FCPA Compliance and Ethics Blog

November 21, 2014

The Strategic Use of Compliance

StrategyWhat is your company’s compliance strategy? By this I do not mean what is your company doing to put in a place a best practices anti-corruption compliance program that meets the requirement of the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. My inquiry goes both further and deeper. Has your company moved beyond the view that compliance with the FCPA is simply enough by incorporating compliance into your business strategy to secure a competitive advantage going forward? I thought about this issue when I read a recent article in the MIT Sloan Management Review, entitled “Finding the Right Corporate Legal Strategy”, by Robert C. Bird and David Orozco. While the authors posed the questions from the legal perspective, I found their insights equally valid from the compliance perspective.

While I am fairly certain that Chief Compliance Officers (CCOs) and compliance practitioners understand the need for the integration of compliance into the day-to-day business operations of a company, many business types still view compliance “as a constraint on managerial decisions, primarily perceiving” compliance as simply a cost. The authors believe that the more enlightened approach is for companies to use functions such as compliance “in order to secure long-term competitive advantage.” To do so the authors detailed five different legal strategies, which they call pathways, that companies might use that I will translate into compliance strategies. They are in ascending order of importance: (1) avoidance; (2) compliance; (3) prevention; (4) value and (5) transformation. The right strategy for your company will depend on a variety of factors such as maturity of your compliance function, commitment by senior management to compliance, your business model and the compliance function’s ability to collaborate with business managers.


This is the idiot response where a company either disregards anti-corruption laws such as the FCPA or UK Bribery Act or engages in willful blindness. Unfortunately, there are many major US and foreign corporations that have come to grief under the FCPA because they did not take some of the most basic steps to comply with these laws. It is largely because senior management believes that compliance provides “little concrete value, so they make no effort to” even acquiring knowledge in the area. Worse yet are companies who gain a modicum of knowledge about such anti-corruption laws “only so that they can circumvent it to achieve a desired objective.” The authors note that while “An avoidance strategy can sometimes be effective…it can also lead to disaster.” This lead to the compliance function and the CCO only being called in an emergency, after the conduct has occurred so that compliance is always in a reactionary mode.


This pathway means complying with laws, not the compliance function itself. Under this pathway, “companies recognize that the law is an unwelcome but mandatory constraint on their activities.” So while following this strategy would allow a company to have subject matter expert (SME) practitioners in the field of compliance, it would exist only “so the business could operate within its legal bounds.” Under this pathway, companies still view compliance as a cost to be minimized. Moreover, anti-corruption laws such as the FCPA or UK Bribery Act are “viewed as primarily inflexible—externally imposed rules that cannot be changed or adapted to suit a particular corporate strategy.” This means that business managers will simply not understand that compliance can be used to further business goals. It also leads most business unit folks to believe that compliance is the Land of No and the CCO is in reality ‘Dr. No’ who is there “primarily as a watchdog that polices corporate conduct for illegal activity.”


Under the prevention pathway, senior management acknowledges that anti-corruption laws can be used as competitive advantage “to further well-defined business roles.” This means that the compliance is proactive rather than reactive. Senior managers understand how the law relates to their business areas “and they appreciate how it can be used to minimize particular business risks.” The compliance function “seeks partnerships with managers to help them achieve their risk-management goals.” This pathway has the added benefit that allows compliance practitioners to recognize the importance of measuring and quantifying compliance issues and data “as a part of a broader effort to support a business oriented strategy.” It also means that the compliance function is available to the business unit when the competitive landscape is “strategically assessed” by the business unit. This is more than simply having a seat at the table; it is being a part of and contributing to the commercial strategy.


Companies operating in this pathway use compliance to “create tangible and identifiable value.” But to do so requires a true corporate commitment because business unit managers will need to have a strong understanding of anti-corruption compliance and how it can be tailored to generate value for the company. The CCO, and indeed the entire compliance function, must see itself “as a key stakeholder in helping the company to increase its return on investment” and should see itself in helping to create value for the company. Usually this comes about in two ways. The first is by using compliance to lower costs of doing business, particularly through third parties. Here you can think of reducing the number of vendors who perform the same services or provide the same products to you by appropriate management of your third party compliance program. The second way is by using compliance to increase revenues.


In this final pathway, a company will incorporate compliance directly into its business model. While the authors note that few companies have been able to move this far in the legal arena, those who have done so possess a rare and valuable “capability that can provide a competitive advantage that is difficult for a business rival to imitate.” One of the keys to making this transformation is that not only is compliance integrated within “the company’s various value-chain activities; it is also linked with the value chains of important external partners as part of the larger business ecosystem.” This pathway is only available to companies with the most mature compliance function and most usually when compliance is combined with “the business model and core competencies of the company.”

Clearly there is no ‘one size fits all’ approach to compliance strategies. However if your compliance program has maturity and senior management can operate with their eyes open, they will see that while the first three strategies focus on managing risk, the final two are targeted towards generating business opportunities or least have compliance as a part of the team doing so. As compliance practitioners move into the CCO 2.0 role that I have advocated, these pathways can provide you with a tangible starting point to educate senior management on what compliance can bring to the (business) table.

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, 2014

November 20, 2014

Compliance Lessons From Mom

John HansonEd. Note-the below post was on the site, thefraudguy.com, which is hosted by John Hanson. I found it so moving I asked John if I could repost on my site, which he graciously allowed me to do. 


If you were wondering whether or not I had dropped off the face of the earth for the last six weeks, you guessed right.  October of 2014 was a month that, along with September 2001, I would love to utterly erase from my memory.

My mother, who had been so courageously battling cancer for the last five years, lost the battle on October 17, 2014.  Despite a contractor catching my house on fire and a kidney stone suddenly showing up, I was able to get to Bristol, VA and be with my mom before her passing.  I remained in Bristol to support my dad and help with all of the funeral arrangements.  After the funeral, I packed their house up and moved dad up to Fredericksburg, VA with my family.

As I reflected on my mom’s life and lessons, there were a few in particular that I find relevant to the work I do today, particularly in the area of compliance and ethics.  My mom was raised in a second generation Italian family in extreme poverty in New Orleans.  I recall hearing stories of how she slept together with her sister and brother in a small room where they had to take turns staying awake to keep the rats off of them.

Despite the obstacles, mom appreciated the value of hard & honest work, education, and selfless service.  Working various jobs, she put herself through nursing school and began what became a forty-one year long career as a nurse.   Mom’s nursing accomplishments were of no comparison with Nobel Prize winners and will never be remembered outside of the small circles of those whom they affected, but they are nonetheless as profound and meaningful, both to those affected and to those who might see in her life and work the impact and role of a positive high ethical tone and commitment to always doing what was right and in the best interests of her “customers” – her patients.

My mom always stressed the importance of honesty and showed me the benefits of it every time I owned up to something I did wrong as a child.  As long as I was honest about my mistakes, the punishment was appropriately reduced.  Thank God – or I would still be in “time-out” some forty years later!   That is a lesson I have carried all my life and am trying hard to pass on to my children, as well as those with whom I work.

Positive ethical tone within an organization begins with honesty.  And ends with dishonesty.

An effective compliance & ethics program will include on-going education and training.  While my mom worked hard to put herself through school to become a nurse, she never stopped her education there.  Over the course of her career as a nurse, she took on many new challenges/specialties, some of which she did pioneering work in.  The lesson is that education never stops.  We never stop learning and we always have room to learn more, regardless of where we are now in our lives and careers.  Compliance training IS on-going education.  It is not checking a box.

Being a nurse is among the most altruistic jobs one might have.  Caring for those who, in many instances, can’t care for themselves.  Helping them with the most humbling and/or simple tasks – many tasks that even family might shy away from.  Not losing sight of their human dignity and treating them with respect, even as they lost respect for themselves.  My mom was always a champion of the patients, even when being so was not always in the financial best interests of the hospital or kindly looked upon by her superiors.  As best as I know, mom never had to deal with any “corporate” fraud issues as a nurse/employee, but she certainly had her share of ethical issues.  Sometimes described as a “firecracker” when it came to advocating for her patients, I am sure mom upset her share of hospital superiors of lesser ethical constitution over the years.

It’s a great lesson for us.  By placing greater value on what we do and doing things right (rather than on where our stock price is), we find a more fulfilling and long-lasting success.  When someone acts unethically or engages in some sort of misconduct, we have to speak up – until somebody listens.

I recall with both joy and sadness a little boy named Stephen, who was a cancer patient under my mom’s care in a pediatric intensive care unit.  I was living far away at the time, working as an FBI Agent.  In caring for Stephen, my mom had learned that he had dreamed of one day becoming an FBI Agent and so she asked that I might visit him when I next came to town – in fact, she made certain to remind me of it MANY times as I planned my next visit!

When I got to town, my mom made sure that the hospital was my very first stop.  She also insisted that I wear a suit – my official FBI Agent “uniform.”   After Stephen’s chemo treatment(s) that day, she rolled him in a wheelchair to a private little waiting area where she had asked me to wait.  Stephen was probably about ten years old and his cancer was terminal – in its latest stage.   It was obvious that this child had suffered much and long, and was still in pain.  He didn’t have a single hair on his head and maybe weighed forty pounds in all his clothes.  Yet when my mom introduced me as her FBI Agent son, he lit up like a Christmas tree.  My mom and Stephen’s mom left briefly, so that we could have our “top secret debriefing.”  I let him hold by badge and credentials, let him see my handcuffs and the gun holstered on my hip, and answered every question he could muster the strength to ask – and many that I knew he would ask if he could.

When our time was over, I gave Stephen an official FBI t-shirt, a junior FBI Agent badge, some FBI pens, and other little things that I can’t even remember – though they meant the world to him.  I learned a couple months later that Stephen had passed and that he had specifically requested that he be buried in that FBI t-shirt that I gave him.  To this day I can’t think about that without tearing up.

This is just one example of how my mom took the time to listen to her “customers” and to appropriately do more for them than what just her job required.   She got no honors, medals, promotions, mentions or bonuses for this – and that was fine by her.  The joy brought to Stephen was priceless.

I’ll miss you mom.  Thanks for all you did for me and for everyone you touched.  I hope I can pass on the lessons I learned from you to my children as well as you passed them on to me.  I also hope that I might follow your example(s) with the same humble obscurity as you sought and that I might touch just one tenth of the number of lives that you did.

Tell Stephen hello for me.

November 12, 2014

John Doar and the Bio-Rad FCPA Enforcement Action – Part II

John DoarJohn Doar died yesterday. He was perhaps most famously known for his role as the House Judiciary Committee Chief Counsel during the investigation of and impeachment proceedings against then President Nixon. However, it was his role in the civil rights movement in the South that in large part inspired me to become a lawyer. He rode with the Freedom Riders in Alabama; walked with James Meredith so that he could register to attend the University of Mississippi, then stayed in the same dorm room with Meredith while the campus rioted; prosecuted the KKK in Mississippi after the murder of three civil rights workers in 1964; and marched for voting rights with Dr. King in Selma. My favorite John Doar story was retold in his obituary in the New York Times (NYT), where he stopped a riot in its tracks with the following ““My name is John Doar — D-O-A-R,” he shouted to the crowd. “I’m from the Justice Department, and anybody here knows what I stand for is right.” That qualified as a full-length speech from the laconic Mr. Doar. At his continued urging, the crowd slowly melted away.”” In my book, he is right up there with Atticus Finch.

In an earlier post, I reviewed the Bio-Rad Laboratories, Inc. (Bio-Rad) Foreign Corrupt Practices Act (FCPA) enforcement action from the perspective of the Non-Prosecution Agreement (NPA) the company was able to secure with the Department of Justice (DOJ). Today I want to review the bribery schemes that the company used to either internally fund the bribes or attempt to evade internal detection. Both the NPA and the Securities and Exchange Commission’s (SEC) Order Instituting Cease-and-Desist Proceedings (Order). The compliance practitioner can use these bribery schemes not only for FCPA training but also to see if any such schemes or their indicia may be present in your company.

Initially I need to discuss the corporate structure. It was apparently quite decentralized. According to the Order, “Bio-Rad’s international sales organization (“ISO”) oversees the company’s international sales operations; this includes all locations outside the United States and Canada. In 2009, the ISO consisted of four sub-divisions: (1) Western Europe; (2) Asia Pacific; (3) Japan; and (4) Emerging Markets. Each sub-division had a general manager, reporting to the vice-president of ISO. The Asia Pacific sub-division included Vietnam and Thailand. The Emerging Markets sub-division included Russia and other eastern European countries. Some countries within the sub-divisions had a country manager who reported to the ISO sub-division general manager.” Emerging markets is clearly a high-risk area for pharmaceutical companies. If your business development or sales organization has such a designation, I would suggest that you check and see if there are sufficient protections in place to at least raise any red flags, which might need further investigation.

However, it was more than the management structure of the business operations that was decentralized, the compliance function was similarly structured. The NPA stated, “BIO-RAD also decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct.” This decentralization so defanged the company’s compliance program that it could not perform even the most basic functions of a compliance organization; no due diligence on third parties, indeed no management of third parties at all from the compliance perspective; no risk assessments were performed and, finally, the most damning was that the compliance function could not even ensure compliance with the company’s own business ethics policy.

The Russia Scheme

However the company used third party representatives to facilitate the bribery scheme. In addition to the lack of due diligence or usual steps that a compliance practitioner might put in place to manage third parties under the FCPA there were several other items of note which constitute lessons learned by the compliance practitioner. First and foremost was the commission rate paid to these third parties, that being between 15%-30%. This alone may well have been enough to demonstrate “a conscious disregard for the high probability that the Russian Agents were passing along at least a portion of their commissions to Russian government officials to obtain profitable public contracts for the sale of medical diagnostic equipment.” Further, the payments made to these agents were sent to countries outside Russia, where neither the alleged services were delivered nor where the agents were legally domiciled. Moreover, not only did these agents have no offices in Russia, they had no employees in Russia either.

Apparently there were contracts in place with these agents. The services these agents were specified to deliver included, “acquiring new business, creating and disseminating promotional materials to prospective customers, distributing and installing products and related equipment, and training customers.” But it really is hard to deliver services if you have no employees. Apparently there were times these agents did deliver something identified as “distribution services” for the commission rates between 15%-30%. However the estimated value of these services for the company was between 2%-2.5% of the total sales.

Another area of obvious concern should have been the pre-payment of commissions to these agents. Any time you pre-pay before a service is delivered (other than a retainer into a lawyer’s trust account) you can potentially run into trouble. But Bio-Rad took it a step further by making pre-payments before contracts with the ultimate buyer were negotiated. Any ideas where those pre-paid commissions might have gone? Another area was the amount of the commissions. They were just less than $200,000, which happened to be the authority level of the head of Bio-Rad’s Emerging Markets business unit. So there was no oversight or second set of eyes on these pre-payments because it was within the manager’s authority level. Finally, these pre-payments were actually forbidden under the contracts but they were made anyway.

The Vietnam Scheme 

The Vietnam Country Manager had contracting authority up to $100,000 and sales commissions up to $20,000. From 2005-2009 Bio-Rad apparently paid bribes directly to health care workers so they would purchase the company’s products. When it was pointed out to the Country Manager this was illegal, he simply moved to a distributor “at a deep discount, which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes…Between 2005 and the end of 2009, the Vietnam office made improper payments of $2.2 million to agents or distributors, which was funneled to Vietnamese government officials. These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated gross sales revenues of $23.7 million to Bio-Rad Singapore.” 

The Thailand Scheme

In Thailand, it was an almost mundane bribery scheme involved compared to Russia and Vietnam. Bio-Rad acquired an interest in a Thai Joint Venture (JV) through an acquisition where it performed “very little due diligence” on the JV. Bio-Rad acquired a minority interest in the JV and it did not communicate directly with the JV’s distributors but only through the majority owners of the JV. The bribery scheme was funded through “an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.” The due diligence was so poor that Bio-Rad did not know that the prime third party sales representative for the JV were the same majority owners of the JV.

Tomorrow, I will discuss some of the internal controls that a company might employ to help prevent such a compliance failure as occurred at Bio-Rad.

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, 2014

November 3, 2014

Giants Join Pantheon of Greats Through the Confluence of Culture and Strategy

Giants Win WSLast week the San Francisco Giants won their third World Series championship in five years. This elevates them into the conversation of the Pantheon of elite teams over the past 50 years. Only the New York Yankees (1998-2000) and the Oakland Athletics (1972-1974) can top the Giants for Worlds Series won in such a time frame. Sorry Red Sox nation, 3 titles in 10 years does not elevate you to the Pantheon, only to the very good. So congratulations to Series MVP Madison Bumgarner, most especially former Astro Hunter Pence, the rest of the team and Giants fans everywhere for having a team for the ages.

One of the things that I love about sports is when a player has a streak, game or season for the ages. We had one from Giants pitcher Madison Bumgarner this Series. Initially it appeared that he would have three wins to his credit, with one earned run. That record would have put him in the company of fellow Giant (albeit New York Giant) Christy Mathewson, who in the 1905 World Series pitched three complete shut-out games in six days. I say it appeared that Bumgarner had nearly equaled Mathewson’s record after his relief appearance in Game 7 where he shut down the Kansas City Royals. However after the game the Official Scorer changed Bumgarner’s Win to a Save. This change dropped Bumgarner into a two with Cincinnati Reds reliever Rawley Eastwick who won two games and saved one in the 1975 World Series. While he did not equal Mathewson’s 0.00 ERA with 3 wins and no losses, he did have a 0.25 ERA with 2 wins and 1 save.

How is it that Bumgarner went from having a Win to being credited with a Save? In an article in the New York Times (NYT), entitled “Win or Save” A Rule with Room for Judgment”, Benjamin Hoffman reported that “In general, if a starting pitcher does not complete five innings, and the score is tied, a victory is assigned to the pitcher of record when the lead changed hands. The exception is when the scorer determines the reliever of record was ineffective. While guidance is given that an ineffective outing would involve a pitcher going less than one inning and giving up two or more runs, Rule 10.17(c) states that it is up to the scorer to determine ineffectiveness.” The Giants relief pitcher immediately before Bumgarner was Jeremy Affeldt, who came into the game with “with runners on base, and pitched well for two and a third innings”. The original Scorer’s ruling was overturned and Affeldt was credited with the Win.

I thought about the Giants win and Bumgarner’s near mythic World Series run as I read a couple of articles in the Houston Business Journal (HBJ) dealing with culture and strategy and their implications for the compliance practitioner. The first was on CEO leadership and it featured Ryan Lance, the Chief Executive Officer (CEO) of ConocoPhillips. He detailed a leadership style that is relatively straightforward. He called it DAM, which he defined as Direction, Align and Motivate. This is a good way for any compliance practitioner to not only think through the implementation of a compliance enhancement or task but equally it should give a manner to use with senior executives to help them to understand their role in the compliance function in your company. Interestingly in the same article, Keith Mosing, CEO of Frank’s International, was quoted for the following, “No. 1 is integrity. I just can’t stress that enough. There are guys who are smarter, but if you don’t have morals and ethics, it’ll backfire on you.”

I considered these two approaches as I read the second article, which dealt more directly with execution of strategies, often the bane for a Chief Compliance Officer (CCO) or compliance practitioner. Why a bane? Because at least since Peter Drucker it has been observed that “Culture eats strategy” where it is the company culture which dictates how and when something might get done. This second article was by Connie Barnaba, entitled “Don’t let company culture eat you”, where she stated “Many brilliant strategies have fallen prey to culture because they fail to recognize that persuading people to accept a new way of doing things is…complicated.”

Company culture is what gives employees clues to what is important and how to act. Business strategy usually means something to change that culture. In the compliance arena this can mean changing the cultural imperative in a country or region that may have existed far before the US Company, subject to the Foreign Corrupt Practices Act (FCPA), came to exist in that location. A big part of any best practices compliance program is to recognize that changes in a business environment will lead to changes in the compliance risk. This change can be in products or services that are offered; locations where they are delivered or a new client base which might include foreign governments or state-owned enterprises. To meet these new compliance risks, there may need to be changes or enhancements to a compliance regime. However, such changes could fail because “they fail to recognize that persuading people to accept a new way of doing things over what is familiar is complicated.” To effectively execute a business strategy change to accommodate a new compliance initiative, a CCO or compliance practitioner should have a clear understanding of not only your company’s culture but also the cultures of the specific business units or geographic areas where you are making the enhancements. You will also need to understand the expectations of the key talent who will assist the compliance department in making the changes.

Finally Barnaba cautions against surprise, about the most detested thing I ever saw in a company. She wrote, “The element of surprise and little or no enemy resistance are the two weapons that make culture a formidable adversary. A business strategy that understands culture and has a well-considered battle plan is likely to overcome the attack and achieve the strategic goal. At the end of her piece, Barnaba provided seven best practices for effective strategy execution, which I have adapted for the compliance function.

  • Identify the changes that are critical to the execution of the compliance strategy.
  • Determine the people, processes and technology that will be impacted by the compliance enhancements.
  • Predetermine how the compliance enhancements will be received by the people who will be impacted by the changes.
  • Manage the business units’ expectations by giving clear reasons for the changes.
  • Provide compliance support to those in the business unit who will be most heavily impacted by the changes.
  • Share your timeline for implementation, including any transition period and the clear expectation of when the business unit will be measured on any change in performance standards.
  • Establish the transitional goal and then exceed it.

I think the Giants showed that compliance and strategy can not only exist together but together they can lead you to succeed at the highest levels. The message is that you have to work to integrate both but if you do, the results can be nothing short of spectacular.

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, 2014

October 23, 2014

Five Quick and Easy Ways To Sabotage Your Compliance Training

Chris BauerEd. Note-today we have a guest post from noted ethics and compliance expert, as well as steel guitar player, Chris Bauer.

Okay, you know that you need to have effective compliance training but do you really know what will actually make it effective? The reality is that far too many compliance training program fail on multiple counts. With compliance as critical as it is, that is unacceptable. Thankfully, there are a few areas which, if attended to well, can correct many of the most-frequently seen problems with the development and execution of these programs.

Here are five of the areas I see getting missed time after time in compliance training programs.

Do you actually have a solid, working definition of what compliance is? I see ethics, compliance, and accountability as being ‘cross-defined’ all the time. Do they inter-relate? Absolutely and it’s even a great idea to inter-relate them in your training. However, until you are clear about what you mean by all three of those terms, your training will leave employees confused and confusion is never good for compliance training…

To Do – Find or create definitions for all three of these terms that are clear, concise and, above all, practical. The moment these terms become hazy or academic you have already lost too many of your employees’ ability to build your ideas into their minute-to-minute, day-to-day practices. Also, be sure to use language that fits the culture of your organization. Just because something sounds good in another organization – or another part of your organization – doesn’t mean that it will work for anyone, let alone everyone, in every corner of your company. This is one of the many reasons that ‘one size fits all’ training is rarely effective. Different parts of your organization are likely to need things said and demonstrated in different ways. You have the choice; you can whine about the inconvenience of that or go about creating a great compliance training program.

Is your training practical? An awful lot of compliance training is little more than a coma-inducing parade of Powerpoint slides with the rules, regulations, and, perhaps, a few key updates. Is that information critical? Perhaps so. However, for starters be sure that the information really is critical before overwhelming employees with so much information that they can’t actually retain it.

To Do – Always build in opportunities for employees to ask how your training really applies to what they do on the job. If they can’t fully see the behaviors in which they are and are not to engage – or if they don’t believe those behaviors are possible in their circumstances – your training has missed the mark. Also, remember that employees are unlikely to tell you spontaneously that they don’t think they can do what you’re asking of them. Be active in seeking out feedback on not only their level of understanding of the material but, as importantly, their confidence that they can do what you’re asking of them. If they don’t think they can do it, it is your job to help them figure out how to deal with any roadblocks – real or perceived – they might see.

Are you simply transferring information or are you providing employees with solid ideas and tools to put the rules and regulations into practice? If you want a culture where compliance is topmost in your employees’ minds, they had better be able to first mentally retain and then apply the mandated rules and regulations. If you aren’t helping them apply what you’re telling them, it will have been an entirely academic exercise.

To Do – Here again, everything you train on needs to have clear, ‘do-able’ behaviors attached. Employees have to know exactly what they need to be doing to bring your compliance program to life. It’s not enough for you to believe that they ought to be able to figure it out; they really need to know and they need to hear it from you. (Mind you, they may also have ideas you haven’t thought of yet. Great! Just don’t pretend it isn’t your job to help them figure it out.)

Are you creating information overload? True, there’s a lot out there that your employees will need to know about compliance. However, are you giving so much in each sitting that it simply can’t be retained? Again, if they can’t retain the information – or, at least, find it easily – they certainly can’t put it into practice. Consider providing training in smaller, on-going chunks. Less time-efficient? Maybe. However, that will more than pay off in having your employees actually recall and apply what they’ve been trained on.

To Do – Remember that smaller chunks of information ‘stick’ better. Further, information that clearly has practical applications does the same. Work to avoid simply smothering employees with regulatory and oversight information. Make it real for them by providing it in digestible, easily recalled, practical chunks. Here again, whine if you like about this being inconvenient but the facts remain; you need to attend to this if you really want your compliance training to be effective.

Are you making compliance a tool for your employees’ personal success? I see a lot of organizations doing a fine job of conveying to employees how their bottom line can be wildly, adversely affected by compliance problems. However, they fail to show employees how compliance is important to them personally. Sure, we all want our employees to put our organization first but, really, is that realistic? If your goal is to motivate employees to attend to compliance – and that had better be one of your goals – you’ll get far more bang for your buck if you can help them see how their lives and careers will be easier/better if they keep their mind on compliance.

To Do – Without your employees, your organization would quite literally be nothing. They are already contributing all day, every day, to the success of your organization. Make compliance training – along with every other training your provide – a tool that they can use for their personal success as well. Maybe that success has to do with advancement, maybe it has to do with some kind of incentive. At the rock bottom, it has to do with them keeping their job. The point is that there will always be ways you can think of to help them see that a focus on compliance is as much for their personal benefit as the company’s. Do your homework and figure out what those motivations are for your employees. It will not only make your training a whole lot more effective, it’s a nice thing to help your employees be successful, yes?

It is all-too-easy to overlook all five of the above requirements for effective compliance training. In fact, by ignoring them, it will be far easier for you to create your training program; just throw a bunch of regulatory requirements onto a Powerpoint presentation or webinar and slam through it for as long as it takes. You will, in fact, be telling your employees what they are required to hear. If, however, your goal is to not sabotage your training and actually get employees to take action and create a culture where compliance is top-of-mind, ignore any of the above five concerns at your own risk.

Christopher Bauer is an expert on creating cultures of ethics, compliance, and accountability. Information on his programs as well as his Trust Foundry blog can be found at www.ChristopherBauer.com. Information specific to his programs on professional ethics can be found at www.BauerEthicsSeminars.com. In addition to speaking, training, and consulting on creating cultures ethics, compliance, and accountability, he publishes a Weekly Ethics Thought seen by thousands or readers worldwide. Free subscriptions are available by visiting either of his websites.

October 13, 2014

Ringo, Sir Paul and an Effective Compliance Program

Paul McCartneySometimes the universe converges in ways that are beyond my simple comprehension. This past weekend was one of them. It began a few months ago when I saw an advertisement from StubHub that showed Ringo Starr playing in Houston on October 10 and Sir Paul McCartney playing in New Orleans on October 11. I figured if the two surviving members of the greatest rock and roll band in the history of the world were going to play on two consecutive nights it was a sure sign from the Oracle of Rock ‘N Roll that I was intended to attend both, lest I tempt a fate worse than going against an entity nearly as powerful as the Oracle of Delphi. Moreover, the Friday concert coincided with the birthday of my little sister who happened to be in town and one of the planets biggest Beatles fans, it made the convergence complete. Ringo Starr

I also learned two completely new and unrelated facts this weekend. The first is that a native of Liverpool, England, is called a ‘Scouser’. That comes from my Liverpudlian friend Pam, who also introduced me to the Liverpool Football Club. The second is that my wife is a closet Mr. Mister uber fan, who rocked out as a teenager to this group in the early days of MTV. On reflection that is perhaps the more odder convergence.

While there is clearly a reason Ringo Starr tours with true musical all-stars and Sir Paul McCartney has been raised to the peerage for his musical prowess, in many ways the Ringo Starr concert was the bigger revelation. I had wondered how Ringo would fill out an entire concert. He did it by surrounding himself with musicians fabulous in their own right. They included: Steve Lukather, former lead singer from Toto on vocals, lead and rhythm guitar; Gregg Rolie, former keyboardist from Santana and Journey on vocals, organ, keyboards; Richard Page, former lead singer from Mr. Mister, on vocals and bass guitar; and finally, best and certainly not least, Todd Rundgren on vocals, lead and rhythm guitar, bass guitar, percussion, harmonica and, occasionally, even keyboards.

So in addition to Ringo singing his standards of Photograph, It Don’t Come Easy, Yellow Submarine and (of course) With a Little Help From My Friends. We also got to hear songs first released by Santana, Toto, Mr. Mister and some great Todd Rundgren hits. The group clearly loved playing and jamming with each other. Further, these other groups’ songs were great fun to hear and as they may never reform, I would not otherwise have the chance to hear them performed lived.

Sir Paul McCartney. You really do not have to say much more. His concert did not exceed my expectations because they were about as high as expectations could have been. He seriously rocked out for over three hours, playing everything from the earliest Beatles songs up to a ballad for his latest wife. I cannot remember ever attending a concert where everyone one in attendance knew the words to every song but we all did and we all sung them all the way through the entire show.

What is the compliance angle to all of this? Just as there is more than one way to put on a great concert, there is more than one way to have an effective compliance program. This continual message from the Department of Justice (DOJ) came again earlier this month through remarks by Assistant Attorney General for the Criminal Division, Leslie R. Caldwell, at the 22nd Annual Ethics and Compliance Conference, where she made clear that while the FCPA Ten Hallmarks of an Effective Compliance Program is one set of guidelines for an effective compliance program, there is no “one-size fits all” compliance program. She laid out another way to think through, review and analyze your compliance program. 

  1. High-level commitment. A company must ensure that its directors and senior management provide strong, explicit, and visible commitment to its corporate compliance policy. Stated differently, and again, “tone from the top.”
  1. Written Policies. A company should have a clearly articulated and visible corporate compliance policy memorialized in a written compliance code. Again, employees need to know what to do–or not do–when faced with a tough judgment call involving business ethics. Companies need to make that as easy as possible for their employees.
  1. Periodic Risk-Based Review. A company should periodically evaluate these compliance codes on the basis of a risk assessment addressing the individual circumstances of the company. Companies change over time through natural growth, mergers, and acquisitions.
  1. Proper Oversight and Independence. A company should assign responsibility to senior executives for the implementation and oversight of the compliance program. Those executives should have the authority to report directly to independent monitoring bodies, including internal audit and the Board of Directors, and should have autonomy from management. Compliance programs needed to be funded; they need to have resources. And they need to have teeth and respect within the company.
  1. Training and Guidance. A company should implement mechanisms designed to ensure that its compliance code is effectively communicated to all directors, officers, employees. This means repeated communication, frequent and effective training, and an ability to provide guidance when issues arise.
  1. Internal Reporting. A company should have an effective system for confidential, internal reporting of compliance violations. I know that many companies have multiple mechanisms, which is good.
  1. Investigation. A company should establish an effective process with sufficient resources for responding to, investigating, and documenting allegations of violations. What this means on the ground will depend on the company. A sophisticated multi-national corporation obviously will be expected to have more resources devoted to compliance than a small regional company.
  1. Enforcement and Discipline. A company should implement mechanisms designed to enforce its compliance code, including appropriately incentivizing compliance and disciplining violations. Further, the response to a violation must be even-handed. People watch what people do much more carefully than what they say. When it comes to compliance, you must both say and do.
  1. Third-Party Relationships. A company should institute compliance requirements pertaining to the oversight of all agents and business partners. This cannot be emphasized strongly enough.
  2. Monitoring and Testing. A company should conduct periodic reviews and testing of its compliance code to improve its effectiveness in preventing and detecting violations. Kick the tires regularly. As I said, compliance programs must evolve with changes in the law, business practices, technology and culture.

Caldwell also emphasized that as important as the compliance program itself; the implementation is also reviewed and evaluated by the DOJ. When the DOJ investigates a case, they look at the messages about compliance that are given to employees; they look at what employees are told in their day-to-day work. This means the DOJ will look at emails, chats, and recorded phone calls. They will interview witnesses about the messages they received from their supervisors and management to determine if they received messages about compliance, or about making money at all costs.

Another consideration for the DOJ is incentives. The DOJ will examine the incentives that a company provides to encourage compliant behavior – or not. This means that if a company is actually encouraging compliance, if its values are to be ethical and within the law, this message must be conveyed to employees in a meaningful way. If not, it is likely that the DOJ will not view the compliance program as credible. Interestingly, Caldwell said that sometimes the effective implementation of a compliance program means standing apart from the other companies in your industry.

Just as Ringo and Sir Paul ably demonstrated, there is more than one way to put on a great concert. They both assessed their strengths and weaknesses and used that information to put great bands around them illustrated their strengths. The same is true in the world of Foreign Corrupt Practices Act (FCPA) compliance. The key is to review and assess your compliance risks and then manage them. And, as always, Document, Document, and Document whatever you do so that if a regulator comes knocking, you can demonstrate evidence of the above.

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, 2014




October 10, 2014

The Horror of Dracula and Internal Controls in International Locations, Part I

Christopher Lee as DraculaThis Friday we celebrate the second in the Hammer Films horror series, which was actually its first offering, based on Count Dracula, entitled “Horror of Dracula”. It starred the famous Hammer Films horror movie two-some of Peter Cushing as Professor Van Helsing and Christopher Lee as Count Dracula. If you have grown up on the classic Universal monster films, the first thing that strikes you about the Hammer Films is the glorious technical color production. The second thing is the focus on gore. Horror of Dracula, with its emphasis on blood is particularly focused. Nevertheless, the productions are first rate and with Cushing and Lee bringing some gravitas to the cast, the movie certainly holds up. One of the biggest changes from Bram Stoker’s novel and the Universal movie version starring Bela Lugosi, is the location change from England to Transylvania for the confrontation between Professor Van Helsing and Dracula. In other words, they were on Dracula’s home turf; not in England on Professor Van Helsing’s home ground.

As the Foreign Corrupt Practices Act (FCPA) deals largely with conduct outside the US, today, I will begin a multi-part series on internal controls at locations outside the US. Part I will focus on how to think through the issues of internal controls outside the US and why your company’s internal controls might require changes for different countries across the globe. In Part II, I will review how to determine the risk in a geographic region outside the US, through a Location Risk Assessment and for Part III, I will close with how a compliance practitioner should use a Location Risk Assessment.

Clearly, a Chief Compliance Officer (CCO) should be considering the entity-wide internal controls for a company. Under the FCPA accounting provisions, issuers can be held liable for the conduct of their foreign subsidiaries, even though the improper conduct occurred outside of the US. The scope of liability is based on the issuer’s incorporation of the subsidiary’s financial statements in its own records and Securities and Exchange Commission (SEC) filings. So, as with the use of third party distributors to sell product, FCPA enforcement looks past the structure of the transaction and makes enforcement decisions based upon the substance. Once again I visited with internal controls expert Henry Mixon to discuss these issues.

While a CCO should expect (or at least hope) that internal controls at locations outside the US are of the same effectiveness as internal controls within US business units and at the US corporate office; unfortunately, that might not always be the case. It is often the case that corporate level internal controls are stronger than those in foreign business units. Mixon indicated that there may well be several reasons for this. First, the company’s Chief Financial Officer (CFO) may be paying closer attention to the corporate level internal controls, with the idea that the corporate level internal controls are the final “filter” to detect issues. This follows partly from the focus in most companies on the controls over financial reporting, which does not include all controls needed for FCPA compliance. A second reason is that many companies were built through acquisitions, resulting in many business units (both in and outside the US) having completely different accounting and internal control systems than the corporate office. There is often a tendency to leave acquired companies in the state in which they were acquired, rather than trying to integrate their controls and conform them to those of current business units. After all, the reason for the acquisition was the profitability of the acquired company and nobody wants to be accused of negatively impacting profitability.

A third situation may exist at locations outside the US that began simply as a sales office. Then the location gradually expanded its scope of operations to become a full scope business unit with its own accounting and data processing functions. Unfortunately, it is not often the situation in which there was a master plan for internal controls as the location’s scope grew. Often processes were added internally and were usually designed by the local personnel that in practice meant the Country Manager had total control over financial affairs and was not really accountable to the Corporate Office. This can be particularly true as long as a country business unit’s profits continue. In such situations, there will rarely be any focus on effective preventive internal controls for FCPA risk.

The next area for inquiry is where should a CCO begin in any of the above scenarios? Mixon believes that the initial first step is to determine the extent of centralization or decentralization of relevant processes or put another way, to what extent are relevant processes performed at the corporate offices? In some companies it is common, for example, to have all vendor invoices paid from the corporate office. In other companies, the corporate accounting function only aggregates information received from business unit accounting departments. This translates into a varying analysis of risk regarding locations outside the US, depending on the degree of accounting decentralization. A good starting point is to determine the extent to which the financial statements of business units outside the US are reviewed and analyzed by the corporate accounting function. This will give good insight into whether the corporate accounting function provides an element of internal control or merely serves as a data aggregator.

The first step for the CCO is to determine the possible universe of risks and to assess the risks to result in a priority of how attention will be focused. One useful approach advocated by Mixon is the Location Risk Assessment (LRA), whose purpose is to capture in one place each location outside the US where your company conducts business and to assess the compliance risks posed by the nature of operations at each location. Once the risks at each location have been properly categorized, you can then prioritize your approach to dealing with the risks.

For your weekend viewing, I would suggest you kick your feet up and look forward to some good, old-fashioned 1950s flavored gore found in the Horror of Dracula. If your temporal compliance matters need your attention, you can look forward to Part II next week, in which I will discuss how a compliance practitioner should perform a Local Risk Assessment.

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, 2014

October 3, 2014

Hammer Films, “We Sell Hammers” and Other Famous Last Words

Hammer FilmsToday is the first of five Fridays in October so today I will begin my now annual October FrightFest blog posts. Over the past couple of years I have focused on the classic Universal horror movies from the 1930s and 40s. This year I am going to re-watch and blog about the classic Hammer Studio monster movies from the late 1950s. Hammer Films was founded in the UK in 1934 and are best known for their Gothic “Hammer Horror” films, produced from the mid-1950-70s. They also Peter Cushing and Christopher Lee, for which fans of Star Wars are eternally grateful, to the greater movie watching audience.

Another type of hammer informs today’s compliance moment, as in “We sell hammers.” That was the excuse given by Home Depot managers when their own cybersecurity department employees would try to obtain budget to update cybersecurity software or to even put on training about the dangers of a data breach. If you have attended any compliance conference this year, you have been subjected to one or more sessions on cybersecurity and/or data breaches. As if the Target fiasco from last year was not enough, the most recent massive breach comes courtesy of Home Depot. Unfortunately the Home Depot saga provides some excellent lessons for the anti-corruption compliance practitioner or a company subject to the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act.

In an article which appeared on the front page of the New York Times (NYT) entitled “Warned of Risk, Home Depot Left Data Vulnerable”, Julie Creswell and Nicole Perlroth, reported that the Home Depot data breach and theft was “The biggest data breach in retailing history” and it had “compromised 56 million of its customers credit cards.” Moreover, the “data has popped up on black markets, and, by one estimate, could be used to make $3 billion in illegal purchases.” How could such an event have happened even after the very public debacle endured by Target?

It certainly did not happen overnight but the article noted that “Industry experts were flabbergasted that Home Depot, one of the world’s largest retailing companies, was caught so flat-footed after the breach at Target, which resulted in the theft of more than 40 million cards before the holiday season.” The article reported Home Depot had been warned by its own employees of data security issues as far back as 2008. But a series of missteps, or perhaps more appropriately non-steps, led to the Home Depot’s current problems. One of the major problems was “Home Depot relied on outdated software to protect its network.” This included information that some of the company was still relying on “outdated Symantec software from 2007 and did not continuously monitor the network for unusual behavior, such as a strange server talking to its checkout registers.”

Another failure by Home Depot was in the area of ongoing monitoring. The article reported that “Credit card industry security rules require large retailers like Home Depot to conduct scans at least once per quarter, using technologies approved by the Payment Card Industry Security Standards Council, which develops technical requirements for its members’ data security programs. The P.C.I. Council requires that approved, third-party quality security assessors perform routine tests to ensure that merchants are compliant.” Unfortunately the article reported that two former employees stated “more than a dozen systems handling customer information were not assessed and were off limits to much of the security staff.” Rather unbelievably, this scanning is not only fundamental to data security but also one of the simplest and least costly. The article quoted Avivah Litan, a cybersecurity expert at Gartner, who said, “Scanning is the easiest part of compliance. There are lots of services that do this. And they can be run cheaply from the cloud.”

Yet another FUBAR by Home Depot was in the hiring for its cybersecurity team. No doubt due to his very Southern name, the company hired Ricky Joe Mitchell, a security engineer, who was swiftly promoted up to a “job in which he oversaw security systems in Home Depot stores.” The problem for Home Depot and indeed Ricky Joe was that he had been terminated from, the articled stated “he was fired by EnerVest Operating, an oil and gas company, and before he left, he disabled EnerVest’s computers for a month.” For that cute little good-bye present, he was “sentenced to four years in federal prison in April.”

The article also reported that many cybersecurity focused employees in the company had departed over the years. The reason was that it appeared no one was listening to their concerns. The company simply refused to believe that it was at risk for a data breach.

So what lessons can be drawn for the anti-corruption compliance specialist who must deal with laws such as the FCPA or UK Bribery Act? Clearly Home Depot failed to adequately assess its risks for a data breach. For the compliance practitioner, I think the lesson here is to understand not only your company’s business sales model, products and services and foreign government touch-points but to reassess those risks on a regular basis.

You should keep track of external and internal events that may cause change to business processes, policies and procedures. Some examples are new laws applicable to your business organization and internal events driving changes within a company. Such internal changes could be a company reorganization or major acquisition. This type of review appears to be similar to the Department of Justice (DOJ) advocacy of ongoing risk assessments. The FCPA Guidance specifies, “a good compliance program should constantly evolve. A company’s business changes over time, as do the environments in which it operates, the nature of its customers, the laws that govern its actions, and the standards of its industry. In addition, compliance programs that do not just exist on paper but are followed in practice will inevitably uncover compliance weaknesses and require enhancements. Consequently, DOJ and SEC evaluate whether companies regularly review and improve their compliance programs and not allow them to become stale.”

Ongoing monitoring is another lesson to be drawn from Home Depot’s fiasco. While ongoing monitoring in the compliance realm is not as easy or inexpensive, ongoing monitoring is a commitment to reviewing and detecting compliance variances in real time and then reacting quickly to remediate them. A primary goal of monitoring is to identify and address gaps in your program on a regular and consistent basis across a wide spectrum of data and information. As in the cybersecurity world, there are both companies and software which you can use to help you in ongoing monitoring.

How about that good-ole boy Ricky Joe? Do you really want to have a head of a critical cybersecurity team who has sabotaged a prior employer? Similarly, in the compliance realm, do you want to have a top salesman or even Chief Compliance Officer (CCO) who engaged in bribery and corruption in a prior job? If the answer is yes, go directly to jail and DO NOT collect $200. What does Ricky Joe’s hiring and rapid promotion tell you about the pre-hire vetting done by Home Depot? Yes, I thought so.

I usually use sports as a mirror to look at compliance issues. Of course living in Houston, there are the sad-sack Houston Astros and their owner who are always around to provide some lessons. But the actions and inactions of Home Depot even rival those of the Astros for some lessons learned on compliance. In my title, I used the “We Sell Hammers” line and promised other famous last words. Unfortunately they come from one, un-named former Home Depot employee, who “went so far as to warn friends to use cash, rather than credit cards at the company’s store.” Famous last words indeed.

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, 2014

October 1, 2014

Creation of Yosemite and Putting Compliance at the Center of Strategy

YosemiteOn this day in 1890, an act of Congress created Yosemite National Park, home of such natural wonders as Half Dome and the giant sequoia trees. Environmental trailblazer John Muir (1838-1914) and his colleagues campaigned for the congressional action, which was signed into law by President Benjamin Harrison.

In 1889, John Muir discovered that the vast meadows surrounding Yosemite Valley, which lacked government protection, were being overrun and destroyed by domestic sheep grazing. Muir and Robert Underwood Johnson, a fellow environmentalist and influential magazine editor, lobbied for national park status for the large wilderness area around Yosemite Valley. With this persuasion, Congress set aside over 1,500 square miles of land for what would become Yosemite National Park, America’s third national park. In 1906, the state-controlled Yosemite Valley and Mariposa Grove came under federal jurisdiction with the rest of the park to create the Yosemite that we know today. It clearly was a triumph for Muir and Johnson but more so for the American people.

I recently read an article in the Harvard Business Review (HBR) that seemed to draw inspiration from the actions of Muir and Johnson. The article by Frank Cespedes, entitled “Putting Sales at the Center of Strategy”, discussed how to connect up management’s new sales plans with the “field realities your salespeople face.” Referencing the well-known Sam Waltonism that “There ain’t many customers at headquarters”; Cespedes believes that “If you and your team can’t make the crucial connections between strategy and sales, then no matter how much you invest in social media or worry about disruptive innovations, you may end up pressing for better execution when you actually need a better strategy or changing strategic direction when you should be focusing on the basics in the field.”

The problem is usually clear. Senior management and the C-Suite make clear their commitment to doing business ethically and in compliance with anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA). The company even has a best practices compliance. But the problem is that the installation or enhancement of a compliance regime is usually perceived as a ‘top-down’ exercise. The reality of the employee base that must execute the compliance strategy is not considered. Even when there are comments, it is derisively characterized as ‘push-back’ and not taken into account in moving the compliance effort forward. I thought Cespedes piece had some great insights for the compliance practitioner so borrowing from his four-point process, I will rework it for a compliance professional.

Communicate the Strategy

It can be difficult for an employee base to implement a strategy that they do not understand. Even with a company wide training rollout, followed by “a string of e-mails from headquarters and periodic reports back on results. There are too few communications, and most are one-way; the root causes of underperformance are often hidden from both groups.” Here Cespedes’ insight is that clarification is a leadership responsibility and in the compliance function that means the Chief Compliance Officer (CCO) or other senior compliance practitioner. Moreover, if the problem is that employees do not understand how to function within the parameters of the compliance program, then there is a training problem and that is the fault of the compliance department. I once was subjected to a PowerPoint of 268 slides, which lasted 7.5 hours, about my company’s compliance regime. To say this was worse than useless was accurate. The business guys were all generally asleep one hour into the presentation as we went through the intricacies of the books and records citations to the FCPA. The training was a failure but it was not the fault of the attendees. If your own employees do not understand your compliance program that is your fault.

Continually improve your compliance productivity

I thought this point was insightful. Cespedes talked about incentivizing your sales force. Why not do the same concepts around compliance? You can work with your Human Resources (HR) department to come up with appropriate financial incentives. Many companies have ad hoc financial awards, which they present to employees to celebrate and honor outstanding efforts. Why not give out something like that around doing business in compliance? Does your company have, as a component of its bonus compensation plan, a part dedicated to FCPA compliance and ethics? If so, how is this component measured and then administered? There is very little in the corporate world that an employee notices more than what goes into the calculation of their bonuses. HR can, and should, facilitate this process by setting expectations early in the year and then following through when annual bonuses are released. With the assistance of HR, such a bonus can send a powerful message to employees regarding the seriousness with which compliance is taken at the company. There is nothing like putting your money where your mouth is for people to stand up and take notice.

Improve the human element in your compliance program

This is another area where HR can help the compliance program. More than ongoing assessment of employees for promotion into leadership positions, here HR can assist on the ground floor. HR can take the lead in asking questions around compliance and ethics in the interview process. Studies have suggested that certainly Gen Y & Xers appreciate such inquiries and want to work for companies that make such business ethics a part of the discussion. By having the discussion during the interview process, you can not only set expectations but you can also begin the training process on compliance.

However, this approach should not end when an employee is hired. HR can also assist your compliance efforts by tracking employees through their company career to identify those who perform high in any compliance metric. This can also facilitate the delivery on more focused compliance training to those who may need it because of changes on FCPA risk during their careers.

Make your compliance strategy relevant

Cespedes notes, “Most C-suite executives know these value-creation levers, but too few understand and operationalize the sales factors that affect them.” In the sales world this can translate into a reduction in assets to underperforming activities. This is all well and good but such actions must be coupled with an understanding of why sales might be underperforming in certain areas. In the compliance realm, I think this translates into two concepts, ongoing monitoring and risk assessment. Ongoing monitoring can allow you to move from a simple prevent mode to a more prescriptive mode; where you can uncover violations of your company’s compliance program before they become full blown FCPA violations. By using a risk assessment, you can take the temperature of where and how your company is doing business and determine if new products or service offerings increase your compliance risks.

Above all, you need to get out and tell the compliance story. Louis D’Amrosio was quoted for the following, “You have to repeat something at least 10 times for an organization to fully internalize it.” If there is a disconnect between your compliance strategy and how your employee base is implementing or even interpreting that strategy, get out of the office and go out to the field. But you need to do more that simply talk you also need to listen. By doing so, can help to align your company’s compliance strategy with both the delivery and in the field.

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, 2014

September 30, 2014

Discipline and Rigor in Your Internal Controls

DisciplineIn a recent New York Times (NYT) Op-Ed by David Brooks, entitled “The Good Order”, he discussed how routine can lead to creativity. He cited to the example of three well-known authors whose habits included the following. “Maya Angelou would get up every morning at 5:30 and have coffee at 6. At 6:30, she would go off to a hotel room she kept — a small modest room with nothing but a bed, desk, Bible, dictionary, deck of cards and bottle of sherry. She would arrive at the room at 7 a.m. and write until 12:30 p.m. or 2 o’clock.” Another example was John Cheever, who “would get up, put on his only suit, ride the elevator in his apartment building down to a storage room in the basement. Then he’d take off his suit and sit in his boxers and write until noon. Then he’d put the suit back on and ride upstairs to lunch.” Finally, there was the example of Anthony Trollope, who “would arrive at his writing table at 5:30 each morning. His servant would bring him the same cup of coffee at the same time. He would write 250 words every 15 minutes for two and a half hours every day. If he finished a novel without writing his daily 2,500 words, he would immediately start a new novel to complete his word allotment.” Brooks thesis for his piece seemed to be summed up by a quote from Henry Miller (of all people), “I know that to sustain these true moments of insight, one has to be highly disciplined, lead a disciplined life.” Sort of gives a whole new meaning to the word ‘discipline’.

However moving back to somewhat salacious concepts, I thought about those words in the context of internal controls around a Foreign Corrupt Practices Act (FCPA) compliance program. Brooks’ thoughts on building and maintaining order inform today’s post. In the area of internal controls, I believe it is incumbent to consider not only the most obvious risk areas for your internal controls but also the universe of potential transactions within the operations of a particular company. Once again relying on my friend and internal controls expert Henry Mixon I queried him about some of the other types of internal controls a company should consider around gifts, travel, business courtesies and entertainment.

One area that companies need to be mindful of is corporate checks and wire transfers, in response to falsified supporting documentation, such as check requests, purchase orders, or vendor invoices. Here Mixon believes that the Delegation of Authority (DOA) is a critical internal control. So, for example a wire transfer of $X between company bank accounts in the US might require approval by the Finance Manager at the initiating location and one officer. However, a wire transfer of $X to the company’s bank account in Nigeria, could require approval by the Finance Manager, a knowledgeable person in the Compliance function, and one officer. The key is that the DOA should specify who must give the final approval for such an expense.

I asked Mixon about the situation where checks drawn on local bank accounts in locations outside the US “off books” bank accounts, commonly known as slush funds. Petty cash disbursements in locations outside the US – the unique control issues regarding locations outside the US will be discussed in a future podcast. Some petty cash funds outside the US have small balances but substantial throughput of transactions. In this instance, Mixon said that the DOA should address replenishment of petty cash funds in countries outside the US, as well as approval of expense reports for employees who work outside the US, including those who travel from the US to work outside US.

Another area for concern is travel, the reason for this being that a company’s corporate travel department and independent travel agencies can buy tickets, hotel rooms, etc., for non-employees. Mixon noted that internal controls might be needed to ensure policies are enforced when travel for non-employees can be purchased through a corporate travel department or through independent travel agencies. As was demonstrated with GlaxoSmithKline PLC (GSK) in China, a company must not discount the risk related to abuse of power internally and collusion with independent travel agencies. Mixon advises that you should implement procedures to ensure compliance with your company policies regarding payment of travel and related expenses for third parties, for not only visits to manufacturing or job sites but also any compliance restrictions that might be in place.

An area for fraud, corruption and corporate abuse has long been Procurement cards or “P Cards”. Mixon cautions that if your company uses procurement cards, assume this to be a very high-risk area, not just for FCPA but also for fraud risk generally. Banks have made a great selling job to corporations for the use of P-Cards to help to facilitate “cash management” but, more often than not, they can simply be a streamlined way to allow embezzlement and misbehavior to go undetected. Here a control objective should be put in place along the lines of a written policy and procedures defining the acceptable and unacceptable use of company Procurement Cards, required forms, required approvals, documentation and review requirements.

An interesting analogy that Mixon used is that misbehavior, like water, seeks its own level. Mixon explained that this meant if the pre-approval process and strong controls over expense reports prevent misbehavior, employees who wish to misbehave will seek other ways to do it where controls are not so strong. This means you should use your risk assessment process to help prioritize where controls are most needed. If your company prohibits gifts and any travel other than for the submitting employee from being included in the expense report, you should consider requiring instead a check request form be used, which, Mixon noted, would be subject to stringent controls. He added that in such cases a checklist should be completed and attached to the check request which includes questions and disclosures designed to flush out exactly what was provided in the way of a business class airline, pocket money, event tickets, side trips, leisure activities, spouses or other relatives who might be traveling and why the travel had business purpose. Such an internal control would allow for a more streamlined processing of expense reports and still elevates the gifts/travel items to the appropriate level of review and requires appropriate documentation.

I inquired as to why a Compliance Officer relies on the audit controls that are in place regarding gifts because in many companies, internal audits of expense reports are common. Mixon noted that it is important to keep in mind that, with respect to gifts, internal audits most often constitute, at best, a detect control, which only gives comfort for some historical period and is not necessarily representative of the controls in place to prevent future violations. So, it will be a false sense of security if a Compliance Officer relies on the internal audit of expense reports to be the control needed over violation of Gift policies.

I thought about one line in Brooks’ piece, which seemed to echo Mixon’s thoughts on internal controls, where Brooks wrote, “Building and maintaining order…requires toughness of mind and rigid discipline to properly serve your own work.” By having the rigor to institute and enforce the types of internal controls Mixon has identified, you can go a long way towards detecting and more importantly preventing a FCPA violation from occurring.

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, 2014

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