FCPA Compliance and Ethics Blog

July 16, 2015

Great Structures Week IV – The Gothic Cathedral and Compliance Incentives

Our Lady at ChartresI continue my Great Structures Week with focus on great structural engineering and its innovations in the medieval world – that being the Gothic Cathedral. I am drawing these posts from The Great Courses offering, entitled “Understanding the World’s Greatest Structures: Science and Innovation from Antiquity to Modernity”, taught by Professor Stephen Ressler. When it comes to Gothic Cathedrals, Ressler notes that they are a rich case study in the development of “architecture and the limits of empirical design, literally written into the walls of the buildings.”

The innovation of the Gothic Cathedral was to use elements of the Roman basilica but to add “height and light, featuring ever taller naves, pierced by ever-larger clerestory windows, and delineated by ever-more-slender engaged columns”. The first innovation came with the pointed arch followed by ribbing on the columns to help stiffen and strength them more effectively. However the truly dynamic innovation was the creation of flying buttresses, which were huge additional columns outside the structure yet were designed to become load-bearing members so the highest point inside the cathedrals could be filled by light through ornately stained glass windows. Two of the finest examples of these Gothic Cathedrals are both found in France. They are the Cathedral of Our Lady at Chartres and Cathedral of St. Stephens at Bourges.

Just as the medieval world built up the structural engineering techniques from their forebears, as your compliance regime matures you can implement more sophisticated strategies to make your Foreign Corrupt Practices Acct (FCPA) compliance program a part of the way your company does business. Using an article in the Spring 2014 issue of the MIT Sloan Management Review, entitled “Combining Purpose with Profits”, as a basis, I have developed six core principles for incentives, for the compliance function in a best practices compliance program.St. Stephens at Bourges

1. Compliance incentives don’t have to be elaborate or novel. The first point is that there are only a limited number of compliance incentives that a company can meaningfully target. Evidence suggests the successful companies are the ones that were able to translate pedestrian-sounding compliance incentive goals into consistent and committed action.
2. Compliance incentives need supporting systems if they are to stick. People take cues from those around them, but people are fickle and easily confused, and gain and hedonic goals can quickly drive out compliance incentives. This means that you will need to construct a compliance function that provides a support system to help them operationalize their pro-incentives at different levels, and thereby make them stick. The specific systems which support incentives can be created specifically to your company but the key point is that they are delivered consistently because it signals that management is sincere.
3. Support systems are needed to reinforce compliance incentives. One important form of a supporting system for compliance incentives “Is to incorporate tangible manifestations of the company’s pro-social goals into the day-to-day work of employees.” Make the rewards visible. As stated in the FCPA Guidance, “Beyond financial incentives, some companies have highlighted compliance within their organizations by recognizing compliance professionals and internal audit staff. Others have made working in the company’s compliance organization a way to advance an employee’s career.”
4. Compliance incentives need a “counterweight” to endure. Goal-framing theory shows how easy it is for compliance incentives to be driven out by gain or hedonic goals, so even with the types of supporting systems it is quite common to see executives bowing to short-term financial pressures. Thus, a key factor in creating enduring compliance incentives is a “counterweight”; that is, any institutional mechanism that exists to enforce a continued focus on a nonfinancial goal. This means that in any financial downturn compliance incentives are not the first thing that gets thrown out the window and if my oft-cited hypothetical foreign Regional Manager misses his number for two quarters, he does not get fired. So the key is that the counterweight has real influence; it must hold the leader to account.
5. Compliance incentive alignment works in an oblique, not linear, way. The authors state, “In most companies, there is an implicit belief that all activities should be aligned in a linear and logical way, from a clear end point back to the starting point. The language used — from cascading goals to key performance indicators — is designed to reinforce this notion of alignment. But goal-framing theory suggests that the most successful companies are balancing multiple objectives (pro-social goals, gain goals, hedonic goals) that are not entirely compatible with one another, which makes a simple linear approach very hard to sustain.” What does this mean in practical terms for your compliance program? If you want your employees to align around compliance incentives, your company will have to “eschew narrow, linear thinking, and instead provide more scope for them to choose their own oblique pathway.” This means emphasizing compliance as part of your company’s DNA on a consistent basis — “the intention being that by encouraging individuals to do “good,” their collective effort leads, seemingly as a side-effect, to better financial results. The logic of “[compliance first], profitability second” needs to find its way deeply into the collective psyche of the company.”
6. Compliance incentive initiatives can be implemented at all levels. Who at your company is responsible for pursuing compliance incentives? If you head up a division or business unit, it is clearly your job to define what your pro-social goals are and to put in place the supporting structures and systems described here. But what if you are lower in the corporate hierarchy? It is tempting to think this is “someone else’s problem,” but actually there is no reason why you cannot follow your own version of the same process.

Looking for some specific compliance obligations to measure against? You could start with the following examples of compliance obligations that are measured and evaluated.

For Senior Management

• Lead by example in your own conduct and in the decisions you take, to the resources and time you commit to compliance.
• Facilitate and proactively practice in day-to-day activities the key compliance competencies, both internally and externally.
• Support specific initiatives from the Chief Executive Officer (CEO), legal and compliance functions.

For Middle Management

• Demonstrate, facilitate and proactively practice in day-to-day activities the key compliance competencies, both internally and externally.
• Support specific initiatives from the legal and compliance functions.
• Ensure that all employees, agents and contractors directly or indirectly reporting to you fully complete all required training and communications in a timely manner.
• Provide full cooperation with investigations conducted by the compliance or legal functions of any alleged violation of compliance policies.
• Include the Chief Compliance Officer (CCO) or another legal or compliance function representative in your management meetings at least twice per year, per geography.
• Identify instances of non-compliance and support compliance monitoring and reporting systems.
• Partner with compliance in resolving compliance issues.

For Business Development or Company Sales Representatives

• Certify that all employees, agents and contractors directly or indirectly reporting to you have fully reported all sales and marketing interactions with all government officials in a timely manner.
• Certify that all employees, agents and contractors directly or indirectly reporting to you have fully, promptly and accurately reported all expenses with third party sales representatives have occurred.

The Gothic Cathedral is one of the greatest structural engineering feats mankind has ever created. It combined a dimension of height not surpassed for nearly 1000 years with an ingress of light not previous seen in structures. This use of light facilitated the development of the artistry of stained-glass windows.

For a review of what goes into the incentive structures of a best practices compliance program, I would suggest you check my book Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program, which is available through Compliance Week. You can review the book and obtain a copy 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

July 14, 2015

Great Structures Week II – Structures from Ancient Egypt and Greece

great pyramid of giza

I continue my Great Structures Week with a focus on great structures from the earliest times, ancient Egypt and Greece. I am drawing these posts from The Teaching Company course, entitled “Understanding the World’s Greatest Structures: Science and Innovation from Antiquity to Modernity”, taught by Professor Stephen Ressler. From Egypt there are of course the Pyramids, of which Ressler says, “They’re important, not just because they’re great structures, but also because they represent some of the earliest human achievements that can legitimately be called engineering. The Great Pyramid of Giza stands today as a testament to the strength and durability of Egyptian structural engineering skills.”

From Greece we derive what Vitruvius called the “Empirical Rules for Temple Design” which define a “single dimensional module equal to the radius of a column in the temple portico, then specify all other dimensions of the building in terms of that module.” These rules are best seen in Greek temples, largely consisting of columns, which are defined as “a structural element that carries load primarily in compression” and beams, which are “structural elements subject to transverse loading and carry load in bending.” My favorite example of the use of columns is seen in the Parthenon; the most famous of all Greek temples still standing.

In many ways these two very different structures stand as the basis of all structural engineering and Great Structures that come later throughout history. For any anti-corruption compliance regime based on the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-bribery statutes, the same is true for a Code of Conduct and written policies and procedures. They are both the building blocks of everything that comes thereafter.

In an article in the Society for Corporate Compliance and Ethics (SCCE) Complete Compliance and Ethics Manual, 2nd Ed., entitled “Essential Elements of an Effective Ethics and Compliance Program”, authors Debbie Troklus, Greg Warner and Emma Wollschlager Schwartz, state that your company’s Code of Conduct “should demonstrate a complete ethical attitude and your organization’s “system-wide” emphasis on compliance and ethics with all applicable laws and regulations.” Your Code of Conduct must be aimed at all employees and all representatives of the organization, not just those most actively involved in known compliance and ethics issues. From the board of directors to volunteers, the authors believe that “everyone must receive, read, understand, and agree to abide by the standards of the Code of Conduct.” This would also include all “management, vendors, suppliers, and independent contractors, which are frequently overlooked groups.”Parethnon

There are several purposes identified by the authors that should be communicated in your Code of Conduct. Of course the overriding goal is for all employees to follow what is required of them under the Code of Conduct. You can do this by communicating what is required of them, to provide a process for proper decision-making and then to require that all persons subject to the Code of Conduct put these standards into everyday business practice. Such actions are some of your best evidence that your company “upholds and supports proper compliance conduct.”

The substance of your Code of Conduct should be tailored to the company’s culture, and to its industry and corporate identity. It should provide a mechanism by which employees who are trying to do the right thing in the compliance and business ethics arena can do so. The Code of Conduct can be used as a basis for employee review and evaluation. It should certainly be invoked if there is a violation. To that end, I suggest that your company’s disciplinary procedures be stated in the Code of Conduct. These would include all forms of disciplines, up to and including dismissal, for serious violations of the Code of Conduct. Further, your company’s Code of Conduct should emphasize it will comply with all applicable laws and regulations, wherever it does business. The Code needs to be written in plain English and translated into other languages as necessary so that all applicable persons can understand it.

The written policies and procedures required for a best practices compliance program are well known and long established. As stated in the FCPA Guidance, “Among the risks that a company may need to address include the nature and extent of transactions with foreign governments, including payments to foreign officials; use of third parties; gifts, travel, and entertainment expenses; charitable and political donations; and facilitating and expediting payments.” Policies help form the basis of expectation and conduct in your company and Procedures are the documents that implement these standards of conduct.

Another way to think of policies, procedures and controls was stated by Aaron Murphy, now a partner at Foley & Lardner, in his book “Foreign Corrupt Practices Act”, when he said that you should think of all three as “an interrelated set of compliance mechanisms.” Murphy went on to say that, “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.”

Borrowing from an article in the Houston Business Journal (HBJ) by John Allen, entitled “Company policies are source and structure of stability”, I found some interesting and important insights into the role of policies in any anti-corruption compliance program. Allen says that the role of policies is “to protect companies, their employees and consumers, and despite an occasional opposite outcome, that is typically what they do. A company’s policies provide a basic set of guidelines for their employees to follow. They can include general dos and don’ts or more specific safety procedures, work process flows, communication guidelines or dress codes. By establishing what is and isn’t acceptable workplace behavior, a company helps mitigate the risks posed by employees who, if left unchecked, might behave badly or make foolhardy decisions.”

Allen notes that policies “are not a surefire guarantee that things won’t go wrong, they are the first line of defense if things do.” The effective implementation and enforcement of policies demonstrate to regulators and the government that a “company is operating professionally and proactively for the benefit of its stakeholders, its employees and the community it serves.” If it is a company subject to the FCPA, by definition it is an international company so that can be quite a wide community.

Allen believes that there are five key elements to any “well-constructed policy”. They are:

  • identify to whom the policy applies;
  • establish the objective of the policy;
  • explain why the policy is necessary;
  • outline examples of acceptable and unacceptable behavior under the policy; and
  • warn of the consequences if an employee fails to comply with the policy.

Allen notes that for polices to be effective there must be communication. He believes that training is only one type of communication. I think that this is a key element for compliance practitioners because if you have a 30,000+ worldwide work force, the logistics alone of such training can appear daunting. Consider gathering small groups of employees, where detailed questions about policies can be raised and discussed, as a powerful teaching tool. Allen even suggests posting Frequently Asked Questions (FAQ’s) in common areas as another technique. And do not forget that one of the reasons Morgan Stanley received a declination to prosecute by the Department of Justice (DOJ) was that it sent out bi-monthly compliance reminder emails to its employee Garth Peterson for the seven years he was employed by the company.

The FCPA Guidance ends its section on policies with the following, “Regardless of the specific policies and procedures implemented, these standards should apply to personnel at all levels of the company.” Allen puts a bit differently in that “it is important that policies are applied fairly and consistently across the organization.” He notes that the issue can be that “If policies are applied inconsistently, there is a greater chance that an employee dismissed for breaching a policy could successfully claim he or she was unfairly terminated.” This last point cannot be over-emphasized. If an employee is going to be terminated for fudging their expense accounts in Brazil, you had best make sure that same conduct lands your top producer in the US with the same quality of discipline.

For a review of what goes into the base structures of a best practices compliance program, I would suggest you check my book Doing Compliance: Design, Create, and Implement an Effective Anti-Corruption Compliance Program, which is available through Compliance Week. You can review the book and obtain a copy 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

July 9, 2015

The Third Man and the Authority of Chief Compliance Officers

ThirdManHarry Lime is back, although he really never left us. As reported by Kristin M. Jones in a Wall Street Journal (WSJ) article, entitled “Harry Lime Reborn”, the glorious British film noir The Third Man, written by Gra ham Greene and directed by Carol Reed, has been restored in a new digital version. It opens this week at select theaters and will tour the country this summer. The screenplay was adapted from the book of the same name by the author, Greene. It is the rare movie that is at least as good as the book. Greene himself noted that the story “was never written to be read but only to be seen.”

The story revolves around protagonist Holly Martin (played by Joseph Cotton) who goes to post-war Vienna at the behest of his college buddy Harry Lime (played with aplomb by Orson Welles). Martin arrives after a funeral for Lime and finds out that Lime was dealing in the black market. Martin searches for Lime, meeting his girlfriend and assorted shady characters along the way. He ends up leading the Military Police occupying the city to Lime and there is a final noir-classic chase through the sewers of Vienna.

What’s my favorite scene? There are way too many to name but the clown’s head shadow is one of the great cinematic visions of undulated terror. The final chase through the sewers of Vienna is a classic. The dialogue is both chilling and funny. Chilling when Lime asks Martin, while they are atop the apex of a Ferris wheel, whether he would refuse money to make the dotlike figures of humans below stop moving; Funny when Lime say that in 200 years of warfare between the Borgias, the Medicis and continual conflict in Italy it produced the flowering of the Renaissance, while 500 years of peace in Switzerland produced the Cuckoo Clock. Finally, is the haunting musical score of Anton Kara’s use of the Zither . The movie definitely makes my Top 10 greatest movies of all-time.

I thought about this movie in the context of the ongoing debate in the compliance world about whether a company could or should combine or separate the role of the Chief Compliance Officer (CCO) from that of the General Counsel (GC). There has traditionally been a split in companies on whether the CCO should report into a legal function and the GC or report directly to a company’s head officer. Mike Volkov noted that “According to the last PWC Compliance Survey, only 29 percent of CCOs have made it into the C-Suite but that will increase. Only 27 percent of CCOs continue to report to the general counsel while 34 percent report directly to the CEO.” Whichever path your company employs it is imperative that the CCO speak from a position of authority.

A consistent voice for the importance of the role and voice of the CCO in any organization is noted compliance expert, Donna Boehme. She writes and speaks consistently on the characteristics for a successful CCO. Writing in the SCCE magazine, Compliance & Ethics Professional, in an article entitled “Five essential features of the Chief Ethics and Compliance Officer position”, Boehme articulated five essential features required for a CCO to be successful in an organization.

  1. Independence

It is incumbent that any CCO must have “sufficient authority and independence to oversee the integrity of the compliance program.” Some indicia of independence would include a reporting line to the company’s Board of Directors and Audit/Compliance Committee but more importantly “unfiltered” access to the Board. There should also be protection of employment including an employment contract with a “nondiscretionary escalation clause” and a requirement for Board approval for any change in the terms and conditions of employment, including termination. There must also be sufficient resources in the form of an independent budget and adequate staff to manage the overall compliance program.

  1. Empowerment

A CCO must have “the appropriate unambiguous mandate, delegation of authority, senior-level positioning, and empowerment to carry out his/her duties. Such can be accomplished through a “board resolution and a compliance charter, adopted by the board.” Additionally the CCO job description should be another manner in which to clarify the CCO “mandate, and at a minimum should encompass the single point accountability to develop, implement and oversee an effective compliance program.” All of the above should lead in practice to a “close working relationship with an independent board committee.”

  1. Seat at the Table

The CCO must “have formal and informal connections into the business and functions of the organization – a seat at the table at important meetings where all major business matters (e.g., risk, major transactions, business plans) are discussed and decided.” She argues that, at a minimum, the CCO should participate in “budget reviews, strategic planning meetings, disclosure committee meetings, operational reviews, and risk and crisis management meetings.”

  1. Line of Sight 

The CCO should have “unfettered access to relevant information to be able to form independent opinions and manage the [compliance] program effectively.” This does not mean that the CCO should have veto power over functions such as safety or environmental or that such functions must report to the CCO, but unless there is visibility to the CCO for these risk areas, the CCO will not able to adequately assess and manage such risks from the compliance perspective. The correct structuring of the CCO role to allow it visibility into these areas will help the CCO coordinate compliance convergence training.

  1. Resources 

It is absolutely mandatory that the CCO be given both the physical resources in terms of personnel and monetary resources to “get the job done.” I have worked at places where the CCO had neither and the CCOs did not succeed because they never even had the chance to do so. Boehme focuses on both types of resources. Under monetary resources she points, as an indicia, to the independence of the CCO from the GC “rather than a shared budget”. This can also bleed over to ‘headcount’ and shared or dotted line reporting resources. There should be independent resources reporting into the compliance function.

Whichever way a company decides to go on this question, it must meet Requirement No. 6 of the Department of Justice’s (DOJ’s) minimum best practices requirement for a Foreign Corrupt Practices Act (FCPA) based compliance program, which reads:

The company will assign responsibility to one or more senior corporate executives for the implementation and oversight of the company’s anti-corruption policies, standards, and procedures. Such corporate official(s) shall have direct reporting obligations to independent monitoring bodies, including internal audit, Company’s Board of Directors, or any appropriate committee of the Board of Directors, and shall have an adequate level of autonomy from management as well as sufficient resources and authority to maintain such autonomy. 

Additionally this is reiterated in the 2011 Amendments to the US Sentencing Guidelines, §8B2.1 (b)(2)(C), which states:

Specific individual(s) within the organization shall be delegated day-to-day operational responsibility for the compliance and ethics program. Individual(s) with operational responsibility shall report periodically to high-level personnel and, as appropriate, to the governing authority, or an appropriate subgroup of the governing authority, on the effectiveness of the compliance and ethics program. To carry out such operational responsibility, such individual(s) shall be given adequate resources, appropriate authority, and direct access to the governing authority or an appropriate subgroup of the governing authority.

If you have the chance to see The Third Man this summer I urge you to do so. For a schedule of its showings across the country 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

July 6, 2015

The All-Star Game and Tone at the Top

All Star GameToday is the 83rd anniversary of the initial Major League Baseball (MLB) All-Star Game, which took place on this date in 1933, in Chicago’s Comiskey Park. The brainchild of a determined sports editor, the event was designed to bolster the sport and improve its reputation during the darkest years of the Great Depression. The sports editor of the Chicago Tribune convinced his owner to allow him to lobby for the game with MLB’s Commissioner, Kenesaw Mountain Landis, and the owners. To win over the public, they allowed fan balloting for the Game’s players. The proceeds went to a charity for retired baseball players. The Game was a rousing success and has continued as an institution to this day.

The conception and execution of the first All-Star Game shows what a committed tone from top management can create. Last week I wrote a couple of posts dealing with the tone for an organization around compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA); one on tone in the middle and one on tone at the bottom. As usual, when I begin writing about a topic, I do not seem to be able to start where I thought I would end. So today, with the anniversary of the first MLB All-Star Game in mind, I decided to round out my triumvirate of posts by concluding with some thoughts on Tone at the Top and the reasons why it is so important to any anti-corruption compliance program.

Quite simply, any compliance program starts at the top and flows down throughout the company. Before you arrive at tone in the middle and bottom, it must start with a commitment at the top. All regulatory schemes for anti-corruption compliance recognize this key hypothesis. The concept of an appropriate tone at the top is in the US Sentencing Guidelines for organizations accused of violating the FCPA; the FCPA Guidance; the UK Bribery Act’s Six Principles of Adequate Procedures; and the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance (OECD Good Practices). The reason all of these guidelines incorporate it into their respective practices is that all employees look to the top of the company to see what is important.

The US Sentencing Guidelines reads:

High-level personnel and substantial authority personnel of the organization shall be knowledgeable about the content and operation of the compliance and ethics program … and shall promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. 

The OECD Good Practices reads:

  1. strong, explicit and visible support and commitment from senior management to the company’s internal controls, ethics and compliance programs or measures for preventing and detecting foreign bribery; 

The UK Bribery Act’s Six Principles of Adequate Procedures reads:

The top-level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are committed to preventing bribery by persons associated with it. They foster a culture within the organisation in which bribery is never acceptable. 

The FCPA Guidance, under the section entitled “Commitment from Senior Management and a Clearly Articulated Policy Against Corruption”, states, “Within a business organization, compliance begins with the board of directors and senior executives setting the proper tone for the rest of the company. Managers and employees take their cues from these corporate leaders. Thus, DOJ and SEC consider the commitment of corporate leaders to a “culture of compliance” and look to see if this high-level commitment is also reinforced and implemented by middle managers and employees at all levels of a business.” But the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) expect more than simply to have senior management say the right things. They both expect that such message will be pushed down the ranks of an enterprise so that “A strong ethical culture directly supports a strong compliance program. By adhering to ethical standards, senior managers will inspire middle managers to reinforce those standards. Compliant middle managers, in turn, will encourage employees to strive to attain those standards throughout the organizational structure. In short, compliance with the FCPA and ethical rules must start at the top. DOJ and SEC thus evaluate whether senior management has clearly articulated company stan­dards, communicated them in unambiguous terms, adhered to them scrupulously, and disseminated them throughout the organization.”

The FCPA world is riddled with cases where the abject failure of any ethical “Tone at the Top” led to enforcement actions and large monetary settlements. In the two largest monetary settlements of enforcement actions to date, Siemens and Halliburton, for the actions of its former subsidiary KBR, the government specifically noted the companies’ pervasive tolerance for bribery. In the Siemens case, for example, the SEC noted that the company’s culture “had long been at odds with the FCPA” and was one in which bribery “was tolerated and even rewarded at the highest levels”. Likewise, in the Halliburton matter, the government noted that “tolerance of the offense by substantial authority personnel was pervasive” throughout the organization.

So how can a company overcome these employee attitudes and set, or re-set, its “Tone at the Top”? In a 2008 speech to the State Bar of Texas Annual Meeting, reprinted in Ethisphere, Larry Thompson, PepsiCo Executive Vice President (EVP) of Governmental Affairs, General Counsel (GC) and Secretary, discussed the work of Professor Lynn Sharp at Harvard. From Professor Sharp’s writings, Mr. Thompson cited five factors, which are critical in establishing an effective integrity program and to set the right “Tone at the Top”.

  1. The guiding values of a company must make sense and be clearly communicated.
  2. The company’s leader must be personally committed and willing to take action on the values.
  3. A company’s systems and structures must support its guiding principles.
  4. A company’s values must be integrated into normal channels of management decision-making and reflected in the company’s critical decisions.
  5. Managers must be empowered to make ethically sound decisions on a day-to-day basis.

David Lawler, writing in his book “Frequently Asked Questions in Anti-Bribery and Corruption, boiled it down as follows “Whatever the size, structure or market of a commercial organization, top-level management’s commitment to bribery prevention is likely to include communication of the organization’s anti-bribery stance and appropriate degree of involvement in developing bribery prevention procedures.” Lawler went on to provide a short list of points that he suggests senior management engage in to communicate the type of tone to follow an anti-corruption regime. I had a Chief Executive Officer (CEO) of a client who, after I described his role in a best practices compliance program, observed, “You want me to be the ambassador for compliance.” I immediately averred in the affirmative. The following is a list of things that a CEO can do as an ‘Ambassador of Compliance’:

  • Reject a ‘do as I say, not as I do’ mentality;
  • Not just ‘talk-the-talk’ but ‘walk-the-walk’ of compliance;
  • Oversee creation of a written statement of a zero tolerance towards bribery and corruption;
  • Appoint and fully resource, with money and headcount, a Chief Compliance Officer (CCO);
  • Oversee the development of a Code of Conduct and written compliance program implementing it;
  • Ensure there are compliance metrics on all key business reports;
  • Provide leadership to middle managers to facilitate filtering of the zero tolerance message down throughout the organization;
  • Not only have a whistleblowing, reporting or speak up channel but celebrate it;
  • Keep talking about doing the right thing;
  • Make sure that you are seen providing your CCO with access to yourself and the Board of Directors.

Coming at it from a different perspective, author Martin Biegelman provides some concrete examples in his book, entitled “Building a World Class Compliance Program – Best Practices and Strategies for Success”. He begins the chapter discussed here with the statement “The road to compliance starts at the top.” There is probably no dispute that a company takes on the tone of its top management. Biegelman cites to a list used by Joe Murphy regarding actions a CEO can demonstrate to set the requisite tone from the Captain’s Chair of any business. The list is as follows:

  1. Keep a copy of the Constitution on your Desk. Have a dog-eared copy of your company’s Code of Conduct on your desktop and be seen using it.
  2. Clout. Make sure your compliance department has authority, influence and budget within the company. Have your Chief Compliance Officer report directly to the Board of Directors.
  3. Make them Accountable. At Senior Executive meetings, have each participant report on what they have done to further the compliance function in their business unit.
  4. Sticks and Carrots. Have both sanctions for violation of company compliance and ethics policies and incentives for doing business in a compliant manner.
  5. Don’t do as I say, Do as I do. Turn down an expensive dinner or trip offered by a vendor. Pass on a gift that you may have received. Turn down a transaction based upon ethical considerations.
  6. Be a Student. Be seen at intra-company compliance training. Take a one or two day course or attend a compliance conference outside your organization.
  7. Award Compliance. You should recognize outstanding compliance efforts with companywide announcements and awards.
  8. The Board. Recruit a nationally known compliance expert to sit on your company’s Board and chair the audit or compliance committee.
  9. Independent Review. Obtain an independent, outside review of your company’s compliance program and report the results to the Board’s Audit Committee.
  10. Vendors. Mandate that all vendors in your Supply Chain embrace compliance and ethics as a business model. If not, pass on doing business with them.
  11. Network. Talk to others in your industry and your peers on how to improve your company’s compliance efforts. 

Many companies struggle with some type of metric that can be used for upper management regarding compliance and communication of a company’s compliance values. One technique might be to require the CEO to post companywide emails or other communications once a quarter on some compliance related topic. The CEO’s direct reports would then also be required to email their senior management staff a minimum of once per quarter on a compliance topic. One can cascade this down the company as far as is practicable. Reminders can be set for each communication so that all personnel know when it is time to send out the message. If these communications are timely made, this metric has been met.

I hope that you can use some of the techniques for setting, creating and moving an appropriate tone for compliance throughout your organization. And, of course, enjoy the 2015 All-Star Game. Although the Astros now play in the American League (AL), my heart is still with the National League (NL).

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

June 30, 2015

Another Great Bassist Gone and Tone at the Bottom

 

Chris SquireAs readers of this blog know, I am a huge fan prog rock fan. So it was with deep sadness and melancholy that I read Chris Squire passed away this weekend. He was a co-founder and bassist for the seminal rock group Yes. The band was one of founders of the musical genre known as ‘progressive rock’ or simply prog rock. According to his obituary in the New York Times (NYT) he was “the only member to have played on every one of Yes’s albums and participated in every one of its tours”. The NYT went on to say that “Mr. Squire’s propulsive and often melodic bass playing was a key element of the Yes sound. A self-taught virtuoso, he has been cited as an influence by many other rock bassists.”

I found some of the tributes from his former band mates to be the most touching and telling of Squire. Bill Bruford, the band’s original drummer, said in statement quoted in the article, “He had an approach that contrasted sharply with the somewhat monotonic, immobile bass parts of today. His lines were important; counter-melodic structural components that you were as likely to go away humming as the top line melody; little stand-alone works of art in themselves.”

Daniel Kreps, writing in Rolling Stone online, in an article entitled “Jon Anderson, Rick Wakeman Remember Yes’ Chris Squire”, quoted Yes co-founder Anderson for the following, “He was an amazingly unique bass player – very poetic – and had a wonderful knowledge of harmony. We met at a certain time when music was very open, and I feel blessed to have created some wonderful, adventurous, music with him. Chris had such a great sense of humor… he always said he was Darth Vader to my Obi-Wan. I always thought of him as Christopher Robin to my Winnie the Pooh.” Keyboardist Rick Wakeman was quoted in the same article “We have now lost, who for me, are the two greatest bass players classic rock has ever known. John Entwistle and now Chris,” Wakeman wrote. “There can hardly be a bass player worth his salt who hasn’t been influenced by one or both of these great players. Chris took the art of making a bass guitar into a lead instrument to another stratosphere and coupled with his showmanship and concern for every single note he played, made him something special.””

As most rock aficionados know, rock music is basically a dialogue between the bass guitar and the drums. With this base line set, the lead guitars and keyboards can go soaring off. That was certainly the formula for Yes. But as it really does not work unless the bass guitar lays the foundation for the entire band, I thought that a tribute to Squire might be a good way to visit one of the points of doing compliance not discussed often enough. While Tone-at-the-Top is almost ubiquitous, one thing not talked about consistently is the tone on the front lines of an organization. Even with a great ‘Tone-At-the-Top’ and in the middle, you cannot stop. One of the greatest challenges for a compliance practitioner is how to affect the ‘tone at the bottom’.

In a MIT Sloan Management Review article, entitled “Uncommon Sense: How to Turn Distinctive Beliefs Into Action”, authors Jules Goddard, Julian Birkinshaw and Tony Eccles looked at this issue when they explored the “often overlooked, critical source of differentiation is [a] company’s beliefs.”

One of the questions that the authors’ answer is: how to tap into this belief system? They posit a structured manner to obtain this information. By using these techniques, they believe that companies can rethink their “basic assumption and beliefs” and identify new directions for their organization. The authors listed seven approaches that they have used which I believe that the compliance practitioner can use to not only determine ‘Tone at the Bottom” but to impact that tone. They are as follows:

  1. Assemble a group. You need to assemble a group of employees who are familiar with the challenges of doing business in a compliant manner in certain geographic regions. Include both long-time employees and those who are relatively new to the organization. The authors also suggest that if you have any employees who have worked for competitors or for other organizations in your industry you include them as well.
  2. Ask questions. You should ask the members of this group to articulate their basic assumptions about your compliance model, about the management model, about your company’s business model and the future of the industry in general. Ask them to do this individually and not as a group.
  3. Categorize the responses. Now comes the work by the compliance practitioner or compliance team, as the authors believe that these assumptions will usually fall into two groups. The first is assumptions that everyone agrees upon, and these are the common beliefs. The second is those assumptions that only a few of the participants will identify – this is what the authors call the “uncommon beliefs”.
  4. Develop tests for common beliefs. For those beliefs that are labeled common – you should consider how you know these to be true? The authors caution that simply because the group may believe that the company operates in a common industry or that we “do it because it has always been done this way” is not necessarily a “hard fact.” Consider what check you could perform to verify the common belief that you desire to test. The authors note that the purpose here is to “identify the ‘common nonsense’ beliefs that everyone holds that are not actually hard laws of nature.”
  5. Develop tests for uncommon beliefs. Here the authors suggest that you need to consider why some people think that these beliefs are true. What is the information or experience that they have drawn upon? Is there any way for you to test these uncommon beliefs?
  6. Reassemble the original group. You should reassemble the original group and have them consider the beliefs that were articulated by them individually in the context of your compliance model and how both your company and your industry do business. Lead a discussion that attempts to identify any assumptions or beliefs that “are quite possibly wrong, but worth experimenting with anyway.”
  7. List of Experiments to perform. The authors believe that the outcome of the first six steps will be “a list of possible experiments [tests] to conduct” to determine the validity of the common and uncommon beliefs. These tests can be accomplished in the regular course of business, through a special project with a special team and separate budget. You should agree on the testing process and review your testing assumptions throughout the process. This process can and should take some time so do not set yourself such a tight time frame that it cannot be fully matured.

The bottom line is that not only must a company ‘talk-the-talk’ of compliance but it must also ‘walk-the-walk’ of compliance. Donna Boehme says that it’s really about the culture of compliance in your organization. Put another way, as Mike Volkov said, in an article entitled “Mood in the Middle Versus Tone at the Top”, “Even when a company does all the right things at the senior management level, the real issue is whether or not that culture has embedded itself in middle and lower management. A company’s culture is reflected in the values and beliefs that exist throughout the company.” You must find a way to articulate and then drive the message of ethical values and doing business in compliance with such anti-corruption laws from the top down, throughout your organization.

So thanks for the tunes and memories Chris while I Keep Calm and Listen to Prog Rock.

Keep Calm and Listen to Prog Rock

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

June 25, 2015

Custer’s Last Stand and Risk Management

Custer's Last StandOn this day in 1876 one of the greatest failures in risk management took place when Lieutenant Colonel George Armstrong Custer and his entire 7th Cavalry were wiped out at the Battle of the Little Big Horn. Custer had split his command into three wings and he took his battalion of 200 or so men down the center of what he thought would be little resistance. Instead he found that he was facing a far superior force of 3000 largely Sioux warriors who quickly overwhelmed and defeated Custer’s command, with all US troops being killed. There is now some debate on whether all the cavalrymen were actually killed by the Native Americans or took their own lives, saving the last bullet for themselves, in western parlance.

Historians have debated over time the reason for Custer’s defeat. Was it arrogance; bad intelligence; faulty command, just plain stupidity or even a wish for martyrdom by Custer? Whichever the cause, it was the worse defeat of the US Army by Native Americans in the Western campaigns of the later 1800s. Today, it might be termed as a faulty assessment and management of the risks involved.

I thought about Custer and his defeat when I read a recent article in the Harvard Business Review (HBR), entitled “Strategy How to Live With Risks. It presented risk, risk assessments and risk management in a new light, a key acumen being that risk management should be used as a “protection shield, not an action stopper.” It was based upon a research paper by the CEB, entitled “Reducing Risk Management’s Organizational Drag”, which I thought it had some interesting insights for the Chief Compliance Officer (CCO) or compliance practitioner.

The first insight is that, in many instances, companies are assessing risks that are in the rear-view mirror. The author pointed to the Sarbanes-Oxley (SOX) Act, passed in response to the Enron and Worldcom accounting scandals in noting, “In the wake of the 2008 financial crisis many large banks changed their business models, and other companies implemented systems to better manage credit risks or eliminate overreliance on mathematical models.” This type of mentality can lead to what the author says, is “a variation on what military historians call “fighting the last war.” As memories of the recession fade, leaders worry that risk management policies are impeding growth and profits without much gain.” The author went on to quote Matt Shinkman of CEB, a member based advisory company, for the following insight “Firms are questioning whether the models they put in place after the financial crisis are working—and more fundamentally questioning the role of risk management in their organizations.”

This retrospective look back is coupled with what the author says is a decision making process which “is too slow, in part because of an excessive focus on preventing risk” and not managing risk; in other words, companies were slowed down even further by something termed “organizational drag”. Companies need to find new mechanisms to assess and manage risk going forward. The best way to do so, many companies have indicated, is through reorganizing or reprioritizing risk management and the article presented “three best practices” in doing so.

Strike the Right Balance Between Risk and Reward

Recognizing that risk management is often simply ‘just saying no’, the HBR articcle suggests that “Today’s risk managers see their role as helping firms determine and clarify their appetite for risk and communicate it across the company to guide decision making. In some cases this means helping line managers reduce their risk aversion.” The interesting insight I found here is that if an asset is low performing it may be because the management is so risk averse. This may present a CCO or compliance practitioner with an opportunity to increase growth through other risk management solutions that they could implement.

Focus on decisions, not process

This insight is one that CCO and compliance practitioners should think about and try and implement. Recognizing that risk assessments are important, the author believes that risk managers should focus more on decisions concerning risk rather than the process of determining risk. This means, “In addition to relying on paperwork or process, risk managers are turning to tools (such as dashboards that show risks in real time) and training that help employees assess risk. They are also helping companies factor a better understanding of risk into their decision making.”

By having a seat at the senior management’s table, a CCO or compliance practitioner can help identify risk issues early on in planning. This allows a COO to help craft a risk management solution, or even better yet show colleagues how to “spot potential problems and managers see how their projects fit into the company’s overall portfolio of projects, each with its own set of risks.” The author again quoted Shinkman, “This is less about listing risks from a backward-looking perspective and more about picking the right portfolio of risky projects.”

Make employees the first line of defense

The author channels his inner Howard Sklar (water is wet) by stating, “Decisions don’t make themselves, people make them”. However from that insight, the author believes that “smart companies work to improve employees ability to incorporate appropriate levels of risk when making choices.” But this means you must not only adequately train your employees to spot the appropriate risk but you, as CCO must provide them with tools to manage the risk. The author wrote, “Companies are also trying to identify which types of jobs or departments face a disproportionate share of high-risk decisions so that they can aim their training at the right people. They’re focusing that training less on risk awareness and more on simulations or scenarios that let employees practice decision making in risky situations. Finally, risk managers are becoming more involved in employee exit interviews, because people leaving an organization often identify risks that others aren’t able or willing to discuss.”

The article ends by noting that the goal is “to transform risk management from a peripheral function to one with a voice integrated into the day-to-day management” of an organization. That is also viewed as a component of CCO 2.0 and a more mature model of improvement. By focusing on training employees on how to spot Foreign Corrupt Practices Act (FCPA) compliance risks and then providing them with the tools to adequately manage that risk, CCOs can deliver greater 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

June 24, 2015

Pink Flamingos and the Compliance Audit

FeatherstoneThe creator of one of the most ubiquitous symbols of mid-century Americana died earlier this week. Don Featherstone, the creator of the pink plastic lawn flamingo, the ultimate symbol of American lawn kitsch, has died. He was 79. Featherstone, a trained sculptor with a classical art background, created the flamingo in 1957 for plastics company Union Products, modeling it after a bird he saw in National Geographic. Millions of the birds have been sold. Whether you think of the Pink Flamingo as a symbol of Miami Vice, Jon Waters and Devine or for something less salacious, here is to Featherstone, a true original.

While Featherstone created one of the ultimate symbols of the second half of the 20th century for a generation of South Floridians, the Japanese company Takata Corporation (Takata) continues to be in the news for much less prestigious reasons. As reported in the New York Times (NYT), in an article entitled “Senate Panel Says Tanaka Cut Audits on Safety”, Hiroko Tabuchi and Danielle Ivory said “In the middle of what would become the largest automotive recall in US history, the Japanese airbag manufacturer Takata halted global safety audits to save money”. Interesting (or perhaps ominously might be a better word) Takata responded by saying it had not halted safety audits for products but rather for worker safety. Doesn’t that give you some comfort?

A US Senate committee report found that “Takata halted global safety audits at its manufacturing plants in 2009, a year after Honda had started recalling a small number of cars to replace the airbags.” These audits were later restarted in 2011 but when they found safety issues related to airbag manufacturing in two key plants, “those findings were not shared with Takata’s headquarters in Tokyo, the report said, citing internal emails from Takata’s safety director at the time.” Moreover, “when the safety director returned to the plant months later to conduct a follow-up audit, employees appeared to scramble to create the appearance of a safety committee within the plant.” Finally, and perhaps most damningly, the report cited an internal Takata email which said, “No safety committee, as such, has been formed” at the plants in question.

Foreign Corrupt Practices Act (FCPA) compliance in many ways follows some of the paths laid out by corporate safety departments some 20-30 years ago when safety became much more high profile in US corporations. The safety committee and safety audits became mainstays of any best practices in the area of safety for a company. These techniques inform any anti-corruption best practices compliance program, either under the FCPA, UK Bribery Act or any other anti-corruption regime. Indeed audits are specifically delineated in the FCPA Guidance as a way to assist in the continuous monitoring of your compliance regime. Such an audit can be thought of as a systematic, independent and documented process for obtaining evidence and evaluating it objectively to determine the extent to which the compliance criteria are fulfilled. There are three factors which are critical and unfortunately with Takata seemed to be lacking in its safety audit protocol: (1) an effective audit program which specifies all necessary activities for the audit; (2) having competent auditors in place; and (3) an organization that is committed to being audited.

Auditing can take several different forms in an anti-compliance program. As a matter of course, you should audit the compliance program in your own organization. A forensic audit can collect and analyze accounting and internal-controls evidence in your compliance regime. This information can be used to produce a fact-based report that can inform the decision-making process in inquiries, investigations and dispute resolution. The by-products of a forensic audit can include remediation strategies to help a company mitigate and remedy procedural or internal-controls gaps that allowed the underlying issue to occur. Further, an internal audit can review a compliance process to determine if employees are following prescribed processes or internal controls, in an operational Sarbanes-Oxley (SOX) or FCPA compliance audit.

In addition to the collection and analysis of evidence, an auditor’s objective is to attest to the credibility of assertions that are under examination, such as the material accuracy of financial statements for which the audited company’s management is responsible. Obviously one of the functions of such an audit is to determine if further investigation is warranted.

Now imagine if this scenario had been followed by Takata. The lack of a safety committee is a glaring omission at any manufacturing facility. Simply noting this and reporting it up the chain could have gone some way towards preventing the situation the company now finds itself in; with a worldwide recall of up to 32 million vehicles. The same is true for a compliance audit. Just as monitoring can provide information to you on a more real-time basis; a compliance audit compliments this real-time oversight with a much deeper dive into what has happened on a historical basis.

The recent BHP Billiton FCPA enforcement action is certainly one to look at in this context. Although there was a committee set up to review gifts and travel requests for the company’s 2008 Olympic hospitality program, the committee did not fulfill this charge. It was alleged in the Securities and Exchange Committee (SEC) settlement documents that this committee was never intended to pass muster on the applications for tickets and travel for government officials but was simply there to provide guidance.

Once again this situation points out the difference between having a paper compliance program in place and the actual doing of compliance. Even with an appropriate oversight structure in place BHP Billiton did not do the work of compliance by evaluating the applications for travel and tickets to the Beijing Olympics but left it to the devices of the business unit employees who were making the requests and ultimately most directly benefited from the gifting.

Another area ripe for audit in your compliance program is your third parties. While there is no one specific list of transactions or other items which should be audited when it comes to your third parties below are some of the areas you may wish to consider reviewing:

  • Contracts with supply chain vendors to confirm that the appropriate FCPA compliance terms and conditions are in place.
  • Determine that actual due diligence took place on the third party vendor.
  • Review the FCPA compliance training program for any vendor; both the substance of the program and attendance records.
  • Does the third party vendor have a hotline or any other reporting mechanism for allegations of compliance violations? If so how are such reports maintained? Review any reports of compliance violations or issues that arose through anonymous, hotline or any other reporting mechanism.
  • Does the third party vendor have written employee discipline procedures? If so have any employees been disciplined for any compliance violations? If yes review all relevant files relating to any such violations to determine the process used and the outcome reached.
  • Review expense reports for employees in high risk positions or high risk countries.
  • Testing for gifts, travel and entertainment which were provided to, or for, foreign governmental officials.
  • Review the overall structure of the third party vendor’s compliance program. If the company has a designated compliance officer to whom, and how, does that compliance officer report? How is the third party vendor’s compliance program designed to identify risks and what has been the result of any so identified?
  • Review a sample of employee commission payments and determine if they follow the internal policy and procedure of the third party vendor.
  • With regard to any petty cash activity in foreign locations, review a sample of activity and apply analytical procedures and testing. Analyze the general ledger for high-risk transactions and cash advances and apply analytical procedures and testing.

The compliance function still is behind the safety function in terms of maturity. Because of this there are many lessons which a Chief Compliance Officer (CCO) or compliance practitioner can draw upon from our colleagues in safety. The safety audit is certainly a technique that can be drafted into your compliance program. But as the ongoing Takata air bag debacle demonstrates, your audit only works if you actually perform it. In other words, the protocol is simple, everyone understands you need to audit, but try and cut costs or corners and you will pay for it in the long run.

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

June 23, 2015

Fraud and the Detection of the Sources for Bribery

 

Detection of FraudIn a recent White Paper authored by Peter Smith for OFS Portal, entitled “Procurement and Fraud in the Supply Chain”, where he examined “fraud linked to procurement and supply chain activities.” Smith focuses on where fraud can occur in the procurement process. From this starting point, he suggests “mitigating actions that organisations can take to protect themselves against fraud.” I found this article to be an excellent review of Supply Chain (SC) activities which the Chief Compliance Officer (CCO) or compliance practitioner could put to good use in reviewing their company’s Foreign Corrupt Practices Act (FCPA) anti-corruption and anti-bribery regime.

A. The Problem – How Does Fraud Happen?

Smith starts by classifying fraud in way which will assist the reader in understanding how it occurs. He believes there are “three critical factors to consider: the perpetrator(s), the plan and the point of failure.” The perpetrator is the one “behind the fraud and either executes it directly or through others.” In the anti-corruption world of the FCPA, this can be through an agent or a supplier who is working to help execute the fraud.

Interestingly, in the area of these third parties (and hence the greatest area of risk for FCPA compliance practitioners to consider) Smith notes that “The plan and point of failure factors are linked in that often the plan relies on the point of failure. In other words, most frauds take advantage in some weakness in the process, technology, policy or systems of combination of those.” Smith writes that there are three key phases “in the procurement life-cycle that can be considered; (1) the supplier selection phase; (2) the contract negotiation and award phase; and (3) the contract delivery management phase.”

Phase I – Supplier Selection and Qualification

This phase should be well known to the compliance practitioner as a part of the third party life-cycle management step denominated as due diligence. But Smith asks that you consider factors other than simply whether someone is on the Denied Parties List (DNP) or is a Politically Exposed Person (PEP). He suggests that you consider misrepresentation by the third party in the nature of “concealing the true nature of its business, history or ownership when it bids for the work.” He also points out that through collusion and cartels, persons or entities can work to control a market. If you did any work with Petrobras over the years, you will certainly recognize that many if its approved suppliers operated in this manner. Given what we now know about how corrupt Petrobras was, this is not too surprising.

But Smith also suggests that employees may be involved in skewing the selection process towards a corrupt agent or other partner. He recommends reviewing the bid process to see if there was bias in the competition, which would push an otherwise arms-length award to a corrupt partner. This could occur through biased competition through specification, where an employee would “construct a specification that makes it likely or inevitable that a particular supplier will win the competitive process.” The next is biased competition through tailoring the evaluation process which gives weight to the specific strengths of a corrupt third party. Finally, Smith points out that there can be biased competition through information leakage when a company employee will leak confidential information to a third party to give them an advantage in the bidding process.

Phase II – Contracting

Smith says the “next critical point at which fraud can take place is during the contract negotiations and in agreeing the detailed terms and conditions.” Moreover, Smith believes this stage is critical if often overlooked because “the seeds are often sown at the contracting stage.” Scenarios can include where there is a certain level of ‘local content’ required “but without any clear contractual mechanism to explain how it will be measured or policed.” As any CCO or other FCPA compliance practitioner would recognize, local content is one of the easiest ways to get into FCPA high risk so managing that risk is critical. I found Smith’s concern with setting out the clear legal terms and conditions around any such requirement as a good way to manage the high risk.

Phase III – Contract Delivery and Management

Here Smith laid several different fraud schemes which could facilitate a bribery plan. The first is fake invoices which can rely on “poor processes within an organisation” to spot. However this scheme can also rely on a company insider to approve such fabrications. Next is “volume over-invoicing”. In this scheme, while a supplier does supply some goods or services, the invoice is raised for more than has been delivered. If there is a scheme to create a pot of money to be used to fund bribes, there will need to be an internal company accomplice to “smooth the way by authorizing receipts or invoices.” Next there is “price-related over-invoicing” the third party will over-price the goods or services, above what is allowed under the contract. Another scheme set out by Smith is “invoice diversion” where “a legitimate payment that should go to a certain supplier is diverted to a third party fraudulently.” Another scheme can simply be to ease the contract terms and conditions which allow the third party to receive a benefit with nothing in return being delivered back to the company. Finally, there is what Smith details as one of the “toughest frauds to detect”, that being the delivery of lower quality products than is contractually specified.

B.The Solution – How to Reduce Fraud

Smith believes that fraud prevention can be built around a troika of concepts. (1) You need to have “effective procurement and spend management policies in place. (2) You must “use appropriate and robust processes”. (3) Finally “applying the right technology to support and manage those processes.” In his paper he followed the same outline on how to reduce the instances of fraud.

Phase I – Supplier Selection and Qualification

While a clear procurement policy is the starting point, it is only the starting point. Having a transparent process is important as well as adequate supplier qualification details. He notes that multiple sign-offs should be in place to ensure that one person does not control the entire process. This should also be incorporated into the communications trail with the competitors to ensure that no one third party receives confidential information. Obviously an appropriate level of due diligence should be applied to confirm that not only are the third party’s who they represent themselves to be but that they are also qualified to do the work or deliver the services. Finally, there should be controls around onboarding “so that firms who are actually going to be suppliers go through more rigorous checks before they are accepted onto” the Vendor Master List.

Phase II – Contracting

Obviously the starting point for any business relationship should be a well-drafted contract. However, for larger organizations Smith believes that “a contracts database or contract lifecycle management system is essential.” To the greatest extent possible there should be standard compliance and legal terms and conditions, coupled with an “appropriate level of sign-off and approvals management for contracts.” Finally, segregation of duties (SOD’s) “to make sure that there are checks and balances and that no one person holds too much power in the process.”

Phase III – Contract Delivery and Management

As I often say in the lifecycle management of third parties, the real work begins when the contract is signed. Smith believes that many of the routes of fraud, “can be closed off by taking a few precautions” which include some of the following steps. First and foremost is “no purchase order, no pay” but this also means there should be an invoice from the vendor which is matched to the contract for accuracy. Once again checks and balances, SOD’s for sign-offs and approvals must be built into your payment system. There should be controls around changes to the contract and, more importantly, changes to any payment details. Lastly, ongoing oversight and monitoring through controls analytics and auditing should be employed on the back end to verify delivery of goods or services.

I found Smith’s White Paper to be an excellent review for the CCO or compliance practitioner around not only the mechanism of how fraud occurs but a review of the techniques for fraud prevention. While his concepts may seem like a review for the compliance practitioner, it also allows you to think through how corruption might take place in your organization. The briber has to get the money from some source and Smith’s White Paper can give you insights on where you might look.

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

 

June 22, 2015

George Carlin and Erga Omnes: the Petrobras Bribery Scandal Expands

George CarlinOn this date in 2008 George Carlin died. If you grew up in the late 1960s or early 1970s and you had anti-parental or anti-establishment inklings, which of course all teenagers do, you knew about George Carlin. In the early 1960s, Carlin was a relatively clean-cut, conventional comic. But around 1970, he reinvented himself as an eccentric, biting social critic and commentator. In this new incarnation, Carlin began appealing to a younger, hipper audience. He grew out his hair and added a beard together with a wardrobe in the stereotypically hippie style.

Carlin’s comedy also became counter-culture, not Cheech and Chong, hippy-dippy dopers, but with pointed jokes about religion, politics yet with frequent references to drugs. His second album with his new routine, FM/AM, won a Grammy Award for Best Comedy Recording. My favorite cut was the 11 O’Clock News. But it was his third album Class Clown that had, what I believe, to be the greatest comedy monologue ever, the profanity-laced routine “Seven Words You Can Never Say on Television.” When it was first broadcast on New York radio, a complaint led the Federal Communications Commission (FCC) to ban the broadcast as “indecent.” The US Supreme Court later upheld the order, which remains in effect today. The routine made Carlin a hero to his fans and got him in trouble with radio brass as well as with law enforcement; he was even arrested several times, once during an appearance in Milwaukee, for violating obscenity laws.

Interestingly I thought about Carlin and his pokings of the Establishment (AKA The Man) when I read several articles over the weekend about the recent spate of arrests around the Petrobras bribery and corruption scandal. In article in the Wall Street Journal (WSJ), entitled “Brazil Probe Sweeps Up Corporate Magnates” Will Connors, Rogerio Jelmayer and Paul Kiernan reported that “Brazilian officials arrested the heads of two Latin American construction giants, alleging they helped to mastermind a cartel that stole billions of dollars from state-run oil company Petrobras with the help of corrupt politicians to whom they paid kickbacks.” Also arrested with the heads of the two companies, Marcelo Odebrecht, head of Odebrecht SA and Chief Executive Officer (CEO) of Andrade Gutierrez, Otávio Azevedo.

The WSJ article reported that “Odebrecht is Latin America’s largest construction conglomerate, with business in the U.S., Europe and Africa, and whose head, Marcelo Odebrecht, is a household name in Brazil. Andrade Gutierrez has business in 40 countries. The privately owned companies are deeply involved in the development of stadiums and infrastructure for the 2016 Summer Olympics in Rio de Janeiro.” Moreover, Odebrecht is reported to have “a presence in 21 countries”. Obviously a question is if the company had engaged in bribery and corruption in Brazil, did they do so in any of the other countries in which they are doing business?

Interestingly, these arrests “come months after the heads of other construction companies were detained by Brazilian authorities.” Indeed in a BBC article in , entitled “Petrobras scandal: Top construction bosses arrested in Brazil”, David Gallas said, “Odebrecht had been named by former Petrobras executives as one of the companies that allegedly paid bribes in exchange for contracts with the oil firm, but until now the firm had not been targeted by investigators.” The WSJ article quoted Brazilian prosecutor Carlos Fernando dos Santos Lima who said at a news conference that the executives from the two companies had not been arrested earlier as the entities, “had a more sophisticated system for making the alleged bribe payments, using foreign bank accounts in Switzerland, Monaco and Panama, so it took longer to prove their case.” David Fleischer, a Brasilia based political analyst, quoted in the WSJ article was even more circumspect. He said, “The prosecutors are very careful. If you’re going after big fish you want to make sure you can take them down.”

Brazilian police said the arrests were “Erga omnes” which the WSJ translated from Latin as “towards all”. I thought about that statement in light of the ongoing debate about enforcement of the Foreign Corrupt Practices Act (FCPA) here in the US. On one side is the Chamber of Commerce and their allies who raise the ever-burgeoning cry that the Department of Justice (DOJ) needs to prosecute the invidious ‘Rogue employees’ who violate the FCPA. You will notice they never want the DOJ to look at the executives who might facilitate payment of bribes in the first place; whether through faux commitment to doing business in compliance, failing to properly allocate resources to compliance and ethics, simply rewarding those employees who git ‘er done no matter what the circumstances or (my favorite) putting a paper program in place and calling it a best practices compliance program.

Indeed those progenitors of relaxed enforcement want the DOJ to back off and let them do business the old fashioned way. However, if the bribery and corruption news from the first half of this year has told the world anything, it is about the dire effects of allowing such illegal conduct to take place and warning against slacking off laws which mandate doing business without bribery and corruption. In another WSJ article, entitled “Roots of a Brazilian Scandal That Weighs Heavily on the Nation’s Economy, Politics”, Marla Dickerson noted, “The scandal has crippled Petrobras, Brazil’s largest and most important company. In late April, the company wrote off more than $16 billion related to losses from graft and overvalued assets. The company’s woes have all but paralyzed the nation’s oil and gas sector. Hurt by slumping oil prices and strapped for cash, Petrobras has slashed investments, sparking a wave of credit downgrades, bankruptcies and layoffs among its suppliers that the weighed on Brazil’s economy.”

I wonder what George Carlin might have thought about all of this. He might have said that what else would you expect but I am relatively certain he would have done so while also sticking his thumb in the eye of The Man. 

For a YouTube version of the 11 O’Clock News, click here.

For a YouTube version of the 7 words you can never say on television, 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

 

June 19, 2015

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

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

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2015

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