chairman McFarlane appreciates the trust and respect style of leadership. I fear things may well turn out badly for Barclay’s yet again with the newly found emphasis on profits, profits and profits.

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

Mifune Gets a Star on the Walk of Fame-the Petrobras Scandal Only Gets Worse

It was announced last week that actor Toshirō Mifune (1920-1997) will be honored with a star bearing his name on the Hollywood Walk of Fame. The Hollywood Chamber of Commerce will add the star in 2016, together with new stars in the motion picture category for Quentin Tarantino, Michael Keaton, Steve Carell, Bradley Cooper, Ashley Judd and Kurt Russell. For those of you who may not have heard of Mifune, he was a veteran of sixteen films directed by Akira Kurosawa as well as many other Japanese and international classics. His films with Kurosawa are considered cinema classics. They include Drunken Angel, Stray Dog, Rashomon, Seven Samurai, The Hidden Fortress, High and Low, Throne of Blood, Sanjuro, and Yojimbo. While there are many great, great performances in these films, my personal favorite is Yojimbo where Mifune plays an un-named Ronin, who cleans out a village infested by two warring clans. The film was the basis for the great first Sergio Leone/Clint Eastwood Spaghetti western, A Fistful of Dollars. 

I had always thought that the Hollywood Walk of Fame honors actors but it turns out that it honors a great many more performers. For instance, next year will also see names like LL Cool J, Cyndi Lauper, Shirley Caesar, Joseph B. “Joe” Smith, Itzhak Perlman, Adam Levine, and Bruno Mars added in the music category. I considered this category of entertainers wider than simply actors when I recently read more about the burgeoning scandal in Brazil around the state owned energy company Petrobras and its ever-growing fallout.

The fallout has extended far beyond Petrobras, Brazil and even the direct parties who may have been involved. In an article in the Financial Times (FT), entitled “Petrobras woes loom large in Shell deal for BG”, Joe Leahy, Jamie Smyth and Christopher Adams reported on how the ongoing matter is affecting the world of super sized mergers and acquisitions. The rather amazing thing about this issue is not that British Gas (BG) has been caught up in the scandal or even has been alleged to paying bribes to Petrobras.

Rather it is because of assets that BG has in its portfolio. The article said, “Brazil has the potential to become the location of the most troubled assets in BG’s portfolio because the UK company is partner to Petrobras in some of the vast pre-salt oilfields off the country’s east coast in the Santos Basin.” This has led to speculation that “There is a risk that Petrobras will struggle to fulfill its mandate as sole operator for all new pre-salt oilfields because of the corruption scandal, and that this leads to delays in developing the deepwater discoveries, including those involving BG.”

This development arising out of the Petrobras scandal is so significant that BG mentioned it in their annual report, saying “In Brazil, we are closely monitoring how the current corruption allegations affecting Petrobras may impact the cost and schedule of the Santos Basin [pre-salt] development because of supply chain disruption and/or capital and liquidity constraints placed on Petrobras.” Think about that statement for a moment. It is only in the annual report because it could have a ‘material’ effect on BG and BG is a company being acquired by Shell to the tune of £55 million. However, as noted in the FT article, “many analysts say that Petrobras, partly because of the magnitude of the scandal, does not have the capital or management bandwidth to be the sole operator of all new pre-salt fields.”

What if Petrobras becomes unable to develop enough resources to feed South America’s largest democracy’s need for energy? In 2014 alone, the company posted a new loss of $7.4 billion, of which $2.5 billion was attributable to the ongoing bribery and corruption scandal. How much will it cost the country of Brazil to bring in outsiders to develop its own natural resources? This is a real possibility and it was further driven home by another FT article by Joe Leahy, entitled “Petrobras plans 37% cut in investment”. Petrobras currently is required by Brazilian “government policy forcing it to import petrol at international prices and sell it in the domestic market at a subsidized rate.”

Things can only get worse as Leahy reported that the company announced it “was cutting its projection for investment in 2015-2019 to $130.3bn or by 37 percent in relation to its previous plan.” This would lead to a reduction in “domestic production to 2.8m barrels per day of oil equivalent by 2020 from the previous target of 4.2m.” The article ended by noting that Petrobras would “divest $15.1bn in assets and undertake additional restructuring and sales of assets totaling $42.6bn in 2017-18.”

All of this certainly bodes poorly for the citizens of Brazil. For those who claim that bribery is a victim-less crime; I would point to this as Contra-Example A. But this information is also of significance to any Chief Compliance Officer (CCO) or compliance practitioner for a US, UK or other western country. Not only must you review any contracts you had with Petrobras and any of its suppliers; now you must digger several levels deeper. If you are in an acquisition mode, you not only need to look at the contracts of your target to see if they may have been obtained through bribery and corruption, the simple fact of having a contract with Petrobras may put your potential portfolio asset base at risk. For if Petrobras has to cut back 37% on investments at this point, chances are it will only get much worse. This 37% reduction is based on only the first round of estimates of the cost to the company of the bribery scandal.

But more than simply contracts directly with Petrobras, if you are evaluating a target who has contracts with Petrobras suppliers, you may be at equal risk. Not only could those suppliers obtain their contracts with Petrobras through bribery and corruption, those same contracts, even if valid, may not be worth their estimated value if Petrobras cannot fulfill them or even worse, pay for the goods and services delivered thereunder. How about payment terms? Do think for one minute, Petrobras would not unilaterally extend payment dates out 30, 60, 90 even 180 days when it finds itself in more bribery and corruption hot water?

Finally, I think there is a very good chance the US Department of Justice (DOJ) or Securities and Exchange Commission (SEC) could come knocking, unannounced, for any US company doing business with Petrobras or even with significant operations in Brazil. The SEC could do something as simple as send a letter requesting clarification of your internal controls or books and records regarding subcontractors or other third parties in Brazil. If you received such a letter, would you be in position to respond from the requirements for a public company under the Foreign Corrupt Practices Act?

Toshirō Mifune had a long and distinguished acting career. While it is not clear how long, how far and how deep the Petrobras corruption scandal will reach, it is clear that its repercussions will extend far past the energy industry or even Brazil. You need to review and be prepared to respond now.

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

Why Should Americans Care About the FIFA Indictments? Part IV – Corruption is a Global Scourge

Today, I conclude my four-part series on the above question posed to me recently by a colleague. In Part I, I responded that only the US government had the wherewithal and will to do so and that it continued the administration’s fight against the scourge of corruption. For Part II I focused on corruption on the pitch and how bribery and corruption ‘changes the truth of the game’ of soccer (AKA Football). In Part III, I reviewed why American citizens should care that US companies are not engaged in bribery and corruption. Today we look at reason number four of why Americans should care about the Department of Justice (DOJ) bringing indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the invidiousness of corruption, that it is not a victimless crime and how its scourge hurts countries.

Jack Warner, the former FIFA Executive Committee member and head of the North American regional soccer federation CONCACAF, is alleged to have received a $10MM bribe to swing votes to South Africa so that it could land the hosting of the 2010 World Cup. However Warner had (allegedly) been previously paid by Morocco for his votes. The Sunday Times, in an article entitled “‘Please, this is very secret’ –the explosive claims of bribery and vote-rigging that Fifa decided to kick into the long grass”, reported that two former FIFA officials, Ismail Bhamjee and Michel Bacchini told the paper that Warner had been paid $1MM by Morocco to secure his vote but Warner double-crossed the country by selling out to South Africa for $10MM. Where is a little honor among crooks? The answer may be in the character of Jack Warner, who is a Minister of Parliament in Trinidad and was once a government minister, but resigned because of fraud allegations. Is that the type of character you really want in your government? What do you thing that type of politician will do when faced with an ethical dilemma? (Hint-take the money)

What about South Africa and its role as an alleged bribe payor? South Africa originally denied any payment was made. However, in an article in the Sunday Times, entitled “Trinidad’s ‘Robin Hood’ plots escape from sheriff”, Tony Allen-Mills reported that the country later changed its story to say that the payment was made to Warner “to fund football development.” Even assuming it was a charitable donation, one can only conclude there were zero protections around the payment.

For we next were told that South Africa did not actually make the payment but FIFA did directly. Amazingly, and pulling a full 180 degree Bat-Turn from his previous positions, the Secretary General of FIFA, Jérôme Valcke said on Wednesday said that he had authorized a $10 million payment to Warner after a full 13 days of denying it. The Sunday Times also reported that US authorities were investigating former FIFA President Sepp Blatter about a meeting, where he was present, and this payment was discussed.

Whoever made the payments, Ed Thomas, in a BBC online article entitled “Fifa corruption: Documents show details of Jack Warner ‘bribes’”, reported that this $10MM was not used for any soccer development in Trinidad but was used by Warner himself. Thomas reported that three payments were made into CONCACAF accounts controlled by Warner, one on January 4, 2008, one on February 1, 2008 and a final payment on March 10, 2008; all adding up to $10MM. Thomas also reviewed documents to show how the money was either laundered and then paid back to Warner or simply used to pay Warner’s personal expenses such as personal loans and credit card bills.

To those who maintain that bribery is a victimless crime, simply imagine what a country like Trinidad could do with $10MM to invest in its soccer programs and infrastructure? How many youth academies could be funded with that amount of money? How many soccer fields could be built? The answers is lots and lots but when corruption is so endemic that a $10MM bribe can be paid with such ease, with no oversight or even questions being raised, it is the citizens of Trinidad who are the victims.

But more than simply Jack Warner and his corruption in Trinidad are at play here. Even world soccer power Brazil has welcomed the investigation into FIFA, as one of those arrested was José Maria Martin, the former head of Brazil’s soccer federation, the CBF. Writing in the Financial Times, (FT) Joe Leahy, in an article entitled “Arrests sparks hope of cleaner Brazilian game”, wrote, “For Brazil, his arrest prompted hopes that finally one of the dirtiest institutions, football, might be held to account.” He quoted Flávio de Leão Bastos Pereira, a professor of criminal law at Mackenzie University in Sao Paulo for the following, “This could stimulate the necessary changes in Brazilian football in terms of greater professionalism, ethics and transparency.”

Apparently endemic corruption reigned in the country that has won five World Cup championships for many years with multiple persons involved in the corruption. Unfortunately for some (at this point unknown) US company or companies, payments were made through a third party agent, “Jose Hawilla – the head of Brazilian based marketing company Traffic and one of the main paymasters behind the corruption at Fifa”. So much money went through Hawilla that in his guilty plea agreement he agreed to forfeit $151MM in his profits.

Interestingly, and probably for an entirely different set of reasons, Brazilian President Dilma Rousseff announced that she welcomed the investigation. In another FT article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported that the President wanted an outside agency to investigation corruption around the CBF because soccer was run by private organizations and the public prosecutors had been unable to crack it. She was quoted as saying “I say that if it needs to be investigated, investigate it – all the world cups, everything.” This is certainly a refreshing change from her attitude towards the investigation into corruption at Petrobras.

The point to all this is that corruption is a global scourge. I, and many others, believe it is a component of political instability and terrorism. But the FIFA scandal shows how corruption, which may appear to be victimless and not appear to hurt anyone, can, does and has destroyed the fabric if not the soul of some of the world’s greatest institutions. Even if you simply think it is much to-do about a game, we all should have some expectation that games will be played fairly with the best team on any given day. Unfortunately the FIFA scandal shows that ‘fixing’ has been there for a long time. The world’s most popular game deserves better. As Americans we should all want to fight the scourge of corruption wherever it might appear and we certainly believe that there should be a level playing field for all who want to compete.

So to my friend who started me on this four-part journey of why Americans should care about the FIFA scandal, I hope that I have persuaded you why you should care. For the rest of you, I hope you have enjoyed this series. One of the joys of blogging and podcasting is engaging with readers and listeners. So keep those questions coming and you too can help me engage in the fight against the global scourge of bribery and corruption.

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

Why Should Americans Care About the FIFA Indictments? Part III – Corruption and US Companies

Today, I continue my four-part series on the above question posed to me recently by a colleague. In Part I, I wrote that only the US government had the wherewithal, tools and will to do so. Yesterday, I focused on corruption on the pitch and how bribery and corruption ‘changes the game’ of soccer (AKA Football). Today is the third of my of my four reasons on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the corruption and US companies.

While there were no US companies specifically identified in the indictments, there were allegations that bribes were paid and pocketed in connection with the sponsorship of the Brazilian national soccer team by “a major U.S. sportswear company.” This company was later determined to be Nike. In an initial statement Nike denied any involvement in the payment of bribes and said they were cooperating with the relevant authorities. However, they later changed this original statement to say, “Like fans everywhere we care passionately about the game and are concerned by the very serious allegations. Nike believes in ethical and fair play in both business and sport and strongly opposes any form of manipulation or bribery. We have been cooperating, and will continue to cooperate, with the authorities.”

Nike is not alone in its World Cup sponsorship as there are numerous other American companies involved, both sportswear manufacturers and other retailers, such as those from the beverage industry. The involvement of US companies and companies subject to the Foreign Corrupt Practices Act (FCPA) brings up the specter of the FCPA for companies involved in FIFA sponsorship and marketing partnerships. I do not see this as an issue so much about level playing fields for business or even the greater benefits that US companies can bring even when they are required to pay bribes. (The latter argument was used by Wal-Mart apologists around the company’s payments of bribes to do business in Mexico as benefiting the people of Mexico. Let us be quite clear-the bribes paid by Wal-Mart benefitted Wal-Mart and its income from its Mexican operations.)

Information in the indictments was quite damning about the involvement of a company identified as ‘sportswear company A or E’. In a Financial Times (FT) article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported one of the cooperating defendants Jose Hawilla, owner of Traffic Group and who has pled guilty, acted as a third party agent for Nike’s landmark 1996 agreement to allow Nike to fit out the Brazilian national soccer team. Moreover, the article noted, “The prosecutors said that additional financial terms between Traffic and the unnamed sportswear company were not reflected in the CBF agreement. Under these terms, the company agreed to pay a Traffic affiliate with a Swiss bank account an additional $30m in ‘base compensation’ on top of the $160m it paid to the CBF. Three days later, the company and Traffic signed a one-page contract saying the CBF had authorized Traffic to invoice Nike directly “for marketing fees earned upon successful negotiation and performance of the agreement”. Anyone see any Red Flags in that scenario?

Beyond the criminal side of the FCPA, there is the civil side enforced by the Securities and Exchange Commission (SEC) through the Accounting Provisions, which consist of the books and records provisions and the internal controls provisions. According to the FCPA Guidance, “The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””

As was made clear with the recent BHP Billiton FCPA enforcement action, violations of the accounting provisions do not apply only to brib­ery-related violations of the FCPA. The FCPA Guidance states these provisions “stand alone to help investors have assurance that all public companies account for all of their assets and liabilities accurately and in reasonable detail.” For the books and records provisions this means that US public companies must “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” For the internal controls provisions, US public companies must provide a system of internal controls that “provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements.” In other words, the accounting provisions are designed to protect investors in addition to working towards preventing, detecting and remediating bribery and corruption.

In addition to these basic legal requirements, which are all set out in the FCPA and violation thereof could lead to criminal or civil exposure; there will be the costs. The FCPA Professor has identified “three buckets” of costs relating to an alleged FCPA violation. The first is the pre-resolution investigative and remediation costs, the second is the fine and penalty assessment and the third is the post-resolution implementation costs. It is generally recognized that buckets one and three can be up to two to six times the amount of the fine and penalty.

But with the FIFA scandal, there will be another huge factor for companies to consider and that is the negative publicity. This scandal is the largest worldwide corruption case ever brought. It is also the highest profile corruption case ever brought. It will command attention for years to come. If any US companies are linked to bribery and corruption at FIFA, their name will be dragged through the international press ad nauseum. If there are leaks about information on companies before they investigate or get out ahead of any allegations, which may spill into the press, it will certainly not look good.

For a taste of this you can look to the accounting firm KPMG, who is the auditor for FIFA. In a story originally reported by Francine McKenna at the Wall Street Journal (WSJ) and later reported by the New York Times (NYT), KPMG has blessed FIFA’s books since at least 1999. In the NYT piece, entitled “As FIFA case grows, focus turns to its auditors”, Lynnley Browning wrote that the KPMG audits “only heightens the puzzling disconnect between the different pictures that are emerging of FIFA as an organization: riddled with bribes and kickbacks in the view of prosecutors yet spotless according to the outsider most privy to its internal financial dealings.” How well do you think KPMG will come out of this?

The bottom line is that any US company or any other entity subject to the FCPA had better take a close look at its dealings with FIFA, regional soccer federations such as CONCACAF and national soccer federations. A full review is in order starting with who you did business with and how you did business with them. As Mike Brown would say, “follow the money” and see where it went, if you can account for it and if it was properly recorded on your company’s books and records. Finally, now would be a very propitious time to review your internal controls; for even if you had a robust paper system of internal controls like BHP Billiton did, if it is simply a check-the-box exercise or even worse you do not follow the internal compliance controls you have in place, you should begin remediation now.

As to why Americans should care about US companies engaging in corruption, that answer would seem to be straightforward. Companies which engage in bribery and corruption mislead investors and diminish the marketplace of information to base investments upon. If a company is engaging in bribery and corruption, they never report it in their books and records; they always try to hide it so that it cannot be detected. Usually poor internal controls exist, which can allow bribery and corruption to exist or even the possibility of it, once again demeaning the value of a company if that company cannot assure its investors that funds will be paid out with the approval of management. Further, contracts or other business obtained through bribery and corruption presents a false picture of the true financial health of a company as it allows profits obtained through illegal means to be booked as legitimate. Finally, if a company is engaging in bribery and corruption, the financial cost to the company can be astronomic. There is only one Wal-Mart that can sustain hundreds of millions dollars spent to investigate allegations of bribery and corruption and remediate any issues. Avon spent north of $500MM on its pre-resolution investigation and remediation. All of this does not even get to the issue of inflated stock values and the inevitable shareholder derivative litigation. Lastly, there is reputational damage. If a company is willing to engage in bribery and corruption as a part of a business strategy do you want to invest in the organization?

As an American should I care about US companies involved in the FIFA corruption scandal? If the facts reported in the FT are close to correct, I would certainly think so. If monies were paid by a ‘sportswear’ company in the form of marketing fees to Traffic or even a flat $40MM payment to a Traffic affiliates Swiss bank account, this is something which should not be tolerated.

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

 

 

 

 

Who is Responsible for Complying with the FCPA?

The 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

Good Bye to Mr. Cub, the Siege of Vienna and Doing More Compliance with Less

Let’s play two! That was perhaps the most famous maxim from Ernie Banks, who died this past weekend at the age of 83. As for a sobriquet, it does not get much better than being known as ‘Mr. Cub’ from any baseball fan from 9 to 90. Banks was famous as one of the greatest power-hitting shortstops, leading the National League (NL) in homers and runs batted in, while playing that position as an All-Star in 1958 and 1959. He ended up with over 500 career home runs, when that actually meant something. But he was also known as ‘Mr. Sunshine’ for having one of the most pleasant dispositions of anyone ever to play Major League Baseball (MLB). He remained close to the Cubs team and made frequent appearances at their spring training grounds, in Arizona. Author Harry Strong wrote in 2013 that “the Chicago Cubs do not have a mascot, but they hardly need one when the face of the franchise is still so visible.” Mr. Cub indeed.

I also considered the invasion of Europe by the Ottoman Empire that culminated in the siege of Vienna, in 1683. This marked the high-water mark for the Ottomans and after their defeat they began a long slide until they became known as the ‘sick man of Europe’ in the early 1900s. One of the more interesting things I learned was that the original walls surrounding Vienna had been constructed from monies paid to the Holy Roman Emperor as his ransom for releasing the English King Richard the Lionhearted back in 1194. Talk about getting some serious value for your spending.

I thought about that initial use of monies by the Holy Roman Emperor, who was then the King of Vienna almost 500 years before the Ottoman invasion and how the later walls of Vienna were re-engineered to repulse not only more modern siege weapons but even the advent of gunpowder and cannon fire which the Ottomans tried to use to batter the city into submission.

While the rest of the US economy is finally on an uptick, things down here in Texas are not so rosy with the price of oil hovering at less than $50 per barrel. Major energy service companies have announced cutbacks in spending and layoffs have commenced in a major way, with some companies trimming their work force by over 10% at this early stage. Even companies that have not laid off workers, as yet, are seriously considering no raises or bonuses for the largest parts of their employee base for 2015. For those in the compliance space, viewed as non-revenue generating overhead, things are beginning to get ugly, if not downright scary.

What does this economic reversal mean for compliance? First, and foremost, your compliance function has to continue to operate to prevent, detect and remediate compliance issues. The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) will not consider arguments that ‘we did all we could with what we had’ when you are still operating in places where there is a high indicia of bribery and corruption. But what do Mr. Cub and the Siege of Vienna have with this economic conundrum facing those Chief Compliance Officers (CCOs) and compliance practitioners in the energy space? Both of these examples point out that you can use other parts of your organization to affect your compliance efforts going forward. Banks was associated with the Cubs for over 60 years. The walls of Vienna, originally constructed in the 13^th century, were used as a base for the next 400 years. I have long advocated that your Human Resource (HR) function should be a first-rate friend of your compliance function. There are several areas where HR has expertise that can facilitate your compliance efforts going forward. These include hiring, employee evaluation and succession planning to help enable you to hire, reward and promote employees with the values that compliment your compliance efforts.

Other areas include the IT and Marketing departments. Another person I would add is the Corporate Secretary, the reason for this is that the Corporate Secretary has several constituencies within the company that he or she may work with and for. This can provide an opportunity to view a company’s ethics and compliance program and to help shape and direct it. The Corporate Secretary, head of IT or Marketing may be excellent resources to the CCO, that may be under-utilized. It might be worth a cup of coffee or short meeting to see what they might think about your ethics and compliance program or how they might be able to assist you in your efforts.

Another way to think through some of these issues was presented in a recent article in the Financial Times (FT) Fast Times column, entitled “Local lessons for taking on the world”, by Tyler Brûlé. In this article he pointed to some roundtable discussions he attended at the recent conference in Davos, where local mayors discussed some “tried – and – tested policies for governing thousands of people that can be applied to millions of people”. I found them some excellent thoughts for a CCO or compliance practitioner who might be required to do more with less on a rather immediate basis.

Degree or not degree. The Swiss do not believe that a person must have an advanced degree to fix high-speed cabling above a mountain pass or to be a fine hotel general manager. Brûlé notes there is “An emphasis on apprenticeships and vocational education means more workers with useful skills, rather than thousands of unemployed people with useless degrees.” For the CCO, think about using non-lawyer resources in key roles such as using a well-trained paralegal to oversee your ongoing third party program.

Support compliance locally. With an emphasis on not just locally grown but also locally made, the Swiss use this practice to aid many different and diverse areas from protecting small businesses to wasteful global logistics. Brûlé said that “Buying local helps expand the wealth base and forces big retailers to cater to an audience who appreciate that many items are still Made in Switzerland.” For the compliance practitioner this means using more local resources to home grow compliance in various regions outside the US.

Join the compliance community. Brûlé believes that “New arrivals need to recognize that they’re signing up to Switzerland’s social codes, and not the other way around.” While this might not seem Politically Correct from the political perspective, from the compliance perspective you should work more closely with HR to hire folks who profess the same values that you espouse.

High-value versus value engineering. Brûlé writes that the Swiss have “A tradition of building infrastructure, housing and offices right the first time rather than engineering them so they need to be updated constantly creates a culture where quality is admired and consumers expect value for money rather than settling for “good enough”.” I recognize that programs, policies and procedures need fine-tuning, however, from the walls of Vienna being in use for over 400 years to the Cubs using Ernie Banks as an institution for nearly that long shows that high-value can be derived from multiple sources. As a compliance practitioner you are only limited by your own imagination to make things work, through trial and error if need be but you can create something which will work for some time.

Talk to me. Interestingly Brûlé found that “the Swiss are among the lowest users of social media in Europe.” He chalked this up to “village life, good public transport and a sense of community.” If there is one skill a CCO or compliance practitioner should learn, work on and employ continuously it is to listen. Beyond that your employee base is in large part looking for your input on how to do business ethically and in compliance. So talk to them as well.

So farewell to Ernie Banks and I hope that the Cubs have a better century in the 21^st than they had in the 20^th.

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

What’s the Password for Compliance? Swordfish and Lessons for the CCO

I continue my exploration of the Marx Brothers this week by looking at their most successful commercial film made for Paramount, Horse Feathers. While Duck Soup is and always will be my favorite film due to its overall and complete anarchy, Horse Feathers comes in a close second. The movie takes place on a college campus and generally revolves around Huxley College’s attempt to win ‘the big game’ against Darwin College and payments to college football players (does that sound familiar?). I remember after the first time I saw it and told my father about it, he was still able, some 40 years after he first viewed it, to quote the famous password scene involving all manners of puns on the word ‘swordfish’. I quote the entire scene, where Professor Wagstaff (Groucho) attempts to gain access to a Speakeasy guarded by Baravelli (Chico).

Baravelli: …you can’t come in unless you give the password.

Professor Wagstaff: Well, what is the password?

Baravelli: Aw, no. You gotta tell me. Hey, I tell what I do. I give you three guesses. It’s the name of a fish.

Professor Wagstaff: Is it “Mary?”

Baravelli: [laughing] ‘At’s-a no fish!

Professor Wagstaff: She isn’t? Well, she drinks like one! …Let me see… Is it “Sturgeon”?

Baravelli: Aw, you-a craze. A “sturgeon”, he’s a doctor cuts you open when-a you sick. Now I give you one more chance.

Wagstaff: I got it! “Haddock”.

Baravelli: ‘At’s a-funny, I got a “haddock” too.

Wagstaff: What do you take for a “haddock”?

Baravelli: Sometimes I take an aspirin, sometimes I take a calomel.

Wagstaff: Y’know, I’d walk a mile for a calomel.

Baravelli: You mean chocolate calomel? I like-a that too, but you no guess it. [Slams door. Wagstaff knocks again. Baravelli opens peephole again.] Hey, what’s-a matter, you no understand English? You can’t come in here unless you say, “Swordfish.” Now I’ll give you one more guess.

Professor Wagstaff: …swordfish, swordfish… I think I got it. Is it “swordfish”?

Baravelli: Hah. That’s-a it. You guess it.

Professor Wagstaff: Pretty good, eh?

Harpo (“Pinky”) takes the perhaps more direct approach. When Baravelli challenges him for the password, he gets into the speakeasy by pulling a sword and a fish out of his trench coat, putting the sword down the throat of the dead fish and presenting the combined sword and fish the doorman. While I still guffaw when reading all of this, I would urge you to click through to the YouTube video I have linked to at the end of this blog post.

I do find some lessons for the Chief Compliance Officer (CCO) or compliance practitioner in this scene. I have adapted the lessons from an article in the Financial Times (FT) by Michael Skapinker, entitled “Seven lessons in management I learnt over the last decade”.

1. Do not rush. It takes Groucho a while but he does not rush and he gets in. We all arrive with a new plan. Your plan may be right or wrong but unless the barbarians are at the gate (i.e. banks or creditors) you will have time to listen, refine and build alliances and to identify those folks who were actually waiting for what you may want to propose. Skapinker believes the most important promise you will make in an interview is to talk to everyone first and then work towards your implementation.
2. A good deputy helps you sleep at night. This one may seem to be a counter-intuitive lesson from the above skit but not in reality, as it is in the interest of the establishment for Groucho to actually enter the Speakeasy. However, Skapinker believes you should have someone who not only understands what you want but also “a deputy with different skills from yours. You want someone who will alert you to problems. But you also want someone who sees the business the way you do”.
3. Decide what your business stands for and tell everyone until you can no longer stand the sound of your voice. The Marx Brothers did this every time they opened their collective mouths; insanity prevailed. Skapinker wrote, “You need to decide what yours is, and you need to keep telling people, both inside and outside. Whether they believe you depends on how true it is”. I cannot think of anything more important for the CCO or compliance practitioner to follow.
4. Hire people on probation. This would seem to be the entire point of the swordfish exercise. You need to find a way to determine if folks are going to do and say the right thing before you let them in. In the corporate world this should take place in the form of employees being evaluated for doing business the right way and in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Whenever someone is promoted to senior management or into a position where there is a high risk of corruption, such as to a region with a propensity for corruption, such an evaluation should be made by the compliance function in conjunction with the Human Resources (HR) function of an organization.
5. Treat your team like adults. If the Marx Brothers were anything it certainly was adults. By this I mean their humor worked on multiple and a multitude of levels. It worked for me as a teenager in the 1970s just as it worked for my father who was then in his late 40s. Skapinker relates what might seem self-obvious that “Most people want to do a good job. They do not come to work to rip you off. So trust them. Judge them by their results and do not hover over them.” However, coming from the energy industry in Houston, I have certainly seen companies that treated employees like they were in the third grade. It simply does not work in the compliance arena because if you are big enough to be international, you will not have the ability to lord over all your employees, all the time. You have to try and hire the right folks, train them and give them the tools to succeed.
6. Tell people what they have just told you. This technique simply shows you are listening, which is how Groucho finally figured out the password and got into the Speakeasy. In a company, Skapinker believes that “There is no more powerful management tool than showing people that you have listened to them. The best way not only to show you have listened, but really to do so, is to repeat their views in good faith back to them. That way, even if you decide something different, they feel they have had a good hearing.” At the close of meetings you can use this strategy to help rally your team around your decision including those who might have disagreed with you.
7. Make your numbers. I think Harpo’s example here is paramount. Let folks see what you are doing. Since he was the mute one, he gave a visual representation of a swordfish but it communicated the message. For the CCO or compliance practitioner, you need to come up with some metrics to demonstrate the value you are adding. I would suggest that it comes in the area of accounting controls because at the end of the day, internal controls under the FCPA are accounting controls. You need to communicate your mission and that you are achieving it to the Board of Directors or senior management. 

I still grin when I think about the swordfish scene. For a clip of the scene on YouTube, 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

The Darwin Awards, Nepotism and Compliance

I am a podcast aficionado. One of my favorites is Slate’s Hang Up and Listen, which is a weekly discussion of sports events and issues. One of its segments details each participant relating a whimsical event from the previous week. I thought about whimsy when I was studying Christopher Columbus and his travels to the New World recently. Everyone knows that In 1492, Columbus sailed the ocean blue but you may not know that on this day in 1493, sailing near the Dominican Republic, he believed that he saw three mermaids which he reportedly described them as “not half as beautiful as they are painted.” However, it turned out that he only saw manatees for the first time.

Mermaids, mythical half-female, half-fish creatures, have existed in seafaring cultures at least since the time of the ancient Greeks. Typically depicted as having a woman’s head and torso, a fishtail instead of legs and holding a mirror and comb, mermaids live in the ocean and, according to some legends, can take on a human shape and marry mortal men. Mermaids are closely linked to sirens, another folkloric figure, part-woman, part-bird, who live on islands and sing seductive songs to lure sailors to their deaths. Mermaid sightings by sailors were most likely manatees, which are slow moving aquatic mammals with human-like eyes, bulbous faces and paddle-like tails.

I thought about Columbus and his initial belief that he saw mermaids and decided to cut him a bit of slack, even if only to chalk it up to whimsy. But sometimes you simply cannot believe that corporations and their senior management are so stupid as I continue to I read about the ongoing Korean Airlines scandal, which has been dubbed Nut-Rage. As readers will recall it involved the (now former) Korean Air executive Cho Hyun-ah (Heather Cho), who threw one of the greatest diva-worthy (or perhaps five year-old worthy) public temper tantrums of all-time. An article in the BBC Online, entitled “Former Korean Air executive apologises for ‘nut rage’“, reported that “Ms Cho was onboard a Korean Airlines plane departing from New York for Incheon last week when she demanded a crew member to be removed, after she was served nuts in a bag, instead of on a plate.” Also, according an article in Slate entitled “Flight Attendant Forced to Kneel for Serving Nuts in a Bag (Instead of a Dish) to Korean Air Executive” by Daniel Politi, Ms. Cho was not simply content to disrupt the plane’s service, air traffic control and airport scheduling, he wrote “Just when you thought the whole story about the Korean Air executive who went nuts over some nuts couldn’t get more ridiculous, the head of the cabin crew said he was forced to kneel to apologize about how a flight attendant served some macadamia nuts. Just in case you haven’t been following the case, Heather Cho, the daughter of the airline’s chairman and the executive in charge of in-flight service, forced a plane to return back to the gate at New York’s JFK airport last week after a flight attendant dared to bring her macadamia nuts in a bag and not a dish. Cho forced the head of the cabin crew to get off the plane.”

But the story did not end there. In another BBC article, entitled “Korean Air executive ‘made steward kneel over nut rage’”, the head of the cabin crew also reported that “Once home, officials from the airline came to his home to ask him to say that Ms Cho did not use abusive language and that he had voluntarily got off the plane.” Not to be outdone in this attempt to obstruct the truth and intimidate the witness, the BBC article also reported “Korean Air initially defended Ms Cho, noting that she was responsible for overseeing flight service in her role as vice-president, but the company later apologised.”

Late last year, Ms. Cho was determined to be a flight risk and was detained by Korean police. Song Jung-A reporting in the Financial Times (FT), in an article entitled “Korean Air ‘nut rage’ heiress held as flight risk”, said that Ms. Cho was detained by the Seoul western district court, which was quoted as saying ““There is a risk of flight or evidence tampering…while investigations are under way.””

However, now this piece of privileged child blowhardedness and outright corporate stupidity has taken an even more serious turn. In a Wall Street Journal (WSJ) article, entitled “Rancor Builds of Korean Air Affair”, Alastair Gale reported, “that behavior led to Ms. Cho’s indictment on charges of assault and changing flight plans, both violations of aviation-safety laws. Ms. Cho was also charged with coercion and obstruction of justice after she allegedly ordered company officials to intervene in the government probe into the incident. If convicted, Ms. Cho faces a maximum penalty of 15 years in prison, according to a spokesman for the Korea Bar Association.”

Where is the corporate stupidity here? Gale noted that “Immediately following the incident, Korean Air released a statement saying Ms. Cho had pointed out the service problem as part of her duties and that the captain decided to offload the head of cabin crew. Jung-A also reported “The court added that there were “systematic attempts to cover up” Ms. Cho’s actions since the nut rage incident this month.” This led to the arrest of another Korean Air executive who was accused of “putting pressure on employees to lie to government investigators” about the incident. Unfortunately when the gene pool is limited, not only do you get inbreeding but you also get the results of inbreeding. In Korea, they even have a name for it – Chaebol. 

As noted in the Gale piece, Chaebol began after the Korean War “when South Korea’s government selected companies to take the lead in industries it thought could thrive internationally. Those companies were guaranteed financing and protected from local competition to help them grow and dri ve the nation out of poverty.” Gale also reported, “Ms. Cho’s tantrum is being held up as an example of the problems that arise when corporate power is passed down family lines. “It is foolish of the owners of big corporations to give their children any role in management unless they show at least a modicum of ability,” conservative South Korean newspaper Chosun Ilbo said in a recent editorial. “The only way to shed the image of rampant nepotism is to place ability before family ties.””

So should Ms. Cho, the Korean practice of Chaebol and the Nut-Rage Affair be chalked up as a whimsy or should this story be featured in the annual Darwin Awards which states, “We watch the watchman watch the watchmen”? Natural selection deems that some individuals 
serve as a warning to others. Who are we to disagree?

The next generation, ever and anon, is descended from the survivors. Nepotism rules exist in well-run corporations for a valid business reason. For if you hire the CEO’s daughter, make her a senior executive with no accountability except to Daddy and she throws uber temper tantrums, you may really have a compliance problem because your corporate culture is obviously sadly lacking.

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