FCPA Compliance and Ethics Blog

June 28, 2013

The NHL and Compliance: Some Thoughts From Alexandra Wrage On Doing Business Ethically

This past week I chaired the Beacon Events Corruption and Compliance – Asia Congress 2013 conference. One of the speakers was Alexandra Wrage, the founder and President of TRACE International, Inc (TRACE). If you have never heard Alexandra speak on anti-corruption, you have missed one of the most dynamic speakers in the industry. Alexandra is Canadian and, in our chats during the event, one of the things that we talked about was the National Hockey League (NHL) championship series between the Chicago Blackhawks and the Boston Bruins. Not only was the series the first championship between two of the Original Six teams since 1979 but the hockey was some of the finest and most exciting played in recent memory. Alexandra noted my somewhat forlorn use of the Houston Astros as a teacher in lessons around compliance and ethics. She also remarked that I had never discussed hockey in any of my blogs so she challenged me to use one of her homeland’s greatest gifts to mankind in a blog post. So here goes.

Last week the Chicago Blackhawks won the NHL’s championship, thereby securing the Stanley Cup, named after Lord Stanley former Governor General of Canada. The six-game series between the Blackhawks and the Boston Bruins was fabulous, in the deciding game, Game Six, the Blackhawks scored two goals in the final 90 seconds to not only erase a 2-1 deficit but win the game and bring the Cup back to Chicago. But here is the compliance angle, this most physical of all sports was played cleanly with no fighting, no cheap shots or dirty checks and no major penalties imposed on the players of either team. It was a great example that the game can be played the right way and done so at the highest level.

This translates into anti-corruption and anti-bribery in the business world as well because as Alexandra put it in her talk to the conference, entitled “Turning compliance into a tool and a strategic asset to drive company performance”, ethical principles are business advantages. She explained that by doing business ethically, not only does a company protect itself for the increasing international enforcement regimes that are being enacted but organizations can protect themselves in a myriad of other ways. If a company agrees to pay a bribe to obtain a contract, that is but one step that puts a company at risk during the entire process and relationship. As Wrage described, when you pay a bribe you are targeting your company for a relationship that can be endlessly changed. It becomes an endless pit of payments from which you cannot extricate yourself. Any government official who accepts a bribe has control over you and the amount that he or she can squeeze out of you going forward. You completely lose control of the negotiating process and indeed the entire contract because there is nothing that you have to enforce. A bribe, even if memorialized in writing, cannot be enforced in any court of law or other legal proceeding such as arbitration.

Wrage also talked about the hidden costs involved in any bribery scheme. An entire set of falsified documents must be created and even alternative corporation structures put in place to set the criminal structure to facilitate bribes. Company employees are not doing their regular jobs when they are engaging in such criminal actions. Indeed, if an employee is willing to engage in bribery, it does not take a long leap for that employee to turn to other criminal activities such as embezzlement. If there is money being syphoned off to pay bribes, it certainly can be routed into an employee’s individual bank account.

Wrage also explained why doing business ethically can benefit companies in the mergers and acquisitions (M&A) context. She talked about the off-cited example of eLandia, where the acquiring company basically had to write off an entire investment because it discovered that the entity purchased had a long running bribery scheme which artificially inflated the value of the company and post-acquisition, when the bribery scheme was stopped, the value plunged.

Wrage also noted that it is well-nigh impossible to get proper valuation on a potential acquisition target if bribery and corruption is occurring inside it. This is because if you take away the business generated from the bribery and corruption, what is the business worth? Put another way, what is your deal worth? Your inquiry needs to extend further than simply into the business as well. You need to understand any target’s sales model and understand how their business partners operate. Additionally, if their sales model is third parties, that is obviously your greatest risk.

Wrage’s thoughts echoed in many ways some of the discussion we saw in last year’s Department of Justice (DOJ)/Securities and Exchange Commission (SEC) FCPA Guidance, where for the first time, there was an extensive discussion about pre-acquisition due diligence, in addition to post-acquisition compliance integration, in the M&A context. The FCPA Guidance related that “most commonly, inadequate due diligence can allow a course of bribery to continue—with all the attendant harms to a business’s profitability and reputation, as well as potential civil and criminal liability.” The FCPA Guidance listed several hypotheticals which discussed pre-acquisition due diligence and that by engaging in such efforts a company may well be able to shield itself from Foreign Corrupt Practices Act (FCPA) liability after the merger occurs.

The FCPA Guidance also presented a fact pattern in its discussions of Declinations to Prosecute (Declination) where a US company was acquiring a foreign entity which was not previously subject to the FCPA. In one example, a US company received its Declination based upon its extensive pre-acquisition due diligence which allowed it to identify and halt the corruption. As there was no continuing misconduct post-acquisition, the FCPA was not violated. The clear import is that if this pre-acquisition due diligence was not performed; a Declination may not be forthcoming.

The bottom line from Wrage is that compliance is good for business. She made clear that ethical principles are a business advantage and not a business disadvantage. Having a strong compliance program in place also builds moral among employees. Lastly, Wrage believes that doing business ethically also builds good reputation with customers. There are numerous stakeholders for any corporation. Wrage has been one of the leading lights to demonstrate that by doing business ethically, and in compliance with anti-corruption/anti-bribery laws like the FCPA and the UK Bribery Act, a company can satisfy many of those constituency simultaneously.

The Blackhawks and the Bruins showed that professional hockey can be played at the highest level without the extracurricular activity that mars so many of the regular season games. So, just as doing business ethically and in compliance with international anti-corruption regimes is good for business, playing great hockey within the rules makes for not only great hockey to watch but improves the entire NHL hockey.

And who says a Texan, or any other Southerner for that matter, cannot fully appreciate hockey?

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, 2013

November 16, 2012

Share more. Spend less. Reduce Risk.

Alexandra Wrage, President of TRACEEd. Note-today we have a guest post from Alexandra Wrage, President of  Trace International.

Well over a thousand people with an interest in enhancing transparency worldwide met in Brasilia for the International Anti-Corruption Conference last week to share best practices, brainstorm, promote new ideas and, often, just to complain about the slow pace of change.

At this conference, as elsewhere, three themes have emerged.

1.The burden on companies will continue to grow.

Governments hoping to have an impact on transnational crime recognize that exerting pressure on multinational companies is the most expedient way to proceed. Governments are hampered by legal obstacles and political sensitivities and cannot easily reach across borders to solve significant social, economic and security challenges. They can, however, require their companies or companies listed on their exchanges to work to reduce bribery (the FCPA and similar laws in other jurisdictions), curb the use of forced or trafficked labor (California Transparency in Supply Chains Act of 2012), reduce violence associated with conflict minerals (Dodd-Frank Wall Street Reform and Consumer Protection Act), and prevent money laundering, (various new initiatives impacting the financial services industry).

2.The current pace of expenditure on compliance is unsustainable.

The numbers of employees companies are expected to train on compliance topics, using both on-line and in-person training, is increasing. Many companies have determined that it’s simpler to just train everyone rather than invest the resources to sort and track different categories of employees. Companies are searching denied parties lists with increasing frequency. Ten years ago, many companies searched only the entity name and only upon contract renewal. Many now prudently search the entity name and the names of all owners, — and they search weekly or daily. The world of due diligence has probably changed the most dramatically as companies are encouraged to seek certainty in all of their relationships. Certainty isn’t available at any price, and near-certainty is very expensive indeed. Companies spend breathtaking sums to try to prove that a media report is not true, that a rumor is unfounded or that a government official’s golf buddy is not likely to trade on the relationship.

And that’s just for compliance with the FCPA. Now companies are looking at setting up parallel due diligence systems to vet their suppliers with respect to their use of conflict minerals or for egregious labor practices. The former may be the purview of the procurement department and the latter the responsibility of the labor and employment group. Multiple processes, occasionally duplicative and often without visibility across departments, result in mounting expense, compliance fatigue and employee cynicism.

3.Companies will have to choose between a more collective, shared-cost approach to compliance, doing too little or paying too much.

Companies have, on the whole, not been able to overcome their queasiness about ill-defined anti-trust concerns or their natural instincts to avoiding sharing information with competitors. That needs to change for the business community to begin stemming the financial hemorrhage and increasing levels of risk.

Here are just three examples of how this could work. Spoiler alert: one is a TRACE project of which we’re very proud.

On-line training: Currently, companies choose either to create their online training in-house with some combination of video vignettes and PowerPoints or pay for generic or moderately tailorable off-the-shelf training that isn’t always relevant to their industry or the regions in which they operate. Instead, industry groups could get organized.  They could pool the resources of their members to create an on-line training module tailored to the specific needs of that industry, with carefully selected case studies relevant to their respective employees, pay a third party LMS to host the module and then share the product amongst the contributors. The benchmarking and exchange of expertise around the roll-out ensures a high-quality product. Everyone gets trained to the same high standard and the cost is shared.

Model policies: Most compliance experts agree that a purely off-the-shelf compliance program is inadequate and companies simply cut and paste their program at their peril. On the other hand, there are component parts of any compliance program that are largely duplicative and vary little. Companies can benefit from perusing the policies of other multinationals and highlighting the aspects relevant to their business. Once this benchmarking step is complete, in-house counsel or compliance experts are in an informed position and can speak to their outside counsel knowledgeably, making the process more meaningful and less expensive. Similarly, access to databases of policies can support on-going benchmarking efforts for companies keen to maintain their state-of-the-art policies. The United Nations Office on Drugs and Crime maintains such a database with the policies of the Global Fortune 500. Industry groups could also work to pool redacted policies for the benefit of all members.

Due diligence: Currently, companies – in-house or through vendors – collect baseline due diligence information about their third party representatives including ownership, ties to the government, past misconduct, denied party hits and compliance certifications. And then the next company does the same thing all over again. The collection of this first round of information is labor-intensive and requires attention to detail, but – apart from the fact of the relationships themselves – none of the information gives rise to either competitive or anti-trust concerns.  Intermediaries themselves will tell you that they are being bludgeoned with repetitive, near-identical requests for information from multiple companies. Instead, third parties could be invited to answer all questions and upload documentation once to a secure global platform, subject to rigorous verification and continuous watch list screening, and all companies could have access to this baseline due diligence with the third party’s approval. (As foreshadowed, TRACE has built this public tool – TRACnumber.com)  Companies pay nothing. Third party intermediaries pay a modest fee to fund the platform and the translation and verification process. The information is shared, saving both parties the cost and delay of duplicative efforts. (Click here to see a 90-second animated video on TRAC.

There are a lot of smart and creative people working in the field of compliance, including the intrepid but briefly incapacitated host of this blog. Accomplishing the more basic tasks through these and other collective approaches will free up time and budget, enabling companies to direct their more complex problems to these experts for carefully tailored solutions.

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.

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