Month: September 2010

Corruption Currents: The Wall Street Journal’s New Corruption Blog

“Corruption Currents, the Wall Street Journal’s corruption blog, will dig into the ever-present and ever-changing world of corporate corruption. It will be a source of news, analysis and commentary for those who earn a living by finding corruption or by avoiding it.”

Apparently corruption has become such a big topic that the Wall Street Journal has launched a new blog focused on the topic. It went live on September 20, but has a dozen plus stories dating back to last week.

The blog is staffed by two reporters from Dow-Jones. Joseph Palazzolo, formerly from Main Justice and Samuel Rubenfeld, who has been reporting for Dow Jones for about a year.

Corruption Currents will focus primarily on bribery, money laundering, sanctions, and terrorism finance.

They are already producing some good stories and aggregating other stories into their “High Tide” feature. You can find it at http://blogs.wsj.com/corruption-currents/

Adequate Procedures to Prevent Bribery in the UK

On 14 September 2010, the United Kingdom’s Ministry of Justice  issued its Consultation Paper on what might be “adequate procedures” prevent bribery. Under section 9 of the Bribery Act, the only defense against criminal liability for a commercial organization which has “failed to prevent bribery” is that the organization had adequate procedures” to prevent bribery.

The consultation is a designed to seek public comment. Responses are due by November 8.

It lays out six principles for bribery prevention:

Risk Assessment – this is about knowing and keeping up to date with the bribery risks you face in your sector and market;
Top level commitment – this concerns establishing a culture across the organisation in which bribery is unacceptable. If your business is small or medium sized this may not require much sophistication but the theme is making the message clear, unambiguous and regularly made to all staff and business partners;

Due diligence – this is about knowing who you do business with; knowing why, when and to whom you are releasing funds and seeking reciprocal anti-bribery agreements ; and being in a position to feel confident that business relationships are transparent and ethical;

Clear, Practical and Accessible Policies and Procedures – this concerns applying them to everyone you employ and business partners under your effective control and covering all relevant risks such as political and charitable contributions, gifts and hospitality, promotional expenses, and responding to demands for facilitation demands or when an allegation of bribery comes to light.

Effective implementation – this is about going beyond ‘paper compliance’ to embedding anti-bribery in your organisation’s internal controls, recruitment and remuneration policies, operations, communications and training on practical business issues.

Monitoring and review – this relates to auditing and financial controls that are sensitive to bribery and are transparent, considering how regularly you need to review your policies and procedures, and whether external verification would help.

It also sets out a few scenarios and how the principles would be applied.

Sources:

SEC Proposal on Short-Term Borrowing Disclosure by Public Companies

The Securities and Exchange Commission voted to propose measures that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. The proposals would require “a registrant to provide, in a separately captioned subsection of Management’s Discussion and Analysis of Financial Condition and Results of Operations, a comprehensive explanation of its short-term borrowings, including both quantitative and qualitative information.”

The proposed rules are aimed to enable investors to better understand whether amounts of short-term borrowings reported at the end of reporting periods are consistent with amounts outstanding throughout the reporting periods. From the FAQs it sounds like the proposal is intended to attack repo transactions.

Sources:

Compliance Bits and Pieces for September 17

elizabeth warren
Here are some recent compliance-related stories that I found interesting:

Fighting to Protect Consumers by Elizabeth Warren in the Huffington Post

The president asked me, and I enthusiastically agreed, to serve as an Assistant to the President and Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau. He has also asked me to take on the job to get the new CFPB started — right now. The president and I are committed to the same vision on CFPB, and I am confident that I will have the tools I need to get the job done.

(Who thinks she is going to pull a Cheney and put herself in the job?)
Whistle Blowers Redux by Charles H. Green in Trust Matters

[T]here’s another whistle blower in town, and he deserves a look-see as well. In this case, his name is Ilya Eric Kolchinsky, and the company he’s blowing the whistle on is his former employer, Moody’s Investors Service. When Kolchinsky used to work for Moody’s, he criticized some of their practices. Moody’s resisted to some extent, and to some extent changed practices based on his criticism. Or so it seems.

Barack Obama to authorise record $60bn Saudi arms sale by Ian Black in the Guardian

Barack Obama is to go ahead with plans to sell Saudi Arabia advanced aircraft and other weapons worth up to $60bn (£39bn), the biggest arms deal in US history, in a strategy of shoring up Gulf Arab allies to face any military threat from Iran.

In Search Of Good Red Tape from the FCPA Blog

But does red tape bring any benefits? The one most commonly cited is that governments need information, and the way to collect it is through regulations. Assuming the amount of red tape that’s actually needed can be determined, the problem is that bureaucracies tend naturally to propagate more and more regulations, increasing contact with users and opportunities to extract bribes. But not everyone would agree that all red tape, or even all bribery, is always bad.

Visualize your success by Bill Piwonka in Integrity at Work

That data can come from EthicsPoint products (such as the location of your remote offices and all the associated reports of misconduct), RSS and other public feeds (such as weather data), premium data feeds (eg subscription data highlighting corruption trends in third world countries) and proprietary feeds (eg point of sale data from your internal financial applications). By layering data on a map, you can then begin to visualize patterns and trends that simply wouldn’t be possible if you were trying to accomplish the same thing through spreadsheets or other methods.

Integrity, Morality, and Ethics

Michael C. Jensen is the Jesse Isidor Straus Professor of Business Administration, Emeritus, at Harvard Business School
Michael C. Jensen, Harvard Business School

I always struggle with definitions of ethics and morality.  Michael Jensen, of Harvard Business School throws integrity into the mix of terms.

Here are his definitions:

Integrity: A state or condition of being whole, complete, unbroken, unimpaired, sound, in perfect condition.

Ethics: In a given group, ethics is the agreed upon standards of what is desirable and undesirable; of right and wrong conduct; of what is considered by that group as good and bad behaviour of a person, group or entity that is a member of the group, and may include defined bases for discipline, including exclusion.

Morality: In a given society, in a given era of that society, morality is the generally-accepted standards of what is desirable and undesirable; of right and wrong conduct, and what is considered by that society as good or bad behaviour of a person, group or entity.

It seems he moves up the chain from individual, to groups, and to a larger society with the three concepts.

He also points out that morality and ethics have a good and bad side to them.They relate to desirable and undesirable behaviors.

On the other hand, integrity is more of a yes or no proposition. You either keep your word or you don’t. I suppose there is some gray in between.

Since Jensen is a business school professor, not a philosophy professor, he is researching the effect of integrity on business performance.

Sources:

  • Jensen, Michael C., Integrity: Without it Nothing Works (November 29, 2009). Rotman Magazine: The Magazine of the Rotman School of Management, pp. 16-20, Fall 2009; Harvard Business School NOM Unit Working Paper No. 10-042; Barbados Group Working Paper No. 09-04. Available at SSRN: http://ssrn.com/abstract=1511274
  • Erhard, Werner, Jensen, Michael C. and Zaffron, Steve, Integrity: A Positive Model that Incorporates the Normative Phenomena of Morality, Ethics and Legality (March 23, 2008). Harvard Business School NOM Working Paper No. 06-11; Barbados Group Working Paper No. 06-03; Simon School Working Paper No. FR 08-05. Available at SSRN: http://ssrn.com/abstract=920625

Europe’s Approach to Derivatives Regulation

With this summer’s passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it’s Europe’s turn to address financial regulation. This morning, the European Commission released its Proposal for Regulation on OTC Derivatives, central counterparties and trade repositories.

The proposal seems to look a lot like the Dodd-Frank’s approach by creating a central trade repository, required margins, and required collateral. The proposal follows the commitment from the G-20 that

“All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.”

The proposal excludes non-financial firms who use derivatives to mitigate risk in their core business from the central clearing requirements.

More analysis to come.

Sources:

I’m reading through the proposal and the supporting documents.

The New Face of Evil?

The New Face of Evil?

His crime was simple: collect money from investors, fake the returns, pocket the money, and repeat. His crime was the biggest: $20 billion in cash plus $45 billion of fake returns.

Should Bernie Madoff be the new name for evil? Christine Hurt of University of Illinois College of Law contrasts Madoff with the original Ponzi schemer, Charles Ponzi himself.

Judge Chin at the Madoff sentencing cast him with the label of evil:

Here, the message must be sent that Mr. Madoff’s crimes were extraordinarily evil, and that this kind of irresponsible manipulation of the system is not merely a bloodless financial crime that takes place just on paper, but that it is instead, as we have heard, one that takes a staggering human toll

His 150 year sentence is a staggering sentence for a non-violent crime. Financial fraud sentences are rapidly increasing in length and severity.

Perhaps, as Hurt point out, this increase in penalty is a reflection of the American society. We are now more afraid of outliving our retirement savings than of home invasion. (But not of people taking pictures of planes.)

Unlike the complexity of the WorldCom and Enron financial misdeeds, Madoff’s were much more straight-forward. It’s an easier story to tell the judge. It’s easier to lay the blame. Bernie kept his mouth shut and did not implicate anyone else.

We are already seeing the “Madoff” label being applied to other fraud schemes. Kenneth Starr’s fraud is being labeled “Madoff-Like.” other frauds are being called “Mini-Madoff.”

Maybe the Madoff label will stick.

Sources:

Michael Lewis, Greece, and Corruption

Michael Lewis has moved from Wall Street, to baseball, the left tackle, Iceland, the credit collapse and on to Greece. He takes a look at Greece’s financial crisis in the October issue of Vanity Fair: Beware of Greeks Bearing Bonds.

One issue is the debt hangover. Greece has about $400 billion in outstanding government debt and $800 billion in pension obligations. That $1.2 trillion is about a quarter-million for each working adult.

Another is the generous wages paid to government works. The average government worker makes three times the wage of the average private-sector job. The national railroad has annual revenues of €100 million, but has an annual wage bill of €400 million and another €300 million in other expenses.

Then there is the corruption. “It’s simply assumed, for instance, that anyone who is working for the government is meant to be bribed.”

The government is notorious for pulling tax collectors off the streets during election years. An estimated 2/3 of Greek doctors report incomes of less than €12,000. Self-employment means self reporting of income. Only those salaried employees who have taxes taken from their paycheck get stuck paying taxes. Greece is a poor country full of rich people.

Just to prove the point, he didn’t get a receipt for his coffee with a whistle-blowing tax collector. Even the fancy hotel was not paying the sales tax it owed.

“Everyone is pretty sure everyone is cheating on his taxes, or bribing politicians, or taking bribes, or lying about the value of his real estate. And this total absence of faith in one another is self-reinforcing. The epidemic of lying and cheating and stealing makes any sort of civic life impossible; the collapse of civic life only encourages more lying, cheating, and stealing. “

Greece was desperate to become part of the European Union. That meant they needed to get their deficit under control and prove a stable economy. It seems like they did it by “cooking their books” instead of economic policy. They simply moved expenses and obligations off their balance sheet to earn their 2001 entrance to the EU, swapping the drachma for the euro.

What went wrong?

Prime Minister Costas Karamanlis was involved in a scandal, leading to his ouster and the ouster of his government. The new finance minister took the more honest approach and began finding all of the financial skeletons.

[He] found so much less money in the government’s coffers than it had expected that it decided there was no choice but to come clean. The prime minister announced that Greece’s budget deficits had been badly understated—and that it was going to take some time to nail down the numbers. Pension funds and global bond funds and other sorts who buy Greek bonds, having seen several big American and British banks go belly-up, and knowing the fragile state of a lot of European banks, panicked. The new, higher interest rates Greece was forced to pay left the country—which needed to borrow vast sums to fund its operations—more or less bankrupt. In came the I.M.F. to examine the Greek books more closely; out went whatever tiny shred of credibility the Greeks had left. “How in the hell is it possible for a member of the euro area to say the deficit was 3 percent of G.D.P. when it was really 15 percent?” a senior I.M.F. official asks. “How could you possibly do something like that?”

The other focus of the Lewis’ story is the Vatopedi Monastery that was part of the Karamanlis scandal. The monastery had title to a lake in northern Greece. They convinced the Greek government to trade for the ownership of the lake with government owned property. This included the gymnastics center from the 2004 Olympics. The lake was worth roughly €55 million and the government property they received is probably worth many time that amount. It’s even more valuable now that the monastery has convinced the government to re-zone big chunks of the property for commercial purposes.

It seems the monks just want to use the money to rebuild their monastery. Nobody is claiming the leadership of the monastery is pocketing the money.  The same is not true on the other side of the transaction.

Sources:

Image of the Parthenon is by Simon Tong.

How About Working for SEC Enforcement?

The Dodd-Frank Act has created some new positions and some long occupied seats have opened up at the Securities and Exchange Commission. Maybe you have the skills to help the SEC?

Yes, the SEC dropped in the rankings of best federal workplace, slipping from 3rd in 2007 to 24th in 2010. I suspect that reflects the turmoil from the Great Panic and Madoff frauds.

The SEC has new mandates and new leadership. The Enforcement Division has some high level openings and are actively look for talented people to apply. The pay looks good (for a government job).

Chief Counsel

This position has not been available for 17 years. Joan McKown left the SEC to join law firm Jones Day as a partner in its Washington, D.C. office. She had held the Chief Counsel position since 1993. The Chief Counsel plays a key role in establishing enforcement policies at the SEC and in reviewing proposed enforcement actions before they are recommended to the Commission for approval.

“The Chief Counsel of the Division of Enforcement serves as principal advisor and consultant to the Director, and other high ranking officials of the Division, on a wide range of matters including technical, and/or precedent-setting, aspects of the federal securities laws.”

Job Posting for Chief Counsel

Associate Director – Office of Whistleblower Coordinator

This is a new position created by Dodd-Frank who will report to the Chief of the Office of Market Intelligence and to the Office of the Director of Enforcement for purposes of whistleblower advocacy.

Job Posting for Associate Director – Office of Whistleblower Coordinator

Associate Director

Chris Conte vacated the position of Associate Director in the enforcement unit to take a position with Steptoe & Johnson LLP after almost 18 years with the SEC. he had just finished an investigation of Dell’s accounting violations and obtained a $100 million penalty.

Job Listing for Associate Director

Compliance Bits and Pieces for September 10

It’s back-to-school week for me (well … my kids). That means summer is over and time to re-focus on good compliance and ethics. Here are some stories on those topics that popped up recently:

Boards of directors: Clueless, but not criminal, mostly by Matt Kranz in USA Today

Directors are rarely charged with fraud. The SEC doesn’t maintain a count of outside directors accused of fraud. But since 1996, the SEC has brought only about nine significant actions against outside directors, the agency says.

Unintended Consequences by Bill Piwonka in Integrity at Work

[A]s governments worldwide enact legislation to decrease the incidents and impacts of unethical behavior, there is a greater chance the various laws will be inconsistent across boundaries. For instance, Sarbanes-Oxley requires publicly held US companies or those listed on US exchanges to offer a way for employees to anonymously report financial misconduct, yet Portugal and Spain have outlawed anonymity. The FCPA allows for facilitation payments in certain circumstances, but the UK Bribery Act forbids them entirely. And so on.

The SEC Departs from an Important Safeguard by Wayne Carin in The Harvard Law School Forum on Corporate Governance and Financial Regulation

Recently, the SEC made permanent the delegation of its statutory formal order investigation authority to the Director of the Division of Enforcement. This delegation, which the Enforcement Director has sub-delegated to senior enforcement staff, essentially transfers the SEC’s broad authority to invoke its subpoena power to numerous of its enforcement staff without any apparent oversight.

My Two Cents On The FCPA’s Affirmative Defenses by Mike Koehler in FCPA Professor

For starters, I respectfully disagree with Sheahen’s statement that “business and businessmen accused of giving bribes to foreign officials have fared poorly in federal courts” as well as the implication that this somehow supports his thesis. The three FCPA trials cited from 2009 – Frederick Bourke, William Jefferson, and Gerald and Patricia Greene were a mixed bag for the DOJ, not slam-dunk successes.

Image of a Thomas Saf-T-Liner HDX school bus is by Joedamadman.