FCPA Compliance & Investigative Due Diligence

ethicspoint-logo

EthicsPoint sponsored a webinar with Ellen Zimiles of Daylight Forensic and Advisory LLC, talking about FCPA Compliance & Investigative Due Diligence. This presentation is supposed to provide an overview of current FCPA trends and highlight elements to implement an effective FCPA compliance policy. These are my notes.

Ellen started off with a summary of current FCPA activity showing a surge in the number of enforcement actions underway by the DOJ and SEC on global corruption and bribery. There is also increased global coordination on corruption investigations and prosecutions. She also noted that there is a focus on individuals. In 2008, 60% of the FCPA defendants were individuals.

The first element of an effective FCPA compliance program is a risk assessment. You need to look at whether a foreign government is your customer or whether you need government intervention as part of your business operations. Obviously, there are some countries that are more prone to fraud. You also need to revisit this assessment periodically.

Next you want to establish and document your FCPA compliance policy. It needs to be clearly documented and understood at all levels in the company. The policies can vary from business unit to business unit and region to region.

You need a designated FCPA compliance officer. The person needs enough authority to make the sales and marketing people listen.

You need internal accounting controls. It is not just anti-bribery. There are also penalties for failure to properly maintain books and records, thereby disguising potential bribery. Your FCPA policy needs to reference the controls over accounting maintenance.

You need enterprise-wide training. Ellen thinks that your overseas employees are the ones more likely to get you in trouble. In part, some countries have a culture of corruption and your employees may have grown up in that culture.

Ellen recommends having a periodic independent audit. Large multi-nationals are increasingly having specialized FCPA compliance personnel.

Your FCPA compliance program should have a plan for dealing with investigations. Obviously, prevention is better than the cure. Make sure you have a good case management system, with document translations.

Ellen moved on to Investigative Due Diligence which is the proactive identification of risks not ordinarily apparent from financial or legal reviews.

a. Application of exploratory techniques developed by law enforcement agencies
b. Analyze large volumes of publiclly available information
c. Identification of red flags

See also:

Martindale- Hubbell Connected Opens Its Barn Door

Martindale-Hubbell Connected: Professional Networking Site for Lawyers

LexisNexis has opened the doors to Martindale-Hubbell Connected, their professional networking site for lawyers. The site has been in beta for many months and still has the beta label. If you are a lawyer you can now register and join the online community: http://www.martindale.com/connected. If you are not a lawyer, you are not invited yet.

I manage to sneak into the site several months ago and finally posted Martindale-Hubbell Connected – My Thoughts last weekend. Several other commenters have offered some harsh opinions about the site for locking them out or for the problems with registration process.

Connected has been a lonely place while I have been a member. Perhaps that will change now that they are opening the community to a larger audience.

The lure of Connected is the idea of combining an online networking community, the Martindale-Hubbell lawyer listings, and the enormous pool of data in the Lexis databases. Theoretically, your lawyer listing, articles, cases, news, and people connections would be all linked together in one place. None of that seems to be in place yet on the launch.

One problem is that Connected is targeting the majority of lawyers instead of a crowd of early adopters. They want to be the largest online community. That is a different strategy than Legal OnRamp, another professional networking site for lawyers. Legal OnRamp is focusing on people who will contribute to that community. There is a barrier to entry and you may get kicked out if you don’t contribute.

Are online communities so mainstream that you can get lots of lawyers onboard and can skip targeting early adopters? I am skeptical. I predict that there will be many lawyers who register (or try to register), see the lack of content, and never come back. Early adopters will  see that Connected is merely a mediocre social network platform lacking many of the robust features of Facebook, LinkedIn or Twitter.

Or maybe I am wrong. Register for Connected and try it out for yourself. Then come back here and leave a comment, letting us know what you thought.

See also:

Does It Pay To Be Good?

sloan_winter2009

Compliance is not just about complying with legal requirements. After all, legal requirements are just a minimum standard of behavior. Your company can (and probably should) operate at a higher level.

Sustainability and ethically produced products are are areas that some companies are spending extra resources. At some point you run into a business ethics conundrum. Are you losing too much in the way of profits for your company to justify spending the extra funds on these initiatives?

It would be great to be in the sweet spot where there is extra revenue to be made from customers willing to pay a premium for ethically produced goods. The company does good AND generates more revenue. That takes the ethical issues off the table.

Remi Trudel and June Cotte conducted some research on this topic and published the results in an article in the Winter 2009 edition of the MIT Sloan Management Review: Does It Pay To Be Good?

They ran two experiments: one on coffee purchasers and a second on t-shirts purchasers. For the coffee experiment, coffee-drinking adult consumers were divided into three groups with different ethical information manipulations.

Our results showed that the premium consumers would pay as a reward for fair trade practices was $1.40 per pound, while the punishment/discount for unfair trade practices was $2.40 per pound. Thus, negative information concerning trade practices had almost twice the impact of positive information on the coffee consumer’s willingness to pay.

For the t-shirt experiment, potential consumers of cotton T-shirts were divided at random into five groups.

The first (100% Ethical) read the following: “Conventionally grown cotton uses more insecticides than any other single crop and epitomizes the worst effects of chemically dependent agriculture. Each year cotton producers around the world use nearly $2.6 billion worth of pesticides — more than 10% of the world’s pesticides and nearly 25% of the world’s insecticides. Danisky is the leading textile and clothing company based in the European Union specializing in organic cotton outdoor wear for active people. Growing cotton organically entails using cultural practices, natural fertilizers, and biological controls rather than synthetic fertilizers and pesticides. Danisky has been recognized for its outstanding environmental record. All of Danisky’s products are 100% organic.”

The second group (50% Ethical) had the same information, except that: “All of Danisky’s products are 50% organic.”

The third group (25% Ethical) had the same information, except that: “All of Danisky’s products are 25% organic.”

The control group was given no ethical information at all.

The results?

Consumers perceived (and rewarded) all levels of ethical production similarly. They did not reward increasing levels of ethical production with increasing price premiums. Our results suggest that once a certain threshold is attained, additional ethical acts or increased ethicalness simply affirms the target company’s position within that category and will not change consumers’ willingness to pay.

So in the end it pays to be good. I am sure that is a message that all companies should hear.

These are the authors conclusions:

Consumers are willing to pay substantially more for ethically produced goods than for unethically produced goods, suggesting that there is a financial reward for socially responsible behavior. The managerial implications of these findings are clear: Act in a socially responsible manner and you may be able to charge more for your products. Perhaps it is even more important to note that consumers will punish the producer of unethically produced goods to a greater extent than they will reward a company that offers ethically produced products. The negative effects of unethical behavior have a substantially greater impact on consumer willingness to pay than the positive effects of ethical behavior. Consumers may still purchase your products if they are unethically produced, but they will only do so at a substantial discount.

So, not only does it pay to be good, you may be punished if you are bad.

See:

Stop Trading on Congressional Knowledge Act

brian_baird

How can you beat the stock market? Become a member of Congress and trade on legislative actions!

You might think that a member of Congress would be prohibited from trading on non-public information that they obtain through their official position. You might be  wrong. Members of Congress and their staff  do not owe any “duty of confidentiality” to Congress. So they can’t be held liable for insider trading based on congressional knowledge. Since they do not have inside knowledge, members of Congress and their staff can share this non-public information with their friends.

Is this a problem? There is a 2004 paper that finds a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month. Federal law does require Senators to disclose their common stock transfers annually in their Financial Disclosure Reports. But that filing is long after the time of the actual stock transactions.

I will not go into the details of the report other than to note that a few Senators are more active than others. You can reach your own conclusions based on the data.

In these days with a greater focus on transparency, risk and governance, you would think that Congress would close this loophole. In January, U.S. Reps. Louise Slaughter and Brian Baird (pictured) introduced the Stop Trading on Congressional Knowledge Act (the STOCK Act)(H.R. 582). Slaughter and Baird also introduced similar bills in 2006 and 2007, without success.

If this bothers you, maybe you should call, email, or tweet your Congressman or Senator.

See also:

Compliance & Ethics Institute Announces Las Vegas Lineup

scce

The Society of Corporate Compliance & Ethics has released the schedule of programs for its Compliance & Ethics Institute to be held September 13-16 in Las Vegas: Preliminary Brochure (.pdf) I am not sure if I am going to head out to Las Vegas for this particular conference, but there are some very interesting topics on the agenda.

These are a few sessions that caught my attention:

  • 102: Facebook, LinkedIn, YouTube–Friend or Foe? How Social Networks and Web 2.0 Are Creating Risks for Companies
    Orrie Dinstein, Chief Privacy Leader, GE Capital
  • 103: Risk Management Culture: The Linkage Between Ethics & Compliance and ERM
    Barbara Kipp, Partner, PricewaterhouseCoopers
  • 303: Compliance at Siemens: A Management Change Process
    Dr. Klaus Moosmayer, Compliance Operating Officer and Chief Counsel Compliance & Investigations, Corporate Legal and Compliance, Siemens AG
  • 403: Key Recent Developments Regarding Attorney-Client Privilege, Work Product Protection, and Indemnification
    Frank Sheeder, CCEP, Partner, Jones Day
  • 505: The Post-Bailout Regulatory Scene: Implications for Your Compliance & Ethics Program
    Matt Kelly, Editor in Chief, Compliance Week
  • 604: The Ethics Gap: How Our View of Business Ethics has Gotten Out of Step with the Public’s and What We Need to Do About It
    Ed Petry, PhD, Vice President, Ethical Leadership Group, A Global Compliance Company

Bits and Pieces on Compliance

Here are a few stories and items that caught my eye this week, but I have not had time to build-out to a full post:

SEC Speaks on Compliance Issues to Investment Advisers by Joel Beck of BD Law Blog

Lori Richards, the Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE) spoke on issues that the examiner staff will be reviewing. Here is a summary of Ms. Richards’ four key areas, but compliance officers for RIAs ought to take 4 minutes and read her speech:

1. Disclosure. The SEC is reverting to the main focus of securities regulation: disclosure. Here, RIAs should be careful that all disclosures are made to their clients, including any conflicts of interests.
2. Custody. Are your advisory clients’ assets safe? How do you know? With recent headline-grabbing articles on ponzi schemes and other fraudulent conduct, Ms. Richards indicated that SEC examiners will be focusing on controls over custody of assets.
3. Performance claims. Are yours accurate? They better be.
4. Resources. Does your compliance program have adequate resources devoted to it to ensure that the RIA carries out an effective compliance program?

Spotting a Ponzi scheme or investment scam by Tracy Coenen of The Fraud Files Blog

Have you invested with a potential Ponzi?.. . How would you spot a Ponzi scheme?

  • Does the business of the company make sense in light of market conditions and your general business knowledge?
  • Does the company exist because of some secret, revolutionary new process or product? If so, what proof is there that the technology or process is legitimate?
  • Does the company rely on some rare gem, piece of real estate, antique, or other hard-to-find item? If so, is the investment scheme really scalable to the extent that the promoters suggest?
  • Is the company guaranteeing rates of return on investments with them?
  • Can their promises be verified in any way?Does the company have a board of directors, auditors, lawyers, and other advisors typical of a company of its size?

SEC’s OCIE Unit Ramps Up Training on Detecting Ponzi Schemes by Bruce Carton of Securities Docket

Burned by its high-profile failure in the Madoff case, the SEC is ramping up its training of staff on how to detect certain types of securities fraud. Reuters reports that the SEC’s inspection unit (the Office of Compliance Inspections and Examinations) is now offering 90-minute classes for employees on topics such as “Basics of Ponzi schemes, affinity fraud and related schemes” and “Exam issues and techniques for detecting Ponzi schemes, affinity fraud and related schemes.” “We’re doing it because of Bernie Madoff,” one SEC official told Reuters.

The New York Times Blogophobia by Felix Salmon for Portfolio.com

What’s with the sudden blogophobia at the NYT? Between Craig Whitney’s astonishingly tone-deaf memo on how to write a blog, and the legal department’s heavy-handed nastygram trying to shut down Apartment Therapy, it seems that one of the most web-savvy media companies in the world has finally reached the point at which it reckons that the web-savvy types can’t be entrusted with the website any more, and the grownups need to step in and screw everything up.

What Do Bernie Madoff, the Loch Ness Monster, and Alex Rodriguez Have In Common?

They are in the 2009 edition of Topps’ Allen & Ginter series of Trading Cards.

topps

The set will consist of 350 cards: 230 baseball players, 30 rookies, 25 historic figures and 15 world champions. It also will include 50 short-printed cards. Among the unusual inclusions to the basic set are Old Faithful (the Yellowstone geyser), Brigham Young, Loch Ness Monster, Vincent Van Gogh, General George Custer, Olympic swimmer Michael Phelps.

Also, there will be a “world’s biggest hoaxes, hoodwinks and bamboozles” set that will include Charles Ponzi, The Runaway Bride, Enron, Cold Fusion, Bernie Madoff and The War of the Worlds.

(I believe A-Rod is part of the baseball players collection.)

topps_2

Thanks to Bruce Carton of Securities Docket for pointing out The Bernard Madoff Trading Card.

See:

Ethical Integrity Leadership – Setting the Tone From The Top

ethicspoint-logo

EthicsPoint sponsored this webinar and these are my notes. Howard Sklar, Vice President & Global Anti-Corruption Leader, American Express Company was the presenter. Howard was quick to point out that it is not just the “tone” but having the right “tone.” Also, it not be just the tone “at” the top, but that it be the tone “from” the top.

Howard started off with trying to define “tone at the top.” Many people just default to the Justice Potter Stewart’s take on pornography: “We know it when we see it.” Howard likes the ACFE definition:

An organization’s leadership creates the tone at the top – an ethical (or unethical) atmosphere in the workplace. Management’s tone has a trickle-down effect on employees. If top managers uphold ethics and integrity so will employees. But if upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud and feel that ethical conduct isn’t a priority. In short, employees will follow the examples of their bosses.

Howard offered up his working definition for the presentation:

Tone at the top is a visible willingness by senior management to let values drive decisions to prioritize those values above other factors – including financial results and to expect all others in the organization to do the same.

Howard pointed out that the first recommendation of the Treadway Commission was the importance of setting the tone at the top.

But who is the top? The Audit Committee, CEO, Board of Directors, vice presidents, . . .? They are clearly at the top of the organization. But in this context you need to be thinking about all leaders throughout the organization. Front-line employees are most influenced by their immediate manager.

Repetition is important. Leaders and employees throughout the organization need to hear the message and hear it consistently. It is important for leaders to talk about the values of the company and to live up to those values. You can not have a message of “win at any cost” and you can no longer operate as a company with the value of  “win at any cost.”

Howard says there is no such thing as “compliance training.” It is all business training. You sell the product in the right way. You need one message. It is also important to integrate personal stories into explaining the values of the company.

Compensation is an incredibly important part of the message. If your salary or bonus is not affected by compliance. [For an example of misaligned pay structure look at Countrywide in originating sub-prime mortgage loans: Did Compliance Programs Fail During the Financial Industry Meltdown?]

The example of an opposite message is a company ingraining earnings targets in employee. Employees should not be told that earning targets are the most important part of the company. Short term thinking is short term thinking, and values are long term.

Compliance can set the goals, but they are part of the business goals not a separate set of compliance goals.

An important measurement for compliance is whether an employee feels comfortable reporting misconduct.

Howard recommends that a compliance officer become a stop in the exit interview process. Departing interviews can offer some insights and discuss problems that they may have been unwilling to report when they were an employee.

Howard says you should make sure that compliance and the compliance officers are on the company’s organization chart.

Some of Howard’s other best practices:

  • Make compliance part of hiring. Check references.
  • Make compliance part of the non-monetary reward and recognition process. Recognize employees who do the right thing.
  • Trumpet your failures as well as your successes.

See:

Ponzimonium, Ponzipalooza, Ponzimania

Charles Ponzi
Charles Ponzi

There is “rampant Ponzimonium.” Or is there a “virtual Ponzipalooza”?

Bart Chilton, a commissioner at the Commodities Futures Trading Commission coined these terms in his speech on March 20 before American Bar Association’s Committee on Derivatives and Futures Law Students.

Personally, I prefer Ponzimania.

The CFTC has filed charges against 15 alleged Ponzi schemes so far this year, compared with 13 during the whole of 2008. (If you do the math that would mean more than 60 cases for 2009, assuming the rate continues. )  In a search of the SEC litigation website I had 57 hits for Ponzi in 2009, compared to 92 for all of 2008.   (I admit that it is less scientific than the CFTC research.) Clearly there are more enforcement actions against Ponzi schemes. We are hearing more about Ponzi schemes in the news.

Is this increase because there are more Ponzi schemes out there?

Or are we just uncovering a greater percentage of Ponzi schemes?

I think the investment tide has gone out, uncovering more Ponzi schemes and fraud in the market. The newscycle has switched from celebrating big gains to wallowing in the muck from the financial implosion.

It is easier to run a fraud when values are increasing. Even a terrible investor can make some money when most of the possible investment choices are rising in value. Plummeting markets decrease the value of the poor investment choices and increase the amount of redemptions by the investors/victims. It was the redemption activity that finally did in Madoff. He could not raise new money fast enough to pay out the redemptions.

Jim Cramer has gone from being a rock star of the investing world to being the punching bag of Jon Stewart. The media is now turning on investment industry looking for targets to aim the public’s ire over the financial implosion. Fraudsters make good news and good targets.

I don’t think there are any more fraudulent schemes currently out there than average. The downturn in the markets is bringing fraud schemes crashing down. The media is feasting on carnage.

I expect that we will be experiencing Ponzimonium, Ponzipalooza, and Ponzimania for awhile.

See: