Farewell to Moe Green and the Promise to Pay a Bribe Under the FCPA

Moe Green died again yesterday but this time he was not shot through the glasses, it was from cancer and the fictional Las Vegas mobster lived to the ripe old age of 79. Of course I am referring to “Alex Rocco, the veteran tough-guy character actor with the gravelly voice best known for playing mobster and Las Vegas casino owner Moe Greene in The Godfather”. As reported in the Hollywood Reporter, Jeffrey Dean Morgan was quoted as saying, “For those of us lucky enough to get to know Rocco, we were blessed”; “He gave the best advice, told the best and dirtiest jokes and was the first to give you a hug and kiss when it was needed. To know Roc was to love Roc. He will be missed greatly.” But it was his scream of the line, “I buy you out, you don’t buy me out!” in response to a buyout offer from Michael Corleone for which Rocco may well best be remembered in an almost 60 year acting career.

Rocco’s death and Green’s line about offers and counter-offers, with attendant promises to pay, with your life or otherwise, inform today’s blog post. Compliance practitioners will recognize that payments of bribes to foreign government officials, officials of state-owned enterprises, and certain others are illegal under the Foreign Corrupt Practices Act (FCPA), which reads, in relevant part, that: “It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to…”

The above is the operative prohibition from the FCPA and its violation can lead up criminal sanctions. However, most Chief Compliance Officers (CCOs), compliance practitioners and those practicing in the FCPA space have focused on all of the language except the words promise to pay. The reason would seem straightforward; not until a bribe has been paid would there be evidence sufficient to uphold sanctions under the FCPA. Yet, just as the Rosetta Stone revealed a new source of information long lost to the world, a promise to pay under the FCPA can have just as serious consequences for companies or individuals.

I thought of these issues when I read a recent article in the New York Times (NYT), entitled “Scandal Casts Shadow on Private Equity Firm’s Quest for a Bargain”, by frequent contributor Steven Davidoff Solomon. In his article, Solomon detailed a transaction by “Cerberus Capital Management, the private equity firm headed by Stephen A. Feinberg, acquired the agency’s Northern Ireland loan portfolio, which had a face value of 4.5 billion pounds (currently about $7 billion), for £1.3 billion in April 2014.”

The FCPA angle came into play because a law firm engaged by Cerberus, Northern Ireland’s Tughans, disclosed “that it had discovered that Mr. Coulter [the now former Managing Partner of Tughans] had diverted the £7 million in professional fees owed to the firm to an account in his name without the knowledge of his partners.” Further, a member of the Republic of Ireland’s parliament, Mick Wallace, “contended that £7 million was put in an offshore bank account on the Isle of Man to pay off an unidentified Irish politician or political party in connection with the Cerberus deal.” Before the money could disappear from the Isle of Man bank account Tughans retrieved it and the firm “parted ways with Mr. Coulter.” Solomon noted that at this time, “no politician has been identified as the potential beneficiary of the £7 million, though speculation is rampant. Police in Northern Ireland have opened a criminal investigation.”

According to Solomon, “Cerberus pointed out in a statement that it has not been accused of any wrongdoing and that it has “zero tolerance for inappropriate or unethical activities. We insist on the same high standards of conduct from our advisers,” it added. “In this matter, as is our standard business practice, we codified these expectations in our engagement letters with our outside advisers so that there was no room for interpretation.” It said it had received assurances from both law firms that they were in compliance with all laws and regulations.”

Henry McDonald, reporting in a The Guardian entitled “Lawyer denies bribery claim over £1bn Irish property sale”, wrote that former Tughans Managing Partner Coulter said, “denied that he or any politician had benefited financially. “The fees payable were paid into a Tughans company account supervised by the firm’s finance team,” he said. “In September 2014, a portion of the fees was retained by Tughans and I instructed Tughans’ finance director to transfer the remaining portion into an external account which was controlled only by me. Not a penny of this money was touched.” Coulter added this rather amazing statement, released through his PR firm, “he had directed the transfer of money for “a complex, commercially and legally sensitive” reason.”

If someone wanted to give a FCPA exam question, where the students had to spot the FCPA issues, this one would probably be about as good as you could dream up. But to think that a law firm’s fee would be put into a bank account in a well-known location which raises as many Red Flags as the Isle of Man, seems stretching things a bit too far. McDonald also reported that the Tughans firm “had passed all documentation relating to this to the Law Society of Northern Ireland. “The firm voluntarily brought the matter to the attention of the Law Society and will continue to cooperate with any inquiry,” it said.” He also noted that Northern Ireland officials had “called in the UK’s National Crime Agency to investigate allegations of bribery and corruption relating to the property deal.”

So what if there had been a promise to pay a bribe, but one was never paid because the money was no longer available in a separate bank account? Under the FCPA, a promise to pay is viewed with equal suspicion as the payment of a bribe. Cerberus is clearly a US entity, so the FCPA would apply. The firm’s expectations of law firms compliance with the FCPA, written into their engagement letter, coupled with the “assurances” the company received from its law firms that it was in compliance with all laws and regulations could protect the firm in a FCPA investigation. But we do have at least one person, Irish Parliament member Mick Wallace, saying the money was put into the Isle of Man bank account to pay off an Irish politician or political party. If there was a promise to pay, the result under the FCPA could be the same as if there was an illegal payment.

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

Another Great Bassist Gone and Tone at the Bottom

 

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

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

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

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

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

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

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

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

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

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

Pink Flamingos and the Compliance Audit

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

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

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

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

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

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

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

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

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

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

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

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

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

© Thomas R. Fox, 2015

Economic Downturn Week, Part I – Mapping of Your Internal Compliance Controls

This week I will present a series on steps that you can take in your compliance program if you find yourself, your company or your industry in an economic downturn. All of the recommendations I will make are ideas that have been put into action by companies currently facing these issues. They are ideas that you can use if you have scarce or lessened economic resources for your compliance function. Today I will take my cue from the recent Securities and Exchange Commission (SEC) enforcement action against BHP Billiton (BHP) as a key indicator of where greater and more rigorous SEC enforcement is heading. That is in the area of the enforcement of internal controls and steps that you can take right now, even with reduced head count and budgetary resources, to improve your Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption compliance program.

However, before we get to that subject, I want to remember Marques Haynes, who died last week. Haynes was a basket baller extraordinaire who played with the Harlem Globetrotters off and on for 40 years. As was set out in his New York Times (NYT) obituary last week, Haynes “whose dazzling ball-handling skills, exhibited for more than 40 years as a member of the Harlem Globetrotters and other barnstorming black basketball teams, earned him a place in the Naismith Basketball Hall of Fame and an international reputation as the world’s greatest dribbler”. He was the first Globetrotter inducted into the Naismith Memorial Basketball Hall of Fame. I saw Haynes play in the later stages of his career with the Globetrotters; both on ABC’s Wide World of Sports and through their non-stop touring when they came to even my Podunk hometown. So here’s to you Marques and I am sure you have called ‘Next’ for that great pickup game in the sky several times now.

As they made clear with several FCPA enforcement actions from last fall, the SEC has placed a renewed interest in the accounting provisions of the FCPA, specifically the internal controls provisions. The BHP enforcement continued this trend, where there was no evidence that bribes were paid or offered in violation of the FCPA, tet the poor internal compliance controls at BHP led to a $25MM fine. Indeed Kara Brockmeyer, the Chief, FCPA Unit; Division of Enforcement of the SEC, who spoke at the recently concluded Compliance Week 2015, in a session entitled “A New Look at FCPA Enforcement”, reiterated that the SEC was committed to protecting investors in US public companies and those which list other securities in the US, through enforcement of the accounting provisions, including internal controls provisions of the FCPA. It would seem that the reason is straightforward; a company with rigorous internal compliance controls is better able to prevent, detect and remedy any FCPA violations that may occur.

So, in the midst of an economic downturn, what can you do around the FCPA’s requirements for internal controls and current SEC emphasis? I would suggest that you begin with an exercise where you map the internal controls your company has in place to the indicia of the Ten Hallmarks of an Effective Compliance Program, as set out in the FCPA Guidance. While most compliance practitioners are familiar with the Ten Hallmarks, you may not be as familiar with standards for internal controls. I would suggest that you begin with the COSO 2013 Framework as your starting point.

As a lawyer or compliance practitioner you may not be familiar with all the internal controls that you have in place. This exercise would give you a good opportunity to meet with the heads of Internal Audit, Finance and Accounting (F&A), Treasury or any other function in your company that deals with financial controls. Talk with them about the financial controls you may already have in place. An easy example is employee expense reports. Every company I have ever worked at or even heard about requires expenses for reimbursement to be presented, in documented form on some type of expense reimbursement form. This is mandatory for IRS reporting; so all entities perform this action. See how many controls are in place. Is the employee who submits the expense reimbursement required to sign it? Does his/her immediate supervisor review, approve and sign it? Does any party in the employee’s direct reporting chain review, approve and sign? Does anyone from accounts payable review and approve, both for accuracy and to make sure that all referenced expenses are properly receipted? Is there any other review in accounts payable? Is there any aggregate review of expense reports? Is there a monetary limit over which additional reviews and approvals occur?

Now if an employee has submitted expenses for activities that occurred outside the US are there are any foreign government officials involved? Were those employees identified on the expense reimbursement form? Was the business purpose of the meal, gift or other hospitality recorded? Can you aggregate the monies spent on any one foreign official or by a single employee in your expense reporting system? All of these are internal controls that can be mapped to the appropriate prong of the Ten Hallmarks or other indicia of your compliance program.

You can take this exercise through each of the five objectives under the COSO 2013 Framework and its attendant 17 Principles. From this mapping you can then perform a gap analysis to determine where you might need to implement internal compliance controls into your anti-corruption compliance program. This can lead to remedial steps that you can take. For example you can recommend procedures be written for all key compliance areas in which there are currently no procedures and your existing procedures can be updated to include compliance issues and clear definition how controls are to be evidenced. Through this you can move from having detect controls in place, to having prevent controls, whenever possible.

As a Chief Compliance Officer (CCO) or compliance practitioner, this is an exercise that you can engage in at no cost. You simply investigate and note what internal controls you have in place and how they may be a part of your anti-corruption efforts going forward. As I said last week, compliance is a straightforward exercise. This does not mean that it is easy; you do have to work at it so that you will simply not have a paper, “check the box”, program. But using the excuse that you have limited resources is simply an excuse and a rather poor one at that. While the clear lesson from the BHP enforcement action is that you are required to have effective internal controls in place, by engaging in this mapping exercise you can then figure out what you have and, more importantly, what internal compliance controls that you do not have and need to institute.

Finally, if you do have resources and need some help, you can reach me at the email below.

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

Do Your Executives Have (Compensation) Skin in the Game?

This year marks the 150^th anniversary of the ascent of the most famous mountain in Europe, the Matterhorn. On Bastille Day, in 1865, four British climbers and three guides were the first climbers to reach the summit. In an article in the Financial Times (FT), entitled “In Whymper’s steps”, Edward Douglas wrote, “It was a defining moment in the history of mountaineering, arguably as pivotal as the first ascent of Everest. Before this calamity climbing was a quirky minority pastime and Zermatt an indigent and obscure village. All that changed on July 14, 1865. As locals cheerfully acknowledge, the Matterhorn disaster enthralled the public around the world and sparked an unprecedented tourist boom.”

The disaster had befallen the climbing team on its descent after having scaled the summit. The team was led by Edward Whymper. As they were coming back down, they were all tied together with rope. When one of the team slipped, he knocked over his guide and “their weight on the rope pulled off the next man…and a fourth climber as well.” Only expedition leader Whymper and two Swiss guides, a father and son duo from Zermott, survived the disaster when “they dug in and the rope tightened – then snapped – leaving them to watch in horror as the bodies of their companions cartwheeled thousands of feet down the mountain.” The depiction of the disaster by the French artist Gustave Doré captures for me the full horror of the tragedy.

Yesterday I wrote about the role of compensation in your best practices compliance program. Today I want to focus on the same issue but looking at senior management and compensation. I thought about this inter-connectedness of compensation in a compliance program, focusing up the corporate ladder when I read a recent article in the New York Times (NYT) by Gretchen Morgenson, in her Fair Game column, entitled “Ways to Put the Boss’s Skin In the Game”. Her piece dealt with a long-standing question about how to make senior executives more responsible for corporate malfeasance? Her article had some direct application to anti-corruption compliance programs such as those based on the US Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Morgenson said the issue was “Whenever a big corporation settles an enforcement matter with prosecutors, penalties levied in the case – and they can be enormous – are usually paid by the company’s shareholders. Yet the people who actually did the deeds or oversaw the operations rarely so much as open their wallets.”

She went on to explain that it is an economic phenomenon called “perverse incentive” which is one where “corporate executives are encouraged to take outsized risks because they can earn princely amounts from their actions. At the same time, they know that they rarely have to pay any fines or face other costly consequences from their actions.” To help remedy this situation, the idea has come to the fore about senior managers putting some ‘skin in the game’. Her article discussed three different sources for this initiative.

The first is a current proxy proposal in front of Citigroup shareholders which “would require that top executives at the company contribute a substantial portion of their compensation each year to a pool of money that would be available to pay penalties if legal violations were uncovered at the bank.” Further, “To ensure that the money would be available for a long enough period – investigations into wrongdoing take years to develop – the proposal would require that the executives keep their pay in the pool for 10 years.”

The second came from William Dudley, the President of the Federal Reserve Bank of New York, who made a similar suggestion in a speech last fall. His proscription involved a performance bond for the actions of bank executives. Morgenson quoted Dudley from his speech, “In the case of a large fine, the senior management and material risk takes would forfeit their performance bond. Not only would this deferred debt compensation discipline individual behavior and decision-making, but it would provide strong incentives for individuals to flag issues when problems develop.”

Morgenson reported on a third approach which was delineated in an article in the Michigan State Journal of Business and Securities Law by Greg Zipes, “a trial lawyer for the Office of the United States Trustee, the nation’s watchdog over the bankruptcy system, who also teaches at the New York University School for Professional Studies.” The article is entitled, “Ties that Bind: Codes of Conduct That Require Automatic Reductions to the Pay of Directors, Officers and Their Advisors for Failures of Corporate Governance”. Zipes proposal is to create a “contract to be signed by a company’s top executives that could be enforced after a significant corporate governance failure. Executives would agree to pay back 25 percent of their gross compensation for the three years before the beginning of improprieties. The agreement would be in effect whether or not the executives knew about the misdeeds inside their company.”

As you might guess, corporate leaders are somewhat less than thrilled at the prospect of being held accountable. Zipes was cited for the following, “Corporate executives are unlikely to sign such codes of conduct of their own volition.” Indeed Citibank went so far as to petition the Securities and Exchange Commission (SEC) “for permission to exclude the policy from its 2015 shareholder proxy.” But the SEC declined to do and at least Citibank shareholders will have the chance to vote on the proposal.

In the FCPA compliance context, these types of proposals seem to me to be exactly the type of response that a company or its Board of Directors should want to put in place. Moreover, they all have the benefit of a business solution to a legal problem. In an interview for her piece, Morgenson quoted Zipes as noting, “This idea doesn’t require regulation and its doesn’t require new laws. Executives can sign the binding code of conduct or not, but the idea is that the marketplace would reward those who do.” For those who might argue that senior executives can not or should not be responsible for the nefarious actions of other; they readily take credit for “positive corporate activities in which they had little role or knew nothing about.” Moreover, under Sarbanes-Oxley (SOX), corporate executives must make certain certifications about financial statement and reporting so there is currently some obligations along these lines.

Finally, perhaps shareholders will simply become tired of senior executives claiming they could not know what was happening in their businesses; have their fill of hearing about some rogue employee(s) who went off the rails by engaging in bribery and corruption to obtain or retain business; and not accept that leaders should not be held responsible.

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

Gary Owens, Laugh-In and Accountability in Your Compliance Program

If you were alive at all during the 1960s, you will recall that one of the cultural phenomenon’s was NBC’s television show Laugh-In. It was brought to you from the NBC studios in beautiful downtown Burbank and featured one very droll player, who always played himself, Gary Owens, as the show’s announcer – Gary Owens. Owens died last week and I was surprised but pleased to learn in reading his obituary in the New York Times (NYT) that he was also the voice for several cartoon characters in the Jay Ward stable (home of Rocky and Bullwinkle) and he was the voice of Space Ghost which had a renaissance during the early years of the Cartoon Network.

I thought about Owens’ role on Laugh-In not only as the straight man but also the character, who in many ways brought accountability to the manic show when I read this week’s article by Adam Bryant in his NYT Corner Office column, entitled “Making a Habit of Accountability”, which featured his interview of Natarajan Chandrasekaran, the Chief Executive Officer (CEO) of Tata Consulting Services. Chandrasekaran was raised on a farm and one of the things that he learned early on from his farmer father was “the value of money and the value of time. So he made us account for things. It wasn’t that there was a right or wrong way, but he wanted us to be accountable for what we did.”

I considered this concept of accountability in your best practices anti-corruption compliance program, whether based upon the Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other program. With the Department of Justice’s (DOJ) recent pronouncements that it will more aggressively prosecute individuals for FCPA violations, perhaps companies should emphasize accountability more in their compliance programs. By doing so, perhaps employees might understand that there really is their personal liberty on the line when they engage in something which might even approach a FCPA violation. Further, by emphasizing personal accountability, companies could demonstrate more pro-active approaches to compliance that the DOJ wants to see going forward.

Chandrasekaran’s remarks went beyond simply emphasizing personal accountability. He also spoke about accountability in the context of a company’s overall culture. In particular I found his thoughts about accountability, learning and culture quite insightful. He said, “Learning cannot be achieved by mandate. It has to be achieved by culture.” He added, “In our executive team meetings, we share experiences and case studies about failures and successes.”

But beyond simply this insight there should also be accountability for helping others achieve the company’s overall goals. While he did not limit it to compliance, I still found it applicable to a best practice compliance regime when he said, “Everybody has to take some accountability for other people, and look for ways to make small contributions to help others. Looking after people has to become everybody’s responsibility. Innovation and caring for people are cultures; they are not departments.” He did admit that such a change would not happen overnight and indeed he has been emphasizing this message for five years at Tata because “It takes time to build that culture.”

Chandrasekaran also had an insight into compliance through his views on company structure. Tata is a flat organization, with multiple business units. He did this so the largest number of employees would feel empowered to make decisions and work collaboratively. While I recognize that such views might be antithetical to US based companies with a more ‘command and control’ approach, Chandrasekaran explained that the leaders of those units are expected “to work together. We said the power of our company will be driven by how well they work together. In some of our bigger monthly meetings, we will start with people presenting examples of their collaborations.”

I considered all of the above in the greater context of a best practices anti-corruption compliance program. One of the things that the FCPA Guidance emphasized was the inter-relatedness of each component of your compliance program. While you might have greater risk in the area of third parties or doing business in certain areas of the world where there are higher perceptions of corruption, you should not pick and choose what prongs of a compliance program you implement. Each step builds upon one another and should all point to accountability for your actions in decision-making calculus for business decisions and their implementations.

However the concept of accountability is not one that is spelled out in the FCPA Guidance or in any formulation of a best practices compliance regime. Yet it is clear that accountability is something that underlies what a compliance program is trying to achieve. Just as Chandrasekaran learned early on there is a value to things; there is a value to time and there is a value to money. So they should be accounted for in the way you do business.

This might best be described as oversight of your compliance program. The issue your company should focus on here is whether employees are accountable within the ambit of your compliance program. Even after all the important ethical messages from management have been communicated to the appropriate audiences and key standards and controls are in place, there should still be a question of whether the company’s employees are accountable to the compliance program.

Two mechanisms to do so are through the techniques of monitoring, which is a commitment to reviewing and detecting compliance programs 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. A second tool is auditing, which is generally viewed as a more limited review that targets a specific business component, region or market sector during a particular timeframe in order to uncover and/or evaluate certain risks, particularly as seen in financial records. However, you should not assume that because your company conducts audits that it is effectively monitoring. A robust program should include separate functions for auditing and monitoring. While unique in protocol, however, the two functions are related and can operate in tandem. Monitoring activities can sometimes lead to audits. For instance if you notice a trend of suspicious payments in recent monitoring reports from Indonesia, it may be time to conduct an audit of those operations to further investigate the issue.

Your company should establish a regular monitoring system to hold employees accountable to doing business under your compliance regime and Code of Conduct. Effective monitoring means applying a consistent set of protocols, checks and controls tailored to your company’s risks to detect and remediate compliance problems on an ongoing basis. While it may seem that accountability means looking over every employees shoulder, it should not simply be seen as the workplace equivalent of parental oversight. Chandrasekaran explained that how you conduct yourself at work can have a huge impact on other employees. He said, “it’s sometimes very hard to imagine, early in your career, how much impact you can have. If you’re in a job and in an organization, the impact you can make is huge, because it’s all about being part of a group that’s driving impact. So look for those opportunities.” If you look for ways to demonstrate accountability you can influence a wide variety of others 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

The End of an Era and the End of Facilitation Payments?

Two famous New Yorkers died this week. Both spoke to not only to the glamour of the Big Apple, but the city’s once undisputed crown as the cultural mecca of the US. They were Allie Sherman and Bess Myerson. 

Sherman was with the New York (Football) Giants as an Assistant Coach when they were the original America’s Team. He later became the Head Coach when the Giants were ending a phenomenal run as the greatest pro football team in America. Sherman coached some of the most memorable players from the last century including Sam Huff, Frank Gifford, Andy Robustelli, Charley Connerly and Y. A. Tittle. As an Assistant Coach, he was a part of a team that went to the National Football League (NFL) championship games in 1956 and 1958/9. As Head Coach, he took the Giants to the championship games from 1961-63. That is six championship games appearances in seven years, a record no other team in football has ever achieved.

The second death was that of Bess Myerson. In my little hometown in podunk Texas, Bess Myerson was about the highest epitomy of American high class and grace that one could imagine. (My parents hated the Kennedys so Jackie was not a candidate.) What I did not fully appreciate until I read her obituary in the New York Times (NYT), entitled “New Yorker of Beauty, Wit, Service and Scandal” by Enid Nemy and William McDonald, was that Myerson was the first Jewish Miss America and what her win of that crown meant in 1945 to Jews in America. The article quoted Barra Grant, Ms. Myerson’s daughter for the following; “When my mother walked down the runway, the Jews in the audience broke into a cheer. My mother looked out at them and saw them hug each other, and said to herself, ‘This victory is theirs.’” But in Bryan, Texas, she was not the Jewish Miss America; she was just Bess Myerson, the one and only Miss America we knew by name.

I thought about these two famous New Yorkers, where they came from and what New York once stood for as I considered the ongoing tragedy of AirAsia Flight 8501 and pondered facilitation payments. In another article in the NYT, entitled “AirAsia Jet That Crashed Had Lacked All Clearances to Fly, Regulators Say”, Tom McCawley reported that “AirAsia Flight 8501, which crashed in the Java Sea on Dec. 28, was allowed to take off from Surabaya, Indonesia, even though it did not have all the required clearances from regulators to fly that day, the Indonesian Transportation Ministry said on Monday.” While the article did not identify those Indonesian who allowed this to occur, McCawley did report “The [Indonesian Transportation] Ministry said it was suspending several officials for allowing the flight to take off.” Moreover, “other airlines and airports across the country will also be scrutinized to see if they have been cutting corners in similar ways.”

The article did not say or even suggest that bribes were paid to allow this flight to take off when it did not have the proper permits to do so, such actions did occur in Indonesia, which had a 2014 score on the Transparency International – Corruption Perceptions Index at 34 and came in at a ranking of 107 out of 157 countries ranked. Fresh on the minds of all anti-corruption, Foreign Corrupt Practices Act (FCPA), UK Bribery Act practitioners and others is the Alstom FCPA enforcement action where a large amount of the companies bribes were paid in Indonesia to secure winning contracts. Of course, Alstom is a French company and AirAsia is Malaysian entity.

FCPA enforcement actions involving US companies and the air industry are unfortunately very well known. Biz-Jet and its bribes to secure business are in a direct line to Dallas Airmotive, involved in a FCPA enforcement action in the past quarter. But in the AirAsia case, I wondered about something different, that continuing FCPA bug-a-boo around facilitation payments. Facilitation payments are exempted out of FCPA violations but the AirAsia case is a clear example of the slippery slope of how something that is not illegal can easily move into such a realm and the true cost of corruption. Two of the loudest responses by the business community to the Wal-Mart allegations of bribery and corruption were that they were simply payments to expedite the process of licensing in Mexico and what did you expect to get things moving in Mexico anyway?

What if AirAsia made small payments to move things along faster with the Indonesian Transportation Ministry? What if these payments might properly be characterized as facilitation payments under an anti-corruption law such as the FCPA? McCawley’s article reported, “Officials have said that AirAsia had permits to fly the popular Surabaya-Singapore route on Mondays, Tuesdays, Thursdays and Saturdays, but later changed its schedule to fly on other days of the week, The Associated Press reported. Flight 8501 took off on a Sunday. Mr. Murjatmodjo said that while Singapore officials had approved the Sunday flight, Indonesia had not, and the aviation agency used incorrect information in granting Flight 8501 a takeoff slot.”

So what if that ‘incorrect information’ used by the Indonesian aviation agency turned out to be ‘facilitated’ by a grease payment? Is the granting of such approval something that would be been granted eventually but AirAsia was just trying to speed up the process? What if there were safety reasons for not allowing AirAsia to operate on the Sunday when the plane went down? What if it was something safety related to the flight controllers or something other than the plane or crew? Make no mistake about it, facilitation payments are bribes, yet there are other gray areas around them that can create confusion and make it hard for companies to police them.

A similar view was recently articulated by Thomas C. Baxter, Executive Vice President and General Counsel at the Federal Reserve Bank of New York who indicated a general unease with facilitation payments. Baxter was quoted in the FCPA Blog for the following, “Baxter said an organizational policy that allows some types of official corruption — including facilitating payments – “diminishes the efficacy of compliance rules that are directed toward stopping official corruption.”” Further, “While I understand that the exception is grounded in a practical reality, I feel that zero tolerance for official corruption would have been a better choice. To any public servant with an extended hand, I would say in a loud and clear voice, “pull it back and do your job.” And, let me note the OECD Working Group on Bribery recommends that all countries encourage companies to prohibit or discourage facilitating payments.”

Allie Sherman and Bess Myerson reminded us of a New York that once existed. With the proliferation of the internet and social media, I doubt US culture will ever be so concentrated in one city again. The AirAsia crash may portend of things in the future, so if it comes to pass that bribery and corruption was involved to obtain a seemingly minor approval to allow the flight of an airplane on a day it was not licensed to fly; perhaps one thing that comes out of the tragedy is the removal of this seeming anomaly of allowing bribes under the FCPA by calling them facilitation payments.

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

Hiring and Promotion in Compliance – Wait for Great

The role of Human Resources (HR) in anti-corruption programs, based upon the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act, is often underestimated. I come from a HR background and practiced labor law early in my career so I have an understanding of the skills HR can bring to any business system which deals with legal issues; which is not only required of all businesses but certainly is true of FCPA or UK Bribery Act compliance. If your company has a culture where compliance is perceived to be in competition or worse yet antithetical to HR, the company certainly is not hitting on all cylinders and maybe moving towards dysfunction.

One of the Ten Hallmarks of an Effective Compliance program relates to the key role HR plays in incentives and discipline. However, another key area that is not given as much attention is in hiring and promotion. The FCPA Guidance states, “[M]ake integrity, ethics and compliance part of the promotion, compensation and evaluation processes as well. For at the end of the day, the most effective way to communicate that “doing the right thing” is a priority is to reward it. Conversely, if employees are led to believe that, when it comes to compensation and career advancement, all that counts is short-term profitability, and that cu tting ethical corners is an ac­ceptable way of getting there, they’ll perform to that measure. To cite an example from a different walk of life: a college football coach can be told that the graduation rates of his players are what matters, but he’ll know differently if the sole focus of his contract extension talks or the decision to fire him is his win-loss record.” In other words make compliance significant for professional growth in your organization and it will help to drive the message of doing business in compliance.

I thought about these concepts when I read an article in the Corner Office column of the Sunday New York Times (NYT), entitled “Sally Smith of Buffalo Wild Wings, on patience in hiring” where columnist Adam Bryant interviewed Sally Smith, the Chief Executive of Buffalo Wild Wings, the restaurant chain. She had some interesting concepts not only around leadership but thoughts on the hiring and promotion functions, which are useful for any Chief Compliance Officer (CCO) or compliance practitioner striving to drive compliance into the DNA of a company.

Leadership – Get Feedback

One of the early lessons which Smith learned about leadership is to set clear expectations. Bryant wrote that Smith told him, “You have to be really clear about what you want and what your expectations are. When you’re clear and everybody understands them, you have a much better chance of success than if you say, “Just do it.” It’s a great slogan, but you’ve got to know what it is that you’re just doing.” This is a constant battle for the compliance practitioner when senior management also makes clear that you must make your numbers as well. However this dynamic tension can be met and one of the best ways is to require business-types to make their numbers but doing so in a way that is in compliance with a company’s Code of Conduct and compliance regime.

A second leadership lesson that Smith has learned is around feedback. As you might guess from a Chief Executive, Smith has found that obtaining honest critiques about her management style from those who work under her is difficult to acquire. To overcome this reluctance she set up a program where her leadership can give anonymous reviews of her performance annually to the company’s Board of Directors. Bryant said, “My leadership team does a performance review on me each year for the board. It’s anonymous. They can talk about my management style or things I need to work on. If you want to continue growing, you have to be willing to say, “What do I need to get better at?”” This type of insight is absolutely mandatory for any best practices compliance program as anonymous reporting is also one of the Ten Hallmarks of an Effective Compliance program. But more than simply an anonymous reporting line for FCPA violations, how does your company consider feedback to determine how all levels of the company is doing compliance going forward or as the FCPA Guidance states, “From the boardroom to the shop floor.”

Hiring and Promotion – Waiting for Great

Here Smith had some thoughts put in a manner not often articulated. One of her cornerstones when hiring is to search out the best person for any open position, whether through an external hire or internal promotion. Bryant stated that Smith said “We use the phrase “wait for great” in hiring. When you have an open position, don’t settle for someone who doesn’t quite have the cultural match or skill set you want. It’s better to wait for the right person.”

Smith articulated some different skills that she uses to help make such a determination. Once a potential hire or promotion gets to her level for an interview, she will assume that person is technically competent but “I assume that you’re competent, but I’ll probe a bit to make sure you know what you’re talking about. And then I’ll say, “If I asked the person in the office next to you about you, what would they say?””

Passion and curiosity are other areas that Smith believes is important to probe during the hiring or promotion process. In the area of passion, Smith will “Often ask, “What do you do in your free time?” If they’re passionate about something, I know they’re going to bring that passion to the workplace.” Smith believes curiosity is important because it helps to determine whether a prospective hire will fit into the Buffalo Wild Wings culture. Bryant wrote, “I look for curiosity too, because if you’re curious and thinking about how things work, you’ll fit well in our culture. So I’ll ask about the last book they read, or the book that had the greatest impact on them.” Smith also inquires about jobs or assignments that went well and “ones that went off the tracks. You ask enough questions around those and you can determine whether they’re going to need a huge support team.”

I found these insights by Smith very useful for a compliance practitioner and the hiring and promotion functions in a compliance program. By asking questions about compliance you can not only find out the candidates thoughts on compliance but you will also begin to communicate the importance of such precepts to them in this process. Now further imagine how powerful such a technique could be if a Chief Executive asked such questions around compliance when they were involved in the hiring or promotion process. Talk about setting a tone at the top from the start of someone’s career at that company. But the most important single item I gleaned from Bryant’s interview of Smith was the “Wait for great” phrase. If this were a part of the compliance discussion during promotion or hiring that could lead to having a workforce committed to doing business in the right way.

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

Right to Retire Or Termination: Remediation of Leadership To Foster Compliance

Many historians have long given 476 AD as the date of the fall of the Roman Empire. Further, it was from this date forward that Europe began its long slide into the abyss, which came to be known as the Dark Age. However, this view was challenged in 1971 by Peter Brown, with the publication of his seminal work “The World of Late Antiquity”. One of the precepts of Brown’s work was to reinterpret the 3rd to 8^th centuries not as simply a decline of the greatness that had been achieved in the heydays of the Roman Empire, but more on their own terms. It was in the year of 476 AD that the last Roman Emperor, Romulus Augustulus, left the capital of Rome in disgrace. However as Brown noted, he was not murdered or even thrown out but allowed to retire to his country estates, sent there by the conquers of the western half of the Roman Empire, the Goths. Not much conquering going on if a ruler is allowed to ‘retire’, it was certainly a replacement but not quite the picture of marauding barbarians at the gate.

I thought about this anomaly of retirement by a leader in the context where a company or other entity might be going through investigations for corruption and non-compliance with such laws as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. Yesterday I wrote about three recent articles and what they showed about a company’s oversight of its foreign subsidiaries. Today I want to use these same articles to explore what a company’s response and even responsibility should be to remediate leadership under which the corruption occurs. The first was an article in the New York Times (NYT), entitled, “Another Scandal Hits Citigroup’s Moneymaking Mexican Division” by Michael Corkery and Jessica Silver-Greenberg. Their article spoke about the continuing travails of Citigroup’s Mexican subsidiary Banamex. Back in February, the company reported “a $400 million fraud involving the politically connected, but financially troubled, oil services firm Oceanografía.”

This has led Citigroup to ever so delicately try to oust the leader of its Mexico operations, Mr. Medina-Mora, by encouraging him to retire. While Citigroup did terminate 12 individuals around the Oceanografía scandal earlier in the year, it has not changed the employment status of the head of the Mexico business unit. This may be changing as the article said, “In a delicate dance, Citigroup is encouraging its Mexico chairman, Manuel Medina-Mora, 64, to retire, according to four people briefed on the matter. The bank has been quietly laying the groundwork for his departure, which could come by early next year, the people said. Still, Mr. Medina-Mora’s business acumen and connections to the country’s ruling elite have made him critical to the bank’s success in Mexico. Citigroup and its chairman, Michael E. O’Neill, cannot afford to alienate Mr. Medina-Mora and risk jeopardizing those relationships, these people said.”

Should Mr. Medina-Mora be allowed to retire? Should he even be required to retire? What about the ‘mints money’ aspect of the Mexican operations for Citigroup? Was any of that money minted through violations of the FCPA or other laws? What will the Department of Justice (DOJ) think of Citigroup’s response or perhaps even its attitude towards this very profitable business unit and Citigroup’s oversight, lax or other?

Does a company have to terminate employees who engage in corruption? Or can it allow senior executives to gracefully retire into the night with full pension and other golden parachute benefits intact? What if a company official “purposely manipulated appointment data, covered up problems, retaliated against whistle-blowers or who was involved in malfeasance that harmed veterans must be fired, rather than allowed to slip out the back door with a pension.” Or engaged in the following conduct, “had steered business toward her lover and to a favored contractor, then tried to “assassinate” the character of a colleague who attempted to stop the practice.” Finally, what if yet another company official directed company employees to “delete hundreds of appointments from records” during the pendency of an investigation?

All of the above quotes came from a second NYT article about a very different subject. In the piece, entitled “After Hospital Scandal, V.A. Official Jump Ship”, Dave Phillips reported that two of the four VA Administration executives who engaged in the above conduct and were selected for termination, had resigned before they could be formally terminated. The article reported that the VA “had no legal authority to stop” the employees from resigning. Current VA Secretary Robert McDonald was quoted in the article as saying, “It’s also very common in the private sector. When I was head of Procter & Gamble, it happened all the time, and it’s not a bad thing — it saves us time and rules out the possibility that these people could win an appeal and stick around.” Plus, he said, their records reflect that they were targeted for termination. “They can’t just go get a job at another agency,” Mr. McDonald said. “There will be nowhere to hide.”

The third article was in the Wall Street Journal (WSJ) and entitled, “GM Says Top Lawyer to Step Down”. In this piece, reporters John D. Stroll and Joseph B. White, with contributions from Chris Matthews and Joann Lublin, reported that General Motors (GM) General Counsel (GC) Michael Millikin will retire early next year. Milliken is famously the GC who claimed not to know what was going on in his own legal department around the group’s settlements of product liability claims of faulty ignition switches. Milliken claimed he was kept “in the dark” by his own lieutenants about the safety issues involved with this group of litigation. Does Milliken have any responsibility for the failures of GM around this safety issue? What does his apparent graceful retirement say about the corporate culture of GM and its desire to actually change anything in the light of its ongoing travails? Of course one might cynically point to GM’s failure to even have a Chief Ethics and Compliance Officer as evidence of the company’s attitude towards compliance and ethics. (I wonder how that might look to the DOJ/Securities and Exchange Commission (SEC) if GM goes under any FCPA scrutiny?)

With Citigroup, the Department of Veterans Affairs and GM, we have three separate excuses for companies (and a Cabinet level department) not disciplining top employees for ethical and/or compliance failures. At Citigroup, the excuse is apparently that it does not want to rock the boat from a top producing foreign subsidiary by terminating the head of the subsidiary under investigation. At the Department of Veterans Affairs, the excuse seems to be they can go ahead and resign because we prefer to get rid of them that way. At GM, it is not clear why the GC who claimed not to know what was going on in even his own law department can ride off into the sunset with nary a contrary word in sight. Millikin’s conduct would seem to be the product of a larger cultural issue at GM.

I thought about how the DOJ might look at these situations for companies if a FCPA claim were involved. Even with McDonald’s observations about what happened when he was with Procter & Gamble; does a company show something less than commitment to having a culture of compliance if it allows an employee to retire? What does it say about Citigroup and its culture given the current dance it is having with its head of the Mexico unit? What about GM and its Sgt. Schultz of a GC and his ‘I was in the dark posture’? As stated by Mike Volkov, in his post entitled “Goodbye Mr. Millikin: GM’s Continuing Culture Challenges”, GM does under appear to understand the situation it finds itself in currently over its failures. He wrote, “GM still does not understand the significance of its governance failure…GM should have taken dramatic and affirmative steps to create a new culture – resources and new initiatives should be launched to rid GM of its current culture and replace it with a new speak up culture. It is a daunting task in such a large company but it has to be done. Until GM wakes up, missteps and failures will continue.” One might say the same for Citigroup and the Department of Veterans Affairs 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, 2014

Discipline and Rigor in Your Internal Controls

In 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