Archie Bunker, Batgirl and the International Fight Against Corruption

This week saw the death of two notables from the television industry, Bud Yorkin and Yvonne Craig. According to his Obituary in the New York Times (NYT), Yorkin rose up the television industry ranks to eventually team with Norman Lear to produce one of the true “pioneering, provocative and singularly successful satirical series” in the history of television, All In The Family, introducing one of the most recognizable characters in all of TV – Archie Bunker. When I say he began at the bottom end of the business: it literally was that, as he began repairing TVs in New York City bars. All In The Family not only broke ground by discussing taboo subjects it also became “the first TV series to top the Nielsen ratings for five consecutive years.”

Yvonne Craig was known, according to her Obituary in the NYT, as the girl “who kept Gotham safe as Batgirl” whom she played in the 1960s TV series Batman. Craig was a classically trained ballerina who brought athleticism and “a scrappy girl-power element” to the series in its third and final season. However, I remember Craig as the green skinned slave girl in the “Whom The Gods Destroy” episode from the original Star Trek series. Her Obituary noted, “She performed a seductive, loose-limbed dance that seemed to nearly overwhelm William Shatner’s red-blooded Captain Kirk, while Leonard Nimoy’s Mr. Spock pronounced it “mildly interesting.””

Interestingly both of these televisions stars inform today’s compliance issue. Yorkin for the way he and his partner Lear held up a mirror, through All In The Family, to address such issues as “racism, sexism, abortion, gay rights and the war in Vietnam, among other television taboos” and Craig, “who kept Gotham safe as Batgirl.” Of course I am referring to the devastating disaster that occurred last week in the Chinese city of Tianjin. A NYT article, entitled “Report Details Role of Political Connections in Tianjin Disaster”, reported that the death toll now stands at 114, with 674 injured and more than 17,000 homes damaged. An unknown number of persons are still missing.

Is anyone really surprised corruption was involved in the tragedy? Enforcement of anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act or even Chinese domestic anti-bribery laws, is not a game for corruption can kill. While most corruption leads to economic damage, there have been clear instances where corruption led to the loss of life. The 2013 massacre at the Narobi Westgate shopping mall was clearly a result of corruption in Kenya that allowed guns used in the attack to be illegally smuggled into the country through bribery.

Now it has been reported that corruption led to the disaster in Tianjin. The FCPA Blog, in a post entitled “Report: Tianjin warehouse owners used guanxi to land phony safety licenses”, wrote that “The owners of the warehouse in the port of Tianjin that exploded last week and killed more than 100 people obtained fraudulent safety licenses through their connections with fire and safety officials, China state media said.” The warehouse where the fire started and spread from was illegally holding certain lethal chemicals. The post also noted, “Ruihai International Logistics owned the warehouse. The main shareholders of the company are ex-Sinochem executive Yu Xuewei and Dong Shexuan, the son of a late police chief, VAO News reported.” The FCPA Blog went on to quote the VOA report for the following, “In an interview with the official Xinhua news agency, Dong and Yu admitted to using their connections, or guanxi, with local officials to obtain various fire safety, land, environmental and safety certifications.”

In addition to the illegally stored chemicals, it turns out there should not even have been a warehouse in that location in the first place. In another NYT article, entitled “Report Details Role of Political Connections in Tianjin Disaster”, Dan Levin reported the warehouse itself was not far enough back from the prescribed distance for residential housing. It seemed clear from the confession of the Mayor of Tianjin that he had been involved in the corruption when he stated, “I bear the unshirkable responsibility for this accident as head of the city.”

Another indicia of Chinese corruption had come into play as well. The executives of the company, which owned the warehouse and illegally stored chemicals, Ruihai, hid their ownership interest. The article reported they “had other people list their shares to avoid the appearance of a conflict of interest.”

In yet another NYT article, entitled “Fear of Toxic Air and Distrust of Government Follow Explosions in China” also by Dan Levin, it was noted “Later on Tuesday, China’s anticorruption agency announced on its website that Yang Dongliang, a former deputy mayor of Tianjin who became the head of the State Administration of Work Safety, was under investigation for “suspected violations of party discipline and the law,” a common euphemism for corruption. The Beijing Youth Daily reported, however, that Mr. Yang has been under investigation for a half-year, raising questions about why the case was announced now. Two other officials accused of taking bribes are also under investigation.”

The fallout from this tragedy continues. However, with such widespread corruption many Chinese feel they are not being told the truth and that their government is protecting corrupt officials. Levin said, “Public reflection on man-made tragedies is politically risky for the ruling Communist Party, according to David Bandurski, an editor of the China Media Project at the University of Hong Kong. “The party leadership is very aware that questions of responsibility in a disaster like this can very quickly move to fundamental issues of power and legitimacy,” he said, explaining that in an authoritarian system, “the buck stops with you.” Mr. Bandurski noted that censors had struggled to control the Tianjin narrative because some Chinese journalists had pushed ahead with their own reporting. “This is a very messy story, and for Chinese media, messy means opportunity,” he said.”

The Petrobras scandal in Brazil is bringing into question the government of President Dilma, it could forebode the same in China. Corruption in all its forms is no laughing matter and enforcing anti-corruption laws is no game. While prosecuting companies engaging in bribery and corruption through the hiring of sons and daughters of government officials to retain or garner new business may seem quite a long way from the Westgate Mall massacre or the massive loss of life in Tianjin; they are clearly on a unidimensional continuum.

Just as Archie Bunker put a light up to many of the social ills of his time, the more light you can shine on corruption, the more you can root it out of the shadows. But do not forget to send in Batgirl and those fighting for justice against corruption as well.

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

BNY Mellon and Lessons Learned In Hiring Family Members – Part II

In yesterday’s post I reviewed the Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action involving the Bank of New York Mellon Corporation (BNY Mellon) around its hiring of sons and nephews of foreign governmental officials to obtain or retain business from certain foreign Sovereign Wealth Funds. I discussed the underlying facts and penalties assessed against BNY Mellon as laid out in the SEC Cease and Desist Order (the “Order”). Today I want to provide some guidance on what this enforcement action may mean for companies going forward when hiring the sons and daughters or close family relatives of foreign government officials.

The first thing to remember is there is nothing in the FCPA which prohibits the hiring of a son, daughter or close family member of a foreign government official. What the FCPA does make illegal is an action where a company “or any officer, director, employee, or agent acting on behalf of such issuer, in order to obtain or retain business, from corruptly giving or authorizing the giving of, anything of value to any foreign official for the purposes of influencing the official or inducing the official to act in violation of his or her lawful duties, or to secure any improper advantage, or to induce a foreign official to use his influence with a foreign governmental instrumentality to influence any act or decision of such government or instrumentality.” [citation omitted]

The actions of BNY Mellon were clearly designed to not simply curry favor with the foreign governmental officials involved but also to either grow the business or help to retain what the company already had in place with the un-named foreign Sovereign Wealth Fund. At this point most companies have a written FCPA compliance program in place; consisting of policies and procedures. Note, this does not mean that the compliance program is effective because for a compliance program to be effective, a company must actually be doing compliance. Many FCPA enforcement actions occur because an exception was granted to a policy or procedure and either the reason for granting the exception was inappropriate or there was no documentation as to why the exception was granted. In the case of BNY Mellon, it was the latter.

BNY Mellon offered high value, high prestige summer internship programs for “undergraduates as well as a separate summer program for postgraduates actively pursuing a Master of Business Administration (MBA) or similar degree. Admission to the BNY Mellon postgraduate internship program was highly competitive and characterized by stringent hiring standards.” The main purpose of these internships was to give BNY Mellon an opportunity to evaluate the interns as potential permanent hires to the company. There was a designated track for nomination to the internship program and internal company evaluation prior to offering candidates an intern position. In other words, there were policies and procedures around the process but BNY Mellon did not follow them.

Hiring Process

The first Red Flag, which BNY Mellon seemingly ignored in this entire process, was that each of the candidates were recommended to the firm by foreign governmental officials who held control of business relations between Sovereign Wealth Funds and the bank. Their requests that their close family relations be hired by BNY Mellon was contra to the banks own process of selecting candidates for its internship program from a exclusive group of universities and colleges in the US and UK. The Order noted, “Successful applicants had to achieve a minimum grade point average, and had to advance through multiple rounds of interviews in addition to having relevant prior work experience and a demonstrated affinity for and interest in financial services work.”

None of these indicia were present in the hiring of the foreign governmental official’s relatives at issue. There was no evidence the candidates met any of BNY Mellon’s own internal criteria for consideration to the internship program. Indeed, as the Order stated, “as recent graduates not enrolled in any degree program, the Interns did not meet the basic entrance standard for a BNY Mellon postgraduate internship.” Finally, to top it off, all three were hired sight unseen and “BNY Mellon decided to hire the Interns before even meeting or interviewing them.” 

The Internships

But BNY Mellon’s violative conduct did not stop by simply hiring the three close family relatives for its internship program. The three persons got benefits far more than simply a regular internship program. BNY Mellon designed special “Bespoke” internship programs for the three interns. As requested by their fathers and uncle, the three interns received “customized work experiences” which “were not regular undergraduate or graduate summer internships at all, but customized one-of-a-kind training programs. The internships were valuable work experience, and the requesting officials derived significant personal value in being able to confer this benefit on their family members.”

The internships were abnormally long, lasting six months, which was twice the normal length. Additionally they were “rotational in nature, meaning that Interns A, B and C had the opportunity to work in a number of different BNY Mellon business units, enhancing the value of the work experience beyond that normally provided to BNY Mellon interns.”

The Costs

In addition to the exceptions granted in the hiring process and the internships themselves, BNY Mellon also paid out money and non-monetary benefits in a manner different to others in the internship program. The Order stated, “BNY Mellon determined, because Interns A and B had already graduated from college, that Interns A and B should be paid above the normal salary scale for BNY Mellon undergraduate interns but below the scale for postgraduate interns. Intern C was unpaid. BNY Mellon also coordinated obtaining visas for all three of the Interns so that they could travel from the Middle East to work in the countries in which they were placed. BNY Mellon paid the legal fees and filing costs related to the visas. As the BNY Mellon Asset Management employee responsible for arranging two of the three internships wrote in a contemporaneous e-mail, the internships constituted an “expensive favor” for the requesting foreign official.” Indeed the Order cited to an email from one BNY Mellon employee who wrote, “I am working on an expensive ‘favor’ for [Official X] – an internship for his son and cousin (don’t mention to him as this is not official).” Further, BNY Mellon knew the request and accommodation was unethical, if not illegal, as the same employee wrote in another email, ““[W]e have to be careful about this. This is more of a personal request . . . [Official X] doesn’t want

[the Middle Eastern Sovereign Wealth Fund] to know about it.” The same employee later directed his administrative assistant to refrain from sending email correspondence concerning Official X’s internship request “because it was a personal favor.”

Lessons Learned Going Forward

I must emphasize once again that there is nothing illegal around the hiring of a close family member of a foreign governmental official. It does however present a higher risk for indicia of bribery and corruption and violation of the FCPA. A higher FCPA risk means you need to evaluate that risk more closely and manage that risk accordingly.

The obvious starting point for any hiring of a close family member of a foreign governmental official is whether the candidate is qualified for the position. If they are not qualified it is ‘Full Stop’ at that point. In the case of BNY Mellon there was no evidence any of the candidates had the academic background, the academic credentials, leadership traits or intangible skills to meet the bank’s normal internship hiring criteria. As with any other anomaly granted in a company’s normal process, there must be a documented reason for the exception, review by appropriate authority of the exception and documentation as to why the exception was granted. None of these steps were present in the BNY Mellon matter. Put another way, if you are hiring a family member or close relative of a foreign government official for any reason other than merit, it had better be a darn good one and well-documented as to your decision-making calculus with appropriate senior management oversight.

But your risk management does not stop simply with the hiring process. If the foreign governmental official is the person who made the request for the hiring of the family member, this is a Red Flag not to be overlooked. Your analysis needs to be on the role of that foreign governmental official in awarding new business to your company or in retaining old business. If the foreign governmental official has direct or even strong indirect control over such business relation, this may present such a direct conflict of interest, this may be a risk that you cannot manage. A good rule of thumb here is whether there is full transparency in the hiring with the foreign government involved with your company. In the case of BNY Mellon, they did not want anyone in the Sovereign Wealth Fund to know BNY Mellon had hired the son or nephew. That is a clear sign transparency is lacking and someone, somewhere is engaging in unethical conduct, if not breaking the law.

Finally, if you do decide to move forward and hire the close family member, you need to assign that new hire to work not associated with the business relationship between your company and the foreign government involved. Just as in the lifecycle of third party management, managing the relationship after a contract is inked is in many ways the most critical element; the same is true in the employment relationship involving close family members of foreign government officials.

Ultimately, you need to have internal controls to ensure effective compliance going forward. You cannot have customer relationship managers making the calls on hiring which over-ride the Human Resources (HR) procedures. There must be not only HR review but also mechanisms to flag for compliance review such hires. Lastly, there needs to be sufficient senior management oversight because this is such a high-risk proposition.

I hope you have enjoyed and found this two-part series on the BNY Mellon FCPA enforcement action and the lessons learned from it useful. The SEC Order provides a clear road map to the Chief Compliance Officer (CCO), compliance practitioner, HR professional or anyone else who reads it on the steps you should take in the hiring of a close family member of a foreign government official with which you are doing business. It may take some additional effort than simply having your business unit employees make the call on who to award prestigious internships to in order to obtain or retain business but in the long run you will have a better run company for doing so. FCPA enforcement is not a game and by doing compliance will make your company a more accurtely operated  entity.

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

BNY Mellon Settles First Sons and Daughters (and Nephews) FCPA Hiring Matter – Part I

Yesterday the Securities and Exchange Commission (SEC) announced a resolution with Bank of New York Mellon Corporation (BNY Mellon) for violations of the Foreign Corrupt Practices Act (FCPA). This was the first enforcement action around the now infamous Princesslings and Princelings investigations where US companies hired the sons and daughters of foreign government officials to curry favor and obtain or retain business.

While JPMorgan Chase has garnered the most attention around this issue, probably because of its notorious spreadsheet tracking of sons and daughters hires to develop business in China, there are multiple US companies under scrutiny for similar conduct. The FCPA Blog has reported that Credit Suisse, Goldman Sachs, Morgan Stanley, Citigroup, and UBS are all under investigation by the SEC for their hiring practices around the sons and daughters of foreign government officials. BNY Mellon has the honor of being the first company to reach resolution on this issue.

This is an important issue for many companies going forward and since this is the initial enforcement action on this issue, I am going to take a deep dive into the matter over the next couple of days. Today, I will discuss the facts of the case and tomorrow I will discuss not only the lessons to be learned from this FCPA enforcement action but also how the Chief Compliance Officer (CCO) or compliance practitioner can use those facts to graft a hiring program around the sons and daughters of foreign government officials which will not violate the FCPA.

In its Press Release, the SEC noted, “The Securities and Exchange Commission today announced that BNY Mellon has agreed to pay $14.8 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.” Andrew J. Ceresney, Director of the SEC Enforcement Division, was quoted in the Press Release as stating, “The FCPA prohibits companies from improperly influencing foreign officials with ‘anything of value,’ and therefore cash payments, gifts, internships, or anything else used in corrupt attempts to win business can expose companies to an SEC enforcement action. BNY Mellon deserved significant sanction for providing valuable student internships to family members of foreign officials to influence their actions.” Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, said, “Financial services providers face unique corruption risks when seeking to win business in international markets, and we will continue to scrutinize industries that have not been vigilant about complying with the FCPA.”

The Cease and Desist Order (Order) entered found that BNY Mellon violated the anti-bribery and internal controls provisions of the Securities Exchange Act of 1934.  BNY Mellon, “Without admitting or denying the findings, the company agreed to pay $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty. The SEC considered the company’s remedial acts and its cooperation with the investigation when determining a settlement.”

The underlying facts and BNY Mellon’s conduct as laid out in the Order provide some clear guidance for the CCO or compliance practitioner regarding what will be a violation of the FCPA in terms of hiring sons, daughters and close family relatives going forward. It should be noted that two of the hires were sons of foreign governmental officials and one was a nephew. However, the first important lesson under this enforcement action is around the parties involved. Although not identified by country, the foreign governmental entity involved was a Middle Eastern Sovereign Wealth Fund. If there was any question as to whether foreign sovereign wealth funds were covered under the FCPA, that answer is now clear, they are covered. All corporate actions should be cloaked with this knowledge going forward.

The Order also specified how the hiring of the relatives led directly to BNY Mellon obtaining and retaining business. One foreign government official, (Official X), “made a personal and discreet request that BNY Mellon provide internships to two of his relatives: his son, Intern A, and nephew, Intern B. As a Middle Eastern Sovereign Wealth Fund department head, Official X had authority over allocations of new assets to existing managers such as the Boutique, and was viewed within BNY Mellon as a “key decision maker” at the Middle Eastern Sovereign Wealth Fund. Official X later persistently inquired of BNY Mellon employees concerning the status of his internship request, asking whether and when BNY Mellon would deliver the internships. At one point, Official X said to his primary contact at BNY Mellon that the request represented an “opportunity” for BNY Mellon, and that the official could secure internships for his family members from a competitor of BNY Mellon if it did not satisfy his personal request.”

There were clear statements by the BNY Mellon official involved that hiring this son and nephew were being done to obtain or retain business. As reported in the Order:

• BNY Mellon was “not in a position to reject the request from a commercial point of view” even though it was a “personal request” from Official X. The employee stated: “by not allowing the internships to take place, we potentially jeopardize our mandate with [the Middle Eastern Sovereign Wealth Fund].”
• Another employee was quoted as saying, ““I want more money for this. I expect more for this. . . . We’re doing [Official X] a favor.”
• Yet another employee was quoted as saying, “I am working on an expensive ‘favor’ for [Official X] – an internship for his son and cousin (don’t mention to him as this is not official).”
• Finally, to demonstrate the nefarious nature of the arrangement and lack of transparency in the entire process, this final BNY Mellon employee said, ““[W]e have to be careful about this. This is more of a personal request . . . [Official X] doesn’t want [the Middle Eastern Sovereign Wealth Fund] to know about it.” The same employee later directed his administrative assistant to refrain from sending email correspondence concerning Official X’s internship request “because it was a personal favor.”

The second foreign government official, (Official Y), “asked through a subordinate European Office employee that BNY Mellon provide an internship to the official’s son, Intern C. As a senior official at the European Office, Official Y had authority to make decisions directly impacting BNY Mellon’s business. Internal BNY Mellon documents reflected Official Y’s importance in this regard, stating that Official Y was “crucial to both retaining and gaining new business” for BNY Mellon. One or more European Office employees acting on Official Y’s behalf later inquired repeatedly about the status and details of the internship, including during discussions of the transfer of European Office assets to BNY Mellon. At the time of Official Y’s initial request, a number of recent client service issues had threatened to weaken the relationship between BNY Mellon and the European Office.”

When it came to hiring Official Y’s son there were some equally damning communications at BNY Mellon that were featured in the Order.

• The BNY Mellon sovereign wealth fund relationship manager said, “that granting Official Y’s request was likely to “influence any future decisions taken within [the Middle Eastern Sovereign Wealth Fund].”
• The same person also worried aloud that if BNY Mellon did not hire the son, it “might well lose market share to a competitor as a result.”
• He went on to write ““Its [sic] silly things like this that help influence who ends up with more assets / retaining dominant position.”
• Finally, he noted that to accede to Official Y’s request was the “only way” to increase business share.

Added to all of this was that none of the three individuals met the BNY Mellon requirements for its internship program; they met neither the academic or professional requirement to obtain an internship. BNY Mellon not only waived its own hiring requirements, it did not even go through the pretense of meeting with them or interviewing them. Finally, these three individuals were provided with “bespoke internships were rotational in nature, meaning that Interns A, B and C had the opportunity to work in a number of different BNY Mellon business units, enhancing the value of the work experience beyond that normally provided to BNY Mellon interns.”

The penalty was also interesting. As set out in the order BNY Mellon agreed to the following penalty amount: “disgorgement of $8,300,000, prejudgment interest of $1,500,000 and a civil money penalty in the amount of $5,000,000, for a total payment of $14,800,000.” The SEC noted the cooperation efforts of the bank in stating, “Respondent acknowledges that the Commission is not imposing a civil penalty in excess of $5,000,000 based upon its cooperation in a Commission investigation.” Further, BNY Mellon engaged in extensive remediation. The Order stated, “Prior to the investigation by the Commission of the Interns, BNY Mellon had begun a process of enhancing its anti-corruption compliance program including: making changes to the Anti-Corruption Policy to explicitly address the hiring of government officials’ relatives; requiring that every application for a full-time hire or an internship be routed through a centralized HR application process; enhancing its Code of Conduct to require that every year each employee certifies that he or she is not responsible for hiring through a non-centralized channel; and requiring as part of a centralized application process that each applicant indicate whether she or a close personal associate is or has recently been a government official, and, if so, additional review by BNY Mellon’s anti-corruption office is mandated.”

Tomorrow I will look at lessons learned for the CCO and compliance practitioner and how you can avoid the missteps of BNY Mellon in your hiring program going forward.

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

© Thomas R. Fox, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2015

Cymbeline – Doing Virtue and FCPA Compliance

Commentators still level the hue and cry that it is somehow the fault of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) that companies continue to violate the Foreign Corrupt Practices Act (FCPA). Things would improve if only the DOJ and SEC would (1) prosecute companies more aggressively; (2) prosecute companies less aggressively; (3) make an example of ‘rogue’ employees who violate their corporate overseers pronouncements not to violate the law; (4) prosecute more corporate executives to ‘send a message’; (5) amend and clarify the FCPA because the concept of do not pay bribes is somehow too complicated for mere mortals to understand; (6) implement a compliance defense because apparently the DOJ does not consider that enough in any decision to prosecute; and/or (7) as The Donald desires, simply do away with the FCPA to restore the ability to pay a fair price for fair corruption.

I thought about all of these varied and contradictory reasons when considering one of Shakespeare’s most enigmatic plays, Cymbeline. In an article in the Wall Street Journal (WSJ) entitled “The Long, Painful Drama of Self-Knowledge”, Stephen Smith considered the character Posthumus who was thought of as virtuous yet, through the crush of the plot, has his virtuous image shattered. Smith poses the question of “Why is Posthumus such a poor leader of himself, and a danger to others?” He answers his own question by saying, “The play suggests that his lack of self-knowledge, along with the flattery of his culture, make him overconfident.” In other words, he was human.

I thought about this analysis in the context of the recent accounting and financial scandal that engulfed the Toshiba Corporation in Japan. For those who did not follow the news, Toshiba announced last month that it had overstated its profits from 2008-2014 by over $1 billion dollars. This was in the face of the company having been publicly recognized for its good governance standards and practices. In an article in the Financial Times (FT), entitled “Japan Inc left shaken by Toshiba scandal”, Kana Inagaki reported, “On paper, it had a structure that gave its external directors the authority to many top executives and an auditing committee to monitor the behaviour of the company’s leaders. It was lauded for its efforts. In 2013, the group was ranked ninth out of 120 publicly traded Japanese companies with good governance practices in a list compiled by the “Japan Corporate Governance Network.””

But it was all a sham as it turned out that chairman of the audit committee was in on the fraud in addition to a plethora of top executives. Kota Ezawa, an analyst at Citigroup was quoted in the piece that “Toshiba was lauded as the frontrunner in governance efforts but that was a misunderstanding. Its governance structure looked good but the execution was not.” Ezawa further stated, “We need to make sure that companies understand that having structures is not enough.” So even a company with $52bn in annual sales must have more than a paper program.

For those who want to point to some defect in the Japanese corporate character, reminding us of the Olympus scandal from 2011, where successive corporate executives covered up long running accounting fraud, Andrew Hill, also writing for the FT in an article entitled “The universal dangers shown by Toshiba’s failings”, says not to point that self-righteous finger quite so quickly. He reminds readers of WorldCom from earlier this century. Being from Houston, I would remind readers of Enron and its accounting fraud as well. Hill cites to the work of Professor Michael Jones to identify four main types of accounting fraud, (1) increasing income, (2) decreasing expenses, (3) increasing assets, and (4) decreasing liabilities. Hill further notes that one common failing in all of these examples is the failure of internal controls. A second key failing is the “Unwillingness to challenge authority, a trait attributed to employees at Toshiba and Olympus — and often given an “only in Japan” spin — is a recurring problem everywhere, from Royal Bank of Scotland under Fred Goodwin to Fifa under Sepp Blatter.”

Hill’s explanation of the how and why of these accounting scandals is as age old as the time of Cymbaline. He wrote, “The most important lesson from Toshiba is about the malign impact of top-down pressure to meet unrealistic targets. Toshiba’s ex-chief executive denies having given direct instructions to staff to inflate profits. But the investigating panel said he told executives to “use every possible measure to achieve profitability” and added that Toshiba’s corporate culture did “not allow employees to go against the will of their superiors”.”

The lessons that Hill finds in the Toshiba accounting scandal are equally applicable to FCPA compliance and enforcement. It is not the DOJ or SEC’s “fault” when companies do not comply with the FCPA. It is up to the companies to which the law applies to comply with it. Make no mistake; it is quite simple not to pay bribes. One only has to wake up and say “I am not paying a bribe today, no matter what the economic benefit is to me”. Yet for a company, it is not easy because you have to not only put the appropriate controls in place, but you have to do compliance by ensuring these controls are executed upon. That was the failing of Toshiba, it had the controls in place but it did not execute on them.

I think this speaks directly as to why FCPA violations continue to occur and be prosecuted. Hill ended his piece by noting, “When aggressive targets, irresistible management pressure and weak controls coincide, misconduct can spread quickly. Rival companies see the inflated numbers and strain to match them. To suggest such weaknesses are confined to one corporate or national culture is a first step into dangerous complacency.” As long as humans are involved with corporations and there are incentives in place for more and greater sales, you will always have the motivation to cut corners and pay bribes. That impulse can be brought on by a bump in salary, a nice bonus, a promotion or sometimes simply keeping your job. That is why a compliance program must be put in place and those controls must be effective.

In Cymbeline the protagonist Posthumus learns that one key component of virtue is prudence. Near the end of his article on Shakespeare’s play Smith writes, “In his story, we glimpse one goal of Shakespearean drama: to help forge just such a character – an integrated human person capable of leading himself and others to peace, with the help of virtue.” For FCPA compliance, as long as there are incentives in place to make money, there will be people who cut corners by paying bribes. Yet companies can temper this by putting an effective compliance program in place and actually doing compliance. Much like Posthumus learns in Cymbeline it is one’s actions which lead to being virtuous; for a company, it is doing compliance that leads to it being called ethical.

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

© Thomas R. Fox, 2015

What Goes Downhill May Go Uphill in FCPA Compliance

Usually the question I am posed is how far down the chain must you go in your due diligence to ensure that your suppliers are in compliance with the Foreign Corrupt Practices Act (FCPA). I would pose that now, after the Petrobras scandal, a company may need to examine the flow in the other direction. I thought about this directional shift when I read an exhaustive report in the Sunday New York Times (NYT) on the Petrobras scandal, entitled “Brazil’s Great Oil Swindle”, by David Segal. The article reviews the genesis of and details the ongoing nature of the Petrobras scandal.

While I have previously written about the other Brazilian companies that have been caught up in the scandal, such as Oderbrecht, Camargo Corrêa and UTC Engenharia, Segal’s article detailed a level of immersion in corruption that should concern every US Company subject to the FCPA and catch the eye of Department of Justice (DOJ) prosecutors handling FCPA cases. It appears that the companies that had direct contracts with Petrobras also colluded in the old-fashioned anti-trust sense, so that not only did they control all the subcontract work done on any Petrobras project but they would also demand bribes from the subcontractors which they then passed up the chain to Petrobras executives and eventually Brazilian politicians. If this scheme turns out to be true, it literally could explode potential FCPA exposure for any US Company doing business on any subcontract where Petrobras was the eventual beneficiary.

Segal reported, “according to prosecutors, these companies stopped competing and started to collaborate. They formed a cartel and decided, in advance, which of them would win a particular deal. A charade competition was orchestrated, and the anointed winner could charge vastly more than it would in a free market.” Further, “A document obtained by prosecutors laid out what it called the “rules of the game.” The trumped-up bidding process was labeled a “sports tournament”, with an assortment of rounds and a “trophy.” There was a no-sore-loser codicil, too: “The teams that participate in a round should honor the rules that have been agreed on, even when they are not the winner.”

But the corruption did not stop simply at these non-Petrobras entities. These companies would demand bribes from their subcontractors that they passed up the line to Petrobras. Segal wrote, “From 1 to 5 percent of the value of a given contract was diverted to those on the receiving end of the scheme, a group that included 50 politicians from six parties, according to prosecutors. Money from cartel members took a circuitous route to politicians’ pockets, passing through ghost corporations whose owners made bribes look like consulting fees.”

Think about all of this for a minute. What happens when everyone and every company associated with a National Oil Company (NOC) is in on the corruption? I thought about this question when I read an article in the Financial Times (FT) by Andres Schipani, entitled “We were terrorized by the drop in oil prices”, where he discussed how the drop in world oil prices has negatively affected Venezuela more than any other top oil producing company. Part of the country’s trouble is the rampant corruption around its NOC PDVSA. Schipani quoted a former minster for the following, “The design of the political economy here only benefits the corrupt.” Moreover, the country is near the bottom of the Transparency International Corruption Perceptions Index (TI-CPI) coming in at 161^st out of 175 countries listed.

Most Chief Compliance Officers (CCOs) and compliance practitioners had focused their third party risk management program around third parties, first on the sales side and then in the Supply Chain (SC). However now companies may well have to look at other relationships, particularly those where the company is a subcontractor involved in a country prone to corruption with a NOC or other key state owned enterprise. Last year the Wall Street Journal (WSJ) in an article entitled “Venezuelan Firm Is Probed In U.S.”, by José De Córdoba and Christopher M. Matthews, reported that a US company ProEnergy Services LLC (ProEnergy), a Missouri based engineering, procurement and construction company, sold turbines to Venezuelan company Derwick Associates de Venezuela SA (Derwick), who provided them to the Venezuelan national power company. The article reported that the DOJ’s “criminal fraud section are reviewing actions of Derwick and ProEnergy for possible violations of the Foreign Corrupt Practices Act”. Derwick was reported to have been “awarded hundreds of millions of dollars in contracts in little more than a year to build power plants in Venezuela, shortly before the country’s power grid began to sputter in 2009”. All of this with a commission rate paid by ProEnergy to Derwick of a reported 5%.

The Brazilian investigation poses far more dire consequences for any US Company that did business with the cartel of Brazilian companies that had locked up the Petrobras work. It means that you need to go back immediately and not only review the underlying due diligence which you did (probably none); then review the contracts with those entities; and, finally, cross-reference to see if there were any contract over-charges which were rebated back to the cartel members. If so, you may well have a serious problem on your hands as any unwarranted rebates, refunds, customer credits or anything else that could have been readily converted into cash to be used to fund a bribe.

This second part is one thing that challenges many compliance officers. The compliance function does not always have visibility into the transactions assigned to specific contracts or projects like your company might be engaged in for Petrobras in Brazil. However it also speaks to the need for transaction monitoring as not simply a cutting edge technique or even best practice but a required financial controls tool that is also applicable to compliance internal controls as well.

As Brazilian prosecutors expand ever outward from Petrobras, US companies subject to the FCPA and UK companies and others subject to the UK Bribery Act would do well to review everything around their Brazilian operations, contracts and dealings. The Petrobras scandal has shown two clear trends to-date. First is that we are far from the end of this scandal. Second, the prosecutors have been fearless so far in following the corruption trail wherever it may go. If they follow it to US companies, they could prosecute them on their own in Brazil for violation of domestic anti-bribery and anti-corruption laws or turn the evidence over to the DOJ. The thing to do now is to get out ahead of this all too certain waterfall.

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

Social Media Week Part V – Tools and Apps for the Compliance Practitioner

To conclude this week’s posts, I wanted to list some of the more prevalent social media tools, explain what they are and how you might use them in a compliance program. (As usual I got carried away so this series will conclude on Monday of next week.) You need to remember that your compliance customer base are your employees. The younger the work force, the more tech savvy they will be and the more adapted to communicating through social media. According to Social Media Examiner’s 2015 Social Media Marketing Industry Report, the top two social networks for marketing are Facebook and LinkedIn. The three social media tools that hold the top spot for social media planning are LinkedIn, YouTube and Twitter. Marketers report that video streaming is becoming increasingly important tools for markets and that is currently encompassed in Meerkat and Periscope. Finally, I would add that Pinterest is another hot social media app.

Facebook

If you do not know what Facebook is at this point, you may have just transported down from a Borg Cube or perhaps you are a Vulcan looking for First Contact. This is the world’s most ubiquitous social media tool. It combines both personal and business applications. For the compliance practitioner, think about the business uses of Facebook. You can open a Facebook page for your compliance function and share an unlimited amount of information. Equally importantly, you can be responsive when employees comment on your posts, it allows you to interact with them and demonstrate that compliance is listening and responsive. The more regularly you post, the more opportunity you have for connecting with your employee base and building trust.

YouTube 

Much like Facebook, YouTube is one of the most ubiquitous social media tools around. It allows you to upload video and audio recordings for unlimited play. For the compliance practitioner, why not consider creating a YouTube channel for your company’s compliance program. You can put together full training on specific issues or you can create short videos. For an example of short videos, you can check out the training videos I have on my website Advanced Compliance Solutions. If there is any information that you wish to put into a visual format, YouTube is one of the best solutions available to you.

LinkedIn

LinkedIn is almost as ubiquitous as Facebook and YouTube. As with Facebook, you can set up a business site or even a private compliance group for your organization. Your employees are the best place to start adding followers, as they are not only your target audience but they are also your biggest advocates. You can encourage employees to add their compliance profile to their personal profiles. By doing so, they automatically become followers and can like, comment on, and share your company updates to help expand your viral reach. As with Facebook, LinkedIn provides you a platform to communicate with your employee base. It has a chat function that can be used to solicit feedback and comments going forward. You can also tie in with or ‘link to’ other groups and people that can facilitate not only creating but also expanding your culture of compliance.

Twitter

Earlier this week, I wrote about how you can use Twitter to capture information from the marketplace of ideas. However Twitter can also be used for communicating with your employee base. Tweets are publicly visible by default, but senders can restrict message delivery to just their followers. Users can tweet via the Twitter website, compatible external applications or by Short Message Service (SMS) available in certain countries. Retweeting is when users forward a tweet via Twitter. Both tweets and retweets can be tracked to see which ones are most popular. Finally, through the use of hashtags (#) users can group posts to Twitter together by topic.

I believe that Twitter is one of the most powerful tools (and completely underused tools) that is available to the compliance function. If employees follow their company’s name through a hashtag, they can see what trending topics other employees are discussing. Compliance practitioners can help lead that internal discussion through the same technique. Moreover, if the Chief Compliance Officer (CCO) or compliance function regularly monitors Twitter they can keep abreast of any communications and those can be used as a backup communication channel, in case the company hotline or other reporting system is not immediately available or even convenient.

Meerkat and Periscope

Two of the newest and perhaps coolest tools a CCO or compliance practitioner can utilize in the realm of social media are Meerkat and Periscope. Both tools allow you to tell a compliance story in real time, throughout your organization and beyond through the capture and broadcast of video, live through your smartphone. They are both live streaming apps that enable you to create a video and open the portal to anyone who wants to use it. Anybody in your Twitter community can click on that link and watch whatever you’re showing on your phone. The big piece is the mobile aspect. It is as simple as a basic tweet and hitting the “stream” button.

This is one of the more exciting new social media tools I see for the compliance practitioner. You could start a compliance campaign along the lines a campaign that the company Hootsuite initiated called “Follow the Sun” using Periscope. They decided to let their employees showcase what they called #HootsuiteLife. They gave access to different people in every company office around the globe. Throughout the day, it would “Follow the Sun,” and people in different offices would log into the Hootsuite account and walk around and show off their culture, interviewing their friends, etc. They talk about the importance of culture and now they are proving it. The number of inbound applications drastically increased after people got that sneak peek into their company. You could do the same for your worldwide compliance team.

You can live stream video training around the globe. Moreover, if you use either of these tools in conjunction with internal podcasting or other messaging you can create those all important “Compliance Reminders” which were so prominently mentioned in the Morgan Stanley Foreign Corrupt Practices Act (FCPA) Declination. The videos that you create with both of these tools can be saved and stored so a record of what you have created can be documented going forward.

Pinterest

According to Pinterest for Dummies, this tool is an online bulletin board, a visual take on the social bookmarking site, where the content shared is driven entirely by visuals. In fact, you cannot share something on Pinterest unless an image is involved. When you share something on Pinterest, each bookmark is called a pin. When you share someone else’s pin, it’s called a repin. Your group pins together by topic onto various boards, aka pinboards, in your profile. Each board mimics a real-life pinboard. You can share images you find online, or you can directly upload images. Using the “Pin It” button, you can share directly in your browser from any web page. You can also share your pins on Twitter and Facebook.

Although a relatively new social media tool, I find it to be one of the more interesting ones for use by the compliance function as it compliments many of the other tools I discussed above. You can set up your compliance account for your organization and pin items, lists, or other visual information that can be viewed and used by employees. In addition to the enumerated items, you can pin such things as a link, a website, graphics or other forms of information. If you think of it as an online bulletin board, you can consider all of the compliance information that you can post for your customer base and the interactions they can have back with you.

All of these tools can help you as CCO or a compliance practitioner to engage with your customer base. On Monday, I will conclude with some final thoughts on why the compliance function should use social media tools available to them.

Once again please remember that I am compiling a list of questions that you would like to be explored or answered on the use of social media in your compliance program. So if you have any questions email them to me, at tfox@tfoxlaw.com, and I will answer them within the next couple of weeks in my next Mailbag Episode on my podcast, the FCPA Compliance and Ethics Report.

 

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

Social Media Week Part II – Sharing in the Compliance Function

I continue my exploration of the use of social media as a tool of doing compliance by looking at some concepts around the sharing of information. In a recent podcast on Social Media Examiner, entitled “Sharing: The Art and Science of Social Sharing”, podcast host Michael Stelzner interviewed Bryan Kramer, a social strategist and author of the book “Shareology: How Sharing is Powering the Human Economy”. Kramer talked about several concepts that I found particularly useful for a Chief Compliance Officer (CCO) or compliance practitioner to think through when considering the use of a social media strategy in a best practices anti-corruption compliance program, under the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or some other compliance regime.

Kramer’s book Shareology is a study of how, what, where, when and why people and brands share. For this book, Kramer conducted more than 250 interviews with executives, marketers and social media people, as well as professors of linguistics, psychology, sociology and so on, with the question “why people share” in mind.

The answer came down to one thing: connection. He found that “People all have the desire to reach out and connect with other people, whether it’s through sharing content and having someone reply back or by sharing other people’s content and helping them out.” From this research, Kramer identified six types of people who share:

• Altruist: Someone who shares something specific about one topic all the time.
• Careerist: Someone who wants to become a thought leader in their own industry, so they can see their career grow.
• Hipster: Someone who likes to try things for the first time and share it faster than everyone else.
• Boomerang: Someone who asks a question so they can receive a comment only to reply.
• Connector: Someone who likes to connect one or more persons to each other.
• Selective: This is the observer.

I find all of these categories to be relevant to a CCO or compliance practitioner in considering the use of social media in their compliance program. All of these can describe not only the reasons to use social media but they can also help you to identify who in your organization might be inclined to use social media and how it can facilitate your compliance program going forward.

The Altruist, Hipster and Careerist speak to how a CCO or compliance practitioner can be seen in getting out the message of compliance throughout your organization. Whichever category you might fall into, it is still about the message or content going forward. I find nothing negative in being seen as one or the other if your message is useful. Even if you are my age, there is nothing wrong with incorporating a little Hipster into your communication skills. As my daughter often reminds me, Dad you are so uncool that you are retro, but that is cool too. Applying that maxim to your compliance regime, if you can communicate in a manner your workforce sees as interesting or even hip, it may well help facilitation incorporation of that message into their corporate DNA.

I found the Boomerang, Connector and Selective categories as good ways to think about how your customer base in compliance (i.e. your employees) might well use social media tools to communicate with the compliance function. The use of social media is certainly a two-way street and you, as the compliance practitioner, need to be ready to accept those communications back to you. Indeed some comments by your customer base could be the most important interactions that you have with employees as their comments or questions could lead you to uncovering issues which may have arisen before they become Code of Conduct or FCPA violations. More importantly, it could allow you to introduce a proscriptive solution which moves your program beyond even the prevent phase.

Kramer also has some insights about the substance of your social media message. Adapting his insights to the compliance field, I found a key message to be that the problem is that companies do not write the way they speak, and don’t speak the language of their employee base. In many ways, compliance is a brand and Kramer believes that “brands and the people representing those brands need to change their language. If they focus on the title and the quality of the content, among other things, it’ll resonate more with their audience.” He also advocates using the social media tools and apps available to you. He specifically mentions Meerkat and Periscope, Snapchat, memes and/or videos to raise the value of the content. He was quoted as saying, “If you have a blog and there are no visuals, you might as well shut it down.”

It would seem the thesis of Kramer’s work is that sharing is a primary method to communicate and connect. In any far-flung international corporation this is always a challenge, particularly for discipline which can be viewed as home office overhead at best; the Land of No populated by Dr. No at worst. Kramer says that you should work to hone your message through social media. Part of this is based on experimenting on what message to send and how to send it. Yet another aspect was based upon the Wave (of all things) where he discussed its development and coming to fruition in the early 1980s. It took some time for it to become popular but once it was communicated to enough disparate communications, it took off, literally. Kramer noted, “It’s the same thing with social media. On social media, we think something will go viral because the art is beautiful or the science is full of deep analytics, but at the end of the day it really takes time to build the community.”

This means that you will need to work to hone your message but also continue to plug away to send that message out. I think the Morgan Stanley Declination will always be instructional as one of the stated reasons the Department of Justice (DOJ) did not prosecute the company as they sent out 35 compliance reminders to its workforce, over 7 years. Social media can be used in the same cost effective way, to not only get the message of compliance out but also to receive information and communications back from your customer base, the company employees.

Once again please remember that I am compiling a list of questions that you would like to be explored or answered on the use of social media in your compliance program. So if you have any questions email them to me, at tfox@tfoxlaw.com, and I will answer them within the next couple of weeks in my next Mailbag Episode on my podcast, The FCPA Compliance and Ethics Report.

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

Great Structures Week IV – The Gothic Cathedral and Compliance Incentives

I 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.

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

Great Structures Week II – Structures from Ancient Egypt and Greece

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, 2^nd 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.”

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