Compliance Bits and Pieces for August 24

These are some compliance related stories that recently caught my attention.

The FCPA Compliance Strategic Plan – Some Lessons for the Astros by Tom Fox

I pondered over Stephen’s thought on the subject of a strategic plan recently when I heard the Houston Astros General Manager say that he was not sure what plan he has to make the Astros a winning if not relevant, team again. Basically he said it was a 1, 3 or 5 year plan, or perhaps something else, he just wasn’t sure. With those words of encouragement in mind it would appear that the Astros plan is the following: (1) Year One: Lose to a new set of teams as the Astros will move from the National League to the America League; (2) Year 3: Continue to lose; (3) Year 5: Be all you can be. How is that for a strategic plan?

Compliance and the Legal Department: A Counterpoint in 3 Geeks and a Law Blog by Susan Hackett

My point is that many law departments choose to in-source compliance rather than out-source it. In-house counsel are hired and paid to intimately learn and live with the client in order to help “keep the milk in the glass”; outside lawyers are often retained to help clean up what’s spilt. If you only see spilt milk, you don’t know much milk is kept in the glass, or how many glasses there are that never tipped over at all. When Toby suggests that GCs would be better served if they were asking for more money for compliance-related activities and that they don’t because they are risk averse, I’d respond quite simply that Toby may not be aware of the extreme focus and resource corporate clients do expend on compliance. What they spend on compliance is spent on in-house staff, and not usually spent on firms or e-discovery vendors. E-discovery systems are not preventive legal systems – they’re remedial, except for the small benefit that some regulate what can be posted or stored (it doesn’t stop the inappropriate activity behind the document or email).

The Key to Compliance: The Trenches by Michael Volkov in Corruption, Crime & Compliance

Ask anyone in the FCPA paparazzi and they will tell you exactly what you need to do to make sure you have an effective anti-corruption compliance program. There are as many answers as there are compliance professionals.

I can assure you that every compliance professional has forgotten the missing link – not Curly Q Link, but the essential aspect of every compliance program. The crux of it all – the raison de’ tere — all boils down to this – think of the interactions which occur between your company and foreign government officials, and try and calculate or imagine in your mind every one of those interactions. Each of them presents opportunities for improper payments, a motive and an opportunity to engage in bribery. The incentive is there, and your job is to stop it – you cannot police every interaction, every meeting, every dinner, and every opportunity for improper behavior.

Money Market Fund Reforms Hit Roadblock by Joe Mont in Compliance Week‘s The Filing Cabinet

Overruled by three of her commissioners, Securities and Exchange Commission Chair Mary Schapiro has been rebuffed in her two-and-half-year effort to reform money market funds.

In a statement issued at 9:20 p.m. on Wednesday night, Schapiro made public that the majority had squashed proposals she has championed to impose structural reforms on the $2.4 trillion domestic marketplace (only Commissioner Elisse Walter broke rank to offer support). These efforts, she said, were needed to “reduce the susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.”A pending vote on the matter has been cancelled.

A Visit to the FBI Academy

As part of my visit to the FBI Headquarters for the FBI Corporate Compliance Officer Outreach Event, we took a trip to Quantico to visit the FBI Academy. The Academy shares space with the Marine Corps base and is therefore behind heavy security. Even with all of that security, there are buildings at the Academy under even more security. Needless to say, we did not get to visit those buildings.

This part of the trip was more about FBI programs, than about compliance. The exception was a viewing of the FBI’s ethics video. This was an impressive production with field agents placing the ethical standards in the context of actual case issues. Change the discussion from law enforcement and the ethics video would be an example of a great corporate ethics video, putting a code of conduct in the context of real situations.

The FBI Academy facilities have an overall 1970s feel to them. This makes sense, since the facilities were built in the 1970s.  We didn’t get change to enter Hogan’s Alley, a mock city used for tactical training. However, we did hear lots of gun fire. The first barrage sounded like a dozen or so trainees opening fire at once. A few minutes later an enormous barrage echoed across the compound, sounding like the ill-fated San Diego fireworks. Clearly, the trainees had switched to automatic weapons.

Materials:

What Will the SEC Do About Advertising and Solicitation?

UPDATE: The SEC will wait a week. A new meeting has been scheduled for August 29.

At today’s meeting the Securities and Exchange Commission is set to consider a rule on lifting its longstanding ban on general solicitation and advertising for privately-issued securities.

Item 3: The Commission will consider rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act

Personally, I would welcome better information about what the SEC considers a general solicitation or general advertisement in connection with the private placement of securities. I don’t think lifting the ban is necessarily a good idea. The appearance of an ad for a private security has been a prominent red flag for an offering. Either it’s a fraud or the company is ignoring the advice of its legal counsel.

The bigger concern is what the SEC will do about verifying that the potential investor meets the accredited investor standard. Currently, most fund manager use a certification filled out by the investor. In addition to meeting the accredited investor standard, the questionnaire will typically include many other items of disclosure.

This process has worked well for decades. Hopefully the SEC won’t mess it up.

If you are wondering what changes the SEC could make, McGuire Woods put together an excellent Preview of New SEC Provisions Permitting Advertised Private Placements. The report tries to summarize the numerous comments submitted to the SEC.

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FBI and Understanding White Collar Criminals

As part of my visit to the FBI Headquarters for the FBI Corporate Compliance Officer Outreach Event, Supervisory Special Agent Susan Kossler discussed her work in the Behavior Analysis division of the FBI.  The Silence of the Lambs and  “Criminal Minds” have glamorized the work of FBI profilers, making them seem like real life versions of Sherlock Holmes who always get their man.

Of course, reality is much more complex. And according to SSA Kossler, much less glamorous.

In applying the analysis to financial crimes, the research unfortunately shows that many of the traits that are indicative of a white collar criminal are also the traits most companies seek in their top executives.

The other complexity is the division in criminal behavior between the leaders and the followers. Take the case of Bernie Madoff. Clearly, he was the leader of the crime. Others convicted, under indictment, or under investigation were mostly followers. They believed in their leader and followed him into the dark cave of blatant fraud. Their motivations and behavioral traits are likely much different than those of Mr. Madoff.

SSA Kossler provided an extensive bibliography if you are interested in further study.

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Bibliography: (Bold indicates the article is available online.)

The FBI’s Compliance Program

As I mentioned last week, I had a chance to meet with the Federal Bureau of Investigation and learn about their compliance program and some aspects of other FBI programs.

Patrick W. Kelley gave a very thoughtful overview of the FBI’s compliance program. Like many compliance programs, it was born from a crisis. The FBI was accused of abusing the use of National Security Letters. An NSL is a demand letter, which differs from a subpoena.  An internal FBI audit found that they violated the NSL rules more than 1000 times in an audit of 10% of its national investigations between 2002 and 2007.

Mr. Kelley was tasked with creating a compliance program to identify and prevent abuse. He looked around at other government agencies, but decided that the private sector was a better model for his program. As a result, the program sounds more like a corporate compliance program and not merely a government bureaucracy.

That means, there is a strong emphasis on management buy-in, the tone at the top and risk reduction methodology. To show the tone at the top, FBI Director Robert S. Mueller, III took time out of his day to speak with the group and talk about the importance of the compliance program.

The Office of Integrity and Compliance reports to the Deputy Director and has a council of senior leaders to help oversee and guide the program. The leaders come from across the Bureau giving a wide swath of exposure to the operational risks they confront.

As with any compliance program, training is a challenge. As global organization, the FBI has tens of thousands of employees spread out across hundreds of offices across the United States and the foreign jurisdictions. Training is at a premium because it can’t be an operational impediment. You would hate to think the FBI missed an opportunity to prevent a major incident from occurring because the agent was sitting in a compliance training program.

On the other hand, I felt the FBI took compliance and operational limitations under the law and the constitution very seriously.

In addition to the compliance side of the OIC, there is also a formal ethics program. These too involve similar themes as you would see in a corporate environment:

  • Gifts (Personal Gifts, Gifts of Travel, Gifts to FBI)
  • Use of Government Property/Time
  • Conflicts of Interest
  • Financial Disclosure
  • Awards
  • Outside Employment
  • Involvement in Non-Federal entities
  • Political Activities
  • Misuse of Position
  • Endorsement and preferential treatment
  • Fundraising in the Federal Workplace

The big issue confronting the OIC is the new disclosure requirements as a result of the STOCK Act. The law was revised to requires certain executive branch employees to make financial disclosures just as Congress is required. That means some FBI employees will need to start making financial disclosures or need to make expanded financial disclosures.

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Compliance Bits and Pieces – Standard Chartered Edition

The British bank Standard Chartered found itself in trouble for dealing with Iranian customers in violations of US sanctions. Here are some stories that covered the news.

Best. Quote. Ever. From Howard Sklar’s Open Air Blog

Preparing for This Week in FCPA today, I came across this quote in the New York State Department of Financial Services’ Order against Standard Chartered:

You fucking Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.

Bank Deal Rankles Regulators by Liz Rappaport, Devid Enrich and Victoria McGrane in the Wall Street Journal

Standard Chartered PLC’s money-laundering clash with a once-obscure New York regulator is shaking up efforts by financial overseers to rein in giant banks around the globe.

The New York Department of Financial Services notified the U.K. regulator for Standard Chartered just 90 minutes before announcing allegations last week against the U.K. bank, said people familiar with the matter.

British regulators said the lack of advance notice from New York regulator Benjamin M. Lawsky breached protocol.

Officials at the U.K. Financial Services Authority complained afterward to the New York regulator, which oversees Standard Chartered’s U.S. unit, that the sudden move could have damaged the stability of the bank and that the lack of advance notice breached long-standing protocol among bank regulators, these people said.

Standard Chartered Faces Suit From Victims of 1983 Beirut Bombing by David Benoit in WSJ.com’s Corruption Currents

The suit, filed Wednesday in Manhattan federal court, alleges the recently revealed claims that Standard Chartered helped Iran hide 60,000 financial transactions from U.S. regulators also kept assets hidden from the victims. The plaintiff group was awarded $2.66 billion in damages from Iran by a 2007 ruling from federal court in Washington D.C. that found Iran liable in the bombing.

Hush money in the Economist’s Schumpeter

It could have been disastrous. Standard Chartered was facing a hearing before New York state’s Department of Financial Services (DFS) on August 15th that would have certainly aired embarrassing information. Instead it will be expensive. The bank has acceded to a fast settlement of the charges that it had illicitly processed $250 billion in transactions with Iran, paying $340m in civil penalties and agreeing to various other provisions.

Lawsky Reveals Details Of Standard Chartered Bank Settlement by Steven Meyerowitz in the Financial Fraud Law blog

Benjamin M. Lawsky, New York Superintendent of Financial Services, has just announced that the New York State Department of Financial Services (“DFS”) and Standard Chartered Bank (“Bank”) have reached an agreement to settle the matters raised in the DFS Order dated August 6, 2012.

Significantly, Lawsky (pictured) said that, “[t]he parties have agreed that the conduct at issue involved transactions of at least $250 billion.”

This is signficant because in its initial public response, the Bank had indicated that it expected that the total transactions amounted to no more than $14 million. This concession alone is a huge win for Lawsky and the DFS.

My Visit with the FBI

You would expect a visit with the FBI to be terrifying. When they come with their badges out and windbreakers on, you are in trouble. The FBI headquarters is easy spot, sitting right on Pennsylvania Avenue in Washington, D.C. Even once you get past the security guards and metal detectors in the front lobby, visitors have to pass through two more security checkpoints. Fortunately, my visit did not involve handcuffs.

The Federal Bureau of Investigation partnered with the Society of Corporate Compliance and Ethics to host the FBI Corporate Compliance Officer Outreach Event. I was fortunate enough to attend.

Patrick W. Kelley, Chief Compliance Officer, Office of Integrity and Compliance of the Federal Bureau of Investigation, was the host. That was the first unexpected piece information. The FBI has a Chief Compliance Officer and a formal compliance program. The second unexpected piece of information was that the FBI’s compliance program faces many of the same issues as any company’s compliance program.

Like many compliance programs, it was born from a crisis. The FBI was accused of abusing the use of National Security Letters. An NSL is a demand letter, which differs from a subpoena. It is issued to an organization, typically a telecom or ISP, to turn over various record and data. NSLs can only request non-content information, such as transactional records, phone numbers dialed or email addresses mailed to and from. Section 505 of the USA PATRIOT Act greatly expanded the use of the NSLs. An internal FBI audit found that they violated the NSL rules more than 1000 times in an audit of 10% of its national investigations between 2002 and 2007.

The FBI Director Robert S. Mueller, III did not like the abuse and tasked Mr. Kelley with creating a compliance program to identify and prevent abuse. To their credit, they also expanded the compliance program to cover 49 other areas of risk.

I’ll be posting more stories from this event over the next few days.

Compliance Bits and Pieces for August 10

These are some of the compliance-related stories that caught my attention.

Anti-Money Laundering For the Non-Banking Entity by Tom Fox

While many companies which operate under anti-bribery laws such as the UK Bribery Act or anti-corruption laws such as the US Foreign Corrupt Practices Act (FCPA), have compliance programs in place to review business relationships, I have found that one of the areas which most non-banking companies do not sufficiently focus on is anti-money laundering (AML).

Fracking, conflicts of interest and adverse inferences by Jeff Kaplan in the Conflicts of Interest Blog

Take the example of “fracking,” an area of considerable complexity, and my own attempts – as a citizen who wants to be reasonably informed – to understand it.   Initially, I was skeptical about the wisdom of the fracking but the more I read the more it seemed, on balance, like a good idea (assuming strong environmental safety measures are put in place and that the embrace of fracking does not diminish the development and deployment of renewable energy sources).

Cheating in Online Courses by Dan Areily

A recent article in The Chronicle of Higher Education suggests that students cheat more in online than in face-to-face classes. The article tells the story of Bob Smith (not his real name, obviously) who was a student in an online science course.  Bob logged in once a week for half an hour in order to take a quiz. He didn’t read a word of his textbook, didn’t participate in discussions, and still got an A. Bob pulled this off, he explained, with the help of a collaborative cheating effort. Interestingly, Bob is enrolled at a public university in the U.S., and claims to work diligently in all his other (classroom) courses. He doesn’t cheat in those courses, he explains, but with a busy work and school schedule, the easy A is too tempting to pass up.

When A Business Relationship Goes Bad by Kathleen Edmond in Best Buy Ethics

Companies like Best Buy often talk about key vendor relationships and business affiliations. The reality is, of course, that companies don’t have relationships – people do. Business relationships generally come down to a person at Company A working with a counterpart at Company B to achieve some set of shared goals. In order for that relationship to be healthy and profitable for both parties, there must always be an atmosphere of trust, mutual respect and independence.

 For this reason, Best Buy maintains a strict Gifts, Business Courtesies and Vendor Relationships policy that is designed to protect Best Buy and vendor alike from the sort of temptations that can arise when relationships go bad. The vast majority of the time these relationships are healthy, respectful and profitable for both parties. Every now and then, however, bad judgment leads someone to cross the line and abuse a relationship for personal gain.

Vanderbilt: The First Tycoon

There were the rich, the super rich, and Cornelius Vanderbilt. T.J. Stiles takes you through the life of the Commodore in The First Tycoon: The Epic Life of Cornelius Vanderbilt.

Sons are notoriously prone to exaggerate the importance of their fathers, as are biographers with their subjects…

Vanderbilt founded a dynasty. The First Tycoon starts with one of the final challenges to that dynasty. The Commodore had left the vast majority of his estate to one of his children. The rest were challenging his will. He wanted his business empire to continue through his children, without it being severed and control lost.

Cornelius “Commodore” Vanderbilt was born in relatively humble family on Staten Island during George Washington’s presidency.  He started in his father’s footsteps as a boatman. He latched onto the power of steam and assembled a huge fleet of steamships. After conquering the water, he assembled a railroad empire. We see Vanderbilt’s role in transportation revolutions, battling the physical growth of the nation with better and faster means of transportation. Along the way he helped shape the growth of the modern corporation

T. J. Stiles argues that Vanderbilt did more than perhaps any other individual to create the current economic world. His steamships and railroad lines took vast amounts of capital, requiring more than one individual to fund the growth and expansion.

Compliance professionals and securities law aficionados may be fascinated by the growth of the corporate entity. At the time they offered less liability protection than we would expect today.

The history of Vanderbilt is also full of stock manipulation and anti-trust issues. Transportation companies routinely gathered together to set rates and limit competition. When competition did break out, it was a vicious battle between the rivals. Sometimes the battle was waged in the stock market with the players trying to corner securities and punish the wealth of their rivals.

The book does a remarkable job of  balancing the epics tales with a fast-moving narrative.