Toyota, Ethics and Compliance

Toyota Logo

With Toyota’s problems all over the news, I started to think about whether compliance and ethics professionals could learn anything from these problems.

To begin, I don’t think there is a systemic problem with their vehicles or with the company. I think the sudden acceleration problem is bunk.

Yes, I own a Toyota, but my Tundra has not been implicated.

Numbers

It is unfortunate that people have died in Toyotas. About 56 people have died in accidents involving Toyotas that allegedly accelerated out of control. That anyone has died or been hurt is difficult to face.

But lets put that number in perspective.  Over 34,000 people died in car crashes in 2008 and over 2 million people were injured.

Over 10,000 of those deadly crashes in 2008 involved alcohol impaired driving. That means you were at least 100 times more likely to be killed by a drunk driver than sudden acceleration.

From an ethics perspective, you obviously don’t want to sell a product that is defective or even a little more likely to injure your customers. Of course, that assumes there is a defect in the product and it’s not just a big pile of media hype.

Look back at Audi

We have seen this situation before. Twenty years ago it was Audi. The reports on Audi suffering from sudden acceleration nearly destroyed the automaker in the late 80s.

They never did find a problem with the Audi cars. Audi was never able to counter the outcry against their cars.

Is there really a problem with the cars?

Surely, the throttle of a car could get stuck open and cause the car to accelerate. Cars are increasingly run through electronics that control the fuel levels and throttle of the car. Floor mats can get stuck on the gas pedals. Cruise controls can malfunction. For any number of reasons, a car could accelerate without the driver’s input. (With Audi, the assumption is that the driver stepped on the gas pedal instead of  the brake pedal.)

But what about the brakes?

Car and Driver ran some tests for unintended acceleration. Even with the throttle held wide open, if you stepped on the brakes your car would stop in roughly the same distance.  In a normal situation, they stopped a Toyota Camry from 70 mph to 0 in 174 feet. With the throttle held open it took 190 feet to stop from 70 mph.

The brakes were not as successful for the hugely powerful Roush Stage 3 Mustang with 540 horsepower. It required an extra 80 feet to stop with all extra horsepower was fighting the brakes.

Even if the engine in most cars suddenly accelerates, the brakes should stop in it roughly the same distance.

However, if you pump the brakes, you may lose the vacuum boost needed for the power assist and have a hard time stopping the car. Prior to anti-lock braking systems, we were taught to pump the brakes in slippery conditions.

Another possibility is that the car could have suffered a brake failure at the same time the throttle failed.

Driver error

One way to deal with sudden acceleration is to disconnect the engine. With a manual transmission you step on the clutch and with an automatic you shift into neutral. (I’m not sure that I would have thought to do that if my throttle got stuck.  I would now.)

With Audi, they main theory was that people were stepping on the gas when they thought they were stepping on the brake.

As for the runaway Prius a few days ago, he could have pumped the brakes and lost the power assist needed to stop the car, or had a simultaneous failure of the brakes and the throttle. (Or he could have faked it.)

Systemic failure

What Toyota needs is a way to avoid systemic failure. It’s really bad to have the throttle and the brakes fail at the same time.

What Toyota needs is a throttle kill switch. When you step on the brakes, the electronic throttle control will cut the throttle and cut the power. In the Car and Driver test, they tried an Infiniti G37 that had the throttle kill and its braking distance barely changed. Many cars have this throttle kill mechanism, but not all.

Having a safeguard for a systemic failure is good thing from a compliance and risk management perspective. By having a throttle kill, it’s easier to point to operator error. (“If you had stepped on the brakes, the engine throttle would have released.”)

What about the conflict of interest?

One problem with a government investigation of Toyota is the inherent conflict of interest the United States government and the taxpayers have in the automobile industry. We own a competitor to Toyota. It would be good for the U.S. ownership in General Motors for Toyota vehicles to be less popular.

I was very disappointed to see Mr. Toyoda flogged in front of a Congressional panel. To some extent, he was being yelled at by the board of directors of GM.

Lessons

In the end, I believe the Toyota story is one of a failure of crisis management and not one of ethics or compliance. It seems like Toyota was not able to quickly gather the facts and act on the facts. They keep announcing recalls, without explaining the problem or the fix.

Every company action made in error is magnified under the white hot lights of the media looking for stories. We the taxpayers and our government has a big conflict of interest in attacking the company without a good set of facts.

The failure of crisis management is going to cost them. There will be shareholder class action lawsuits, driver lawsuits, owner class action lawsuits, the cost of recalls and the long term damage to the company’s image.

Sources:

MoFo2Go

Do I care if my law firm has an iPhone App? As client, I care about my law firms delivering useful information to me.

Kevin O’Keefe says your law firm should forget about building an iPhone App. Morrison & Foerster didn’t heed his advice and created MoFo2Go, an iPhone app.

iPhone App versus Mobile View

Kevin’s post was in response to a iPhone app built around a law firm’s blog. I looked at Arnold & Porter’s iPhone app for their Consumer Advertising Law Blog. It required a separate application and was very clunky. All it had was blog content. They would have been better off just having their site enabled for mobile viewing. Kevin was right.

(By the way, Compliance Building uses MobilePress to make a really nice looking mobile view of the site on the iPhone. It looks mediocre on the Blackberry.)

Rather than reading on the commute home, I decided to download MoFo2Go to my iPhone and see if Kevin was right.

Disclaimer

MoFo2Go is the first app I’ve seen that has a disclaimer wrapper that I had to “accept” before installing. Clearly this app had some lawyer input on the design.

Splash Screen

The four functional buttons take up 20% of the screen space, with the new firm motto taking up the majority of the space. Is this an ad or a tool? I think they got that wrong.

Lawyer Directory

This is a nice feature. I can look up lawyers. With one step I can call the lawyer. It also allows me to add the lawyer to my contacts, send an email to the person and view their full bio. I wish the phone number and email were clickable to take these actions instead of menu items at the bottom.

Locations

So assuming I’m trying to get to a MoFo office, I could use this to get directions. It kicks you over to the Google Maps feature in the iPhone.

News

It’s nice enough of MoFo to publish all of these updates. But MoFo is an international law firm with dozens of practice area. Only a small fraction of their publications are of any use to me.

They have four filters: Alerts, Releases, Newsletters and MoFoTech. Please explain why dividing the publications into Alerts and Newsletters helps me to find information. It’s a useless distinction from a client’s perspective.

The Releases are MoFo press releases, so I can just ignore those.

MoFo Tech is a publication focused on tech-based companies. It has all all 7 articles from the single edition of the publication. MoFo Tech Fall/Winter 2009. That seems to be a lot of screen devoted to a small publication.

Play

Yes, MoFo2Go has a game. It’s a classic marble maze. You tilt the iPhone to move a marble through a maze. When you succeed, in addition to a score, you get a MoFo Factoid (“In 2009, Chambers & Partners ranked MoFo Band 1 in Intellectual Property.” I guess I didn’t do very well if that is reward I got at the end of the maze).

So What?

The only useful feature in MoFo2Go is the lawyer directory. The rest is useless or a waste of time.

They should have just made MoFo.com mobile-friendly for the iPhone.  MoFo.com is unusable on the iPhone.

Surprisingly, there is a mobile version of MoFo.com for the blackberry. It’s stripped to the lawyer directory and the office locations. Unfortunately, they stripped the email from the directory. But you can just click on the phone number to call the lawyer. Nice.

Should Law Firms Have iPhone Apps?

From my perspective as a client, No. Don’t bother with an iPhone app.

Make your law firm website mobile-friendly so that your clients can easily to get to the information they need. That means make it easy to get to the lawyer directory and office locations. Just like MoFo did with the blackberry version of their website.

Sources:

Compliance Bits and Pieces for March 12

Harry Markopolos high school photo

Here are some compliance stories from the past week that I found interesting:

Shadowing a Swindler by Richard Tofel

His review of the Harry Markopolos book: No One Would Listen

[N]early all the whistleblowers she had met shared two qualities. First, they were onto something—that is, there was at least some truth to what they were saying. Second, they were “a little bit nuts.” … None of this behavior makes Mr. Markopolos’s case against Mr. Madoff any less convincing. Nor does it excuse the SEC. But it does provide a fuller picture of the author than the cardboard cut-out of the lonely hero we’ve been hearing about for the past 15 months. With his book, Mr. Markopolos sheds more light than he intends on just why no one would listen.

OECD Guidance On Internal Controls, Ethics and Compliance by Melissa Klein Aguilar in Compliance Week‘s The Filing Cabinet

The OECD Working Group on Bribery has issued “Good Practice Guidance on Internal Controls, Ethics and Compliance,” which calls for companies in the 38 countries that are party to the OECD Anti-Bribery Convention to put in place strict internal controls and establish ethics and compliance programs as part of a strategy to combat bribery in international business deals.

Blagojevich Speaks on Ethics (And I Would Listen) by Chris MacDonald on The Business Ethics Blog

Of course, when you’re listening to someone who is accused of, or who has admitted to, significant wrongdoing, there’s no guarantee you’re hearing the truth. Some of them may be inveterate liars; others may be lying to polish their own image. So, naturally, you should take what they say with a grain of salt. But to think that there’s nothing to learn from them is a mistake.

To Improve Performance, Audit Your Employees’ Emails by Michael Schrage

Because the rhythm and rhetoric of effective email exchange is a critical success factor in business performance, mismanagement of email may in fact be a symptom of other weaknesses in your organization.

The Rise of  Client Collaboration by Jordan Furlong

Welcome to the world of client collaboration, where buyers of legal services share information with each other and where lawyers are often not needed on the voyage. The internet has enabled people with legal questions and problems to speak with and learn from each other on a massive scale, far beyond what was possible in the days before email and social networks. As a result, they are turning less frequently to their lawyers and more frequently to each other to acquire the legal information they need.

SIGTARP Quarterly Report to Congress

As important as assessing the effectiveness of TARP programs is, in the final analysis, TARP can truly only be a success if TARP is both managed well and its positive effects are enduring. The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time. It is hard to see how any of the fundamental problems in the system have been addressed to date.

FCPA Enforcement in 2010: Prepare for Blastoff by Bruce Carton in Securities Docket

When Assistant Attorney General Lanny Breuer was recently asked to comment on enforcement of the Foreign Corrupt Practices Act in 2009, he minced no words: “One can say without exaggeration that this past year was probably the most dynamic single year in the more than 30 years since the FCPA was enacted.”

Upcoming Appearances and Conferences

For those of you stalking me or trying to find out when my house is empty, here are some places I will be this spring:

Mark Fryenburg asked back to his speak to his class: CS 299 Web 2.0: Technology, Strategy, Community. I’m going to tackle personal knowledge management. After all, that is the reason that Compliance Building exists. I’ll be there on the afternoon of March 17. I did a similar presentation to this class last spring.

Rather than the marketing aspects of blogs and web 2.0 tools, I’ll focus on how they can help you as individual in accumulating the knowledge you need to do your job and develop yourself professionally.

Hopefully, I can open the eyes of these college students. Don’t assume that the digital generation knows how to use web 2.0 tools any better than you.
In April will be heading down to San Antonio to an ICI Mutual Conference to speak about social media and compliance.

My presentation will focus on the issues that investment companies and investment advisers will have in dealing with social media. This will be my first time in San Antonio.
On May 6,  I will be speaking at the Annual Conference for the Association of Legal Administrators.

My topic will be The Social Networking / Web 2.0 Revolution. I’m going to bring my experience as a lawyer, law firm client, legal administrator and user of web 2.0 to give a better understanding of the web can firms and ways that firms can manage the use of web 2.0.
On May 17, I will be down in Miami at Interact 2010: The Legal and Compliance Technology Forum.

I will be on a panel with Kathleen Edmond, Chief Ethics Officer of Best Buy and Janice Innis-Thompson, SVP & Chief Compliance Officer of TIAA-CREF. We will talking about governing social media. The focus will be on ways to monitor, manage and make the most of employee use of web 2.0 tools.
compliance-week_2010 From May 24 to 26, I will be hanging out at the Compliance Week 2010 Conference. I’ll be able to sit back and enjoy the great agenda and leading speakers from the industry and government. I had a great time at this conference last year and met some great people. So I’m going back for more.

There should be some great compliance bloggers there: Francine McKenna of re: The Auditors, Bruce Carton of Securities Docket, Tom Fox of Tfoxlaw’s Blog (he needs a better name for his blog), Alex Howard of SearchCompliance.com, and Compliance Week Editor In Chief Matt Kelly
For a change of pace, I’m speaking at Pax East on March 26 on Bringing up the Next Generation of Geeks.

In my spare time, I’m a contributor to Wired’s Geekdad. The Pax East panel will be composed of a bunch of the GeekDad writers.

You can see my upcoming and past speaking engagement on my speaking engagements page.

Consumer Complaints and Fraud

Visit the Better Business Bureau

I occasionally like to look at consumer fraud complaints to see if I can learn any lessons for corporate compliance.On the consumer side there is tremendous volume of complaints and many parties trying to help.

It caught my eye when four different organizations got together to identify the top consumer complaints for 2009. Here are their lists:

Massachusetts Office of Consumer Affairs

1. Home Improvement Contractors
2. Auto Insurance
3. Health Insurance
4. Lemon Law
5. Foreclosure assistance

Massachusetts Attorney General’s Office

1. Time Share Resellers
2. Loan Modification Fee Schemes
3. Deceptive Advertising and Solicitations
4. Deceptive Lending Schemes
5. Fake Check Scams

Better Business Bureau of Eastern Massachusetts

1. New Car Dealers
2. Retail Furniture Dealers
3. Collection Agencies
4. Used Car Dealers
5. Movers

Federal Trade Commission

1. Identity Theft
2. Third Party/Creditor Debt Collection
3. Foreign Money Orders/Check Scams
4. Internet Services
5. Shop-at-Home and Catalogue Sales

Differences in the Lists of Complaints

I’m sure each agency has a different taxonomy for categorizing complaints so it’s not fair to compare across agencies. I will anyhow.

It seems really strange that the lists are so different. You would think that there would be some common themes.

I see “Lemon Law” on the Office of Consumer Affairs, with “New Car Dealers” and “Used Car Dealers” on the Better Business Bureau list. So they both have cars, but no sense of the consumer complaint from the BBB list.

The Office of Consumer Affairs has “foreclosure assistance” and the Attorney General has “Loan Modification Fee Schemes” on its list. I sense those entries are a sign of the times and each agency is trying to focus on those related issues.

How you intake complaints will affect how you classify complaints and how you report on complaints. So I thought it would be a useful exercise to see how these agencies intake complaints to see if you can see a relationship to their top complaints.

Federal Trade Commission

Why does the FTC have a category for “Internet Services”? That seems way too broad. I guess it is just the “internet is scary” category. So I tried out the FTC Complaint Assistant.

Its no surprise that “Identify theft” is the top category. That the first question asked. So with the FTC complaint everything is either an identify theft complaint or something else.

The something else is then divided into “Debt collectors or debt collection practices”, “Credit Reports” or something else. So its no surprise what the second item is on the FTC list. It does leave me surprised that “Credit Reports” did not make their top five. The “internet” is one of the categories in other, but the other two on the top five are no obvious from the input taxonomy.

Better Business Bureau

Next I went to the Better Business Bureau’s online complaint form.  Their form’s taxonomy is

  • my vehicle
  • My cell phone or wireless carrier
  • a product or service (other than a vehicle or a cell phone)
  • a charity
  • children’s advertising

So its no surprise that New Car Dealers and Used Car Dealers are in their top five list.

Massachusetts Office of Consumer Affairs

I thought it was strange to see this agency in the mix because it has a limited mandate when it comes to consumer complaints. If you go to their How to Resolve a Consumer Problem webpage they make it hard to even find how to file a complaint with this agency.

They really just have jursdiction on Lemon Law disputes and home improvement arbitration. So what’s odd is that lemon law was only in the number four position in their top five.

(In the interest of disclosure, I worked as a intern at this agency working on consumer complaints.)

Massachusetts Attorney General

This consumer complaint form has the broadest taxonomy, with two dozen categories to choose among.  I would put the most faith its listing of the top consumer complaints because you are not forcing them into a box.

But that leaves me wondering how “time share resellers” are above “loan modification fee schemes”? Maybe there are just lots of people trying to unload their time shares in this bad economy so they can avoid having to modify their loan.

Sources:

  • Press Release: Top 5 Consumer Issues and Complaints Outlined by Patrick-Murray Administration’s Office of Consumer Affairs and Business Regulation, Attorney General’s Office, Better Business Bureau, and Federal Trade Commission

The Problem with Selective Disclosure

If you want to see a classic case of the problems with selective disclosure take a look at the recent SEC case against Presstek, Inc. and its former CFO.

Presstek was having a bad quarter in 2006. The CFO knew that the company would be reporting bad financial performance for the quarter. The CFO told an investor that the results would be bad. The investor immediately sold its shares in Presstek. The next day Presstek publicly released its poor financial performance for the quarter.

Slam dunk.

It’s that kind of selective disclosure that the SEC was trying to prevent when it enacted Regulation FD. It is bad that some investors could preferential treatment to material information and be able to act on that information before the general public.

“This investigation related to matters that occurred prior to the changes in executive leadership which took place in 2007,” said Jeff Jacobson, Presstek’s Chairman, President and Chief Executive Officer. “We feel very strongly about corporate governance and we are pleased to put this legacy issue behind us.”

In addition to the $400,000 settlement with the SEC, Presstek also had to pay a $1.25 million to settle a securities class action case related to the matter.

Even though it was a straightforward violation, the question I have is: How did the SEC find out? Perhaps they noticed the spike in the selling of shares and the purchasing of puts by the investor. Perhaps somebody blew the whistle? Perhaps the company self-reported?

Sources:

New Codes of Conduct for Real Estate Companies

It’s always useful to look at what your competition is doing. The same is true in drafting your code of conduct (or code of ethics or whatever name you chose). It is useful to look at you what your competitors’ codes of conduct look like.

Since Sarbanes-Oxley requires a public company to have a code of conduct, its fairly easy to dig around the investor relations portion of their website or SEC filings to get your hands on examples.

Since my company is a real estate company, I put together a database of Codes of Conduct for Real Estate Companies.

My original goal was to find codes for other real estate private equity companies. I struck out.

So I expanded to public REITs and real estate investment advisers. All of the companies in the database are public.

So far I have not found a private real estate company that has published its Code of Conduct. This is what I expected and not a criticism. In fairness, I haven’t publicly published my Code of Conduct.

With compliance, it’s better to think of competitors as peers instead of the competition. You might get some market gain with a competitor lost to a compliance or ethical failure. You’re more likely to get more government oversight and regulation, less of investor confidence and many more headaches.

Database of Codes of Conduct for Real Estate Companies

Image of Columbia Center is by simonsonjh from Wikimedia Commons

w:en:Creative Commons
attribution share alike

New Anti-Money Laundering Guidance

Money Laundering is bad and financial institutions need to have internal controls policies, procedures and processes to identify higher-risk accounts and monitor the activity. At the core of an anti-money laundering program is that an institution must know its customers and the risks presented by its customers.

The program becomes more difficult when the customer is a corporation or legal entity.

An alphabet soup of federal regulators just jointly issued new guidance “to clarify and consolidate existing regulatory expectations for obtaining beneficial ownership information for certain accounts and customer relationships.” The Financial Crimes Enforcement Network, Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, Securities and Exchange Commission, and Commodity Futures Trading Commission all joined in the guidance.

Identifying the ownership and control of a legal entity can be difficult. Often, the only way to get the information is from the entity itself, with no third party way to identify the veracity of the information. Most financial institutions struggle with how far to dive into a legal entity to determine the beneficial ownership.

This joint guidance effectively adopts the FinCEN definition of beneficial owner:

“[T]he individual(s) who have a level of control over, or entitlement to, the funds or assets in the account that, as a practical matter, enables the individual(s), directly or indirectly, to control, manage, or direct the account. The ability to fund the account or the entitlement to the funds of the account alone, however, without any corresponding authority to control, manage, or direct the account (such as in the case of a minor child beneficiary), does not cause the individual to be a beneficial owner.” [31 CFR 103.175(b)]

The first step is to obtain enough information about the structure and ownership of the entity so you can determine if the account will pose a heightened risk. With a heightened risk, you should conduct enhanced due diligence.

Accounts for senior foreign political figures always require Enhanced Due Diligence that is reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption. [31 CFR 103.178 (b)(2) and (c)]

The one interesting statement is that financial institutions should consider implementing policies on an enterprise-wide basis to share information about beneficial ownership of their customers. Anti-money laundering staff should be able to cross-check for information with other departments. Avoid silos of information.

The guidance does not offer anything new or insightful. But it is good to see the regulators joining together to try to standardize the expectations across different types of financial institutions.

Sources:

Image is by AlwaysAwake: Money Laundering: Hiding ownership and profits in offshore jurisdictions using myriad mechanisms in Switzeland, money laundering capital of the world, & other islands and nations. Favorite tool of mega-rich arch-criminal banking & corporate investors

National Consumer Protection Week

National Consumer Protection Week

National Consumer Protection Week 2010 is March 7-13.

Take advantage of the FTC’s free resources, which can help you protect your privacy, manage money and debt, avoid identity theft, understand credit and mortgages, and steer clear of frauds and scams.

This year’s theme is Dollars & Sense: Rated “A” for All Ages. The idea is to highlight the importance of using good consumer sense at every age, from grade school to retirement.

In the meantime, Congress still seems to be thinking about whether there should be a federal consumer protection agency and who should be in charge of it. Senator Dodd appears to want it under the umbrella of the Federal Reserve. US Representative Barney Frank wants a Consumer Financial Protection Agency to be an independent watchdog on financial issues.

For a more light-hearted view:

Sources:

Weekend Book Review: Shades of Grey by Jasper Fforde

shades of grey book cover (US edition)

Books about compliance, business ethics, law and financial markets can be well written, interesting and thought-provoking. But they’re not fun.

So I decided I needed change and found a whimsically absurd novel that touches upon compliance: Shades of Grey, by Jasper Fforde.

Chromatacia is a world where people have limited ability to see color and your standing in the community depends on the colors you can see and how well you can see them. At the top of the social order stand those who see purple. At the bottom are the greys who can’t see any colors. Society is dominated by color and you are what you can see.

The protagonist is Eddie Russert, a red-seeing youth who has been punished with a humility reassignment for a school prank. Eddie is sent out to a fringe city with a “Pointless Task” of conducting of a chair census.

The book is more about a totalitarian regime than compliance. But it’s the rules that run the regime and compliance with rules that keeps society in order.

“But they were the Rules – and presumably for some very good reason, although what that might be was not entirely obvious.” For instance it is forbidden to count sheep, make new spoons or use acronyms. There is also a ban on the numbers between 72 and 74.

“The Rule book tells us precisely what is right or wrong — that’s the point. the predictability of the Rules and the unquestioning compliance and application is the bedrock of —” Eddie is cut off by Jane, a grey in the village of East Carmine. It’s his interest in Jane that sends Eddie on his adventures in Shades of Grey.

Jasper Fforde is probably best known for his Thursday Next series of books where literature has a prominent place in everyday life. Thursday Next herself being in the Literary Detective Division of Special Operations at starts the series by looking into who has stole a manuscript and killed one of the characters in it, changing the story forever. If you enjoyed those books, you will also enjoy Shades of Grey.