Tag: consequence management

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Modern Philosophers and Compliance: Part 3 – John Rawls and Fairness in the Corporate Compliance Program

This week we will conclude our lengthy exploration of the philosophical underpinnings of the modern corporate compliance program. We have examined Hannah Arendt and her concepts of personal responsibility and how they relate to the modern compliance program, and Simone de Beauvoir and the conditions for ethical action in a corporation. We will review Jürgen Habermas and the governance of speaking up and Hans Jonas and responsibility for the future of corporate compliance. Today we continue with John Rawls and the twin concepts of Institutional Justice and Institutional Fairness in a corporate compliance program.

A compliance program promises how the company will exercise power. Employees are asked to follow rules, disclose concerns, cooperate with investigations, and accept consequences when misconduct is established. In return, they should be able to expect a process whose protections and standards do not depend on their commercial value or proximity to leadership. John Rawls gives compliance professionals a practical way to examine that promise.

In the first two posts, we considered personal responsibility through Hannah Arendt and the conditions for ethical action through Simone de Beauvoir. Today, in Part 3, Rawls brings us to the design of the institution itself. Would employees accept its rules if they did not know which position they would occupy when those rules were applied?

Justice as Fairness and the Corporate Institution

Rawls was an American political philosopher whose A Theory of Justice, published in 1971, developed an account of justice as fairness. His theory addresses society’s basic structure, including the institutions that distribute rights, opportunities, and advantages. It prioritizes equal basic liberties and addresses fair opportunity and the conditions under which economic inequalities can be justified.

A corporation is a different kind of institution. Rawls’s principles cannot simply be converted into an employee handbook. The useful connection is an approach to justification: examine institutional arrangements from a standpoint that limits the influence of personal advantage.

Rawls developed this approach through the original position, a hypothetical situation in which people select principles behind a veil of ignorance. They lack knowledge of their own social position and particular advantages, while retaining general knowledge relevant to institutional design. The restriction prevents them from tailoring principles to their individual circumstances.

In compliance, we can adapt that thought experiment. Imagine designing a disciplinary process without knowing whether you will be a junior employee, a regional executive, a witness, or the person accused. What protections would you require? Which differences in treatment could you defend? The exercise asks policy owners to step outside the interests associated with their current roles.

Designing the Process Before Knowing the Employee

Consider this hypothetical. A multinational company discovers that a regional sales director submitted personal expenses as business entertainment. The investigation establishes that he knowingly mischaracterized the expenses and had received clear training. He has no prior disciplinary record. His business unit produces a significant share of company revenue.

Six months earlier, the company dismissed a junior account manager for knowingly submitting comparable personal expenses. Assume the amounts, evidence of intent, training, and disciplinary history are materially similar, and no relevant legal difference exists. The sales director’s sponsor now recommends a warning because losing him could disrupt customer relationships.

The CCO faces a concrete governance question. Is the proposed distinction consistent with a defensible standard, or has commercial importance become a private exemption? The hypothetical deliberately holds relevant factors constant so that management must address the remaining reason for different treatment.

Apply the veil of ignorance. Would employees endorse a policy under which the consequences for deliberate expense falsification depend on how difficult the offender is to replace? Would leaders accept that principle if they expected to occupy the junior role? Asking those questions before deciding the case makes the underlying rule visible.

The company must still manage business continuity. It can plan customer coverage and succession while determining an appropriate response. Those operational responsibilities should be distinguished from the criteria used to assess misconduct. Otherwise, the need to retain an individual can quietly become the standard for deciding accountability.

The DOJ Connection Through Consistent Discipline

The Department of Justice’s Evaluation of Corporate Compliance Programs (ECCP) explicitly examines whether discipline and incentives are applied fairly and consistently. In Rawlsian terms, these map to what we call Institutional Fairness and Institutional Justice. The ECCP asks whether comparable misconduct received different treatment, why differences occurred, and how consistency is assessed across organizational levels and locations.

That inquiry aligns with the practical question raised by our hypothetical: can the company explain the distinction using relevant facts and established criteria? Rawls supplies a philosophical lens for examining the justification. The ECCP supplies an enforcement framework for scrutinizing actual practice.

Consistency requires judgment. An inadvertent mistake and deliberate concealment can warrant different responses. Supervisory responsibility, repeated misconduct, cooperation, harm, and applicable legal requirements may also matter. The organization should identify the factors it considers and document how they affect the outcome.

Return to the sales director. The decision-makers should examine the earlier case and any genuinely relevant distinctions. They should also consider whether the earlier response was itself appropriate. Fairness does not require repeating an unjustified sanction merely to preserve a record of identical outcomes. If the standard needs correction, the company should explain the correction and, with counsel and human resources, consider its implications for prior cases.

Fair Investigations Protect the Credibility of Findings

Institutional Fairness depends on a credible investigation. An organization cannot justify a consequence through careful reasoning if favoritism, prejudgment, or a refusal to examine contradictory evidence shaped the underlying inquiry.

The ECCP examines whether investigations are independent, objective, appropriately scoped, and documented. Applying Rawls’s thought experiment adds a practical design question: what process would we accept without knowing whether we would make the allegation or have to answer it?

Both positions deserve consideration. A reporter should have a reliable route for raising concerns and protection against retaliation. An accused person should have an appropriate opportunity to respond to material allegations before final findings, subject to legitimate investigative and legal constraints. Witnesses should be treated respectfully, and credibility assessments should rest on evidence.

These are proposed governance safeguards, rather than a claim that Rawls or the ECCP establishes a uniform corporate procedure. Companies must adapt their protocols to the circumstances and applicable law. They should nonetheless be able to explain why any significant departure was necessary and who authorized it.

In our hypothetical, an investigator whose promotion depends on the sales director may face a conflict. An independent assignment can protect the inquiry. The executive sponsor should supply relevant information without controlling findings. Clear roles reduce the opportunity for commercial pressure to influence the factual record before a disciplinary decision is even considered.

Exceptions Need Reasons That Survive Scrutiny

Policies inevitably encounter circumstances their authors did not anticipate. A mature compliance program needs a disciplined method for handling exceptions. The question is whether the justification would apply to another similarly situated person.

Consider a policy requiring advance approval for certain travel. An emergency evacuation and a preferred executive’s scheduling convenience present different reasons for an exception. The decision record should identify the relevant circumstances, the authority approving the departure, and any compensating safeguards. A personal relationship with the approver is not a defensible criterion.

Rawls also used reflective equilibrium, a method of working toward coherence among considered judgments and principles through revision. Applied by analogy, it encourages the CCO to examine difficult cases alongside the stated policy. A recurring, well-founded exception may reveal a defective rule. A convenient exception may reveal unwillingness to enforce a sound one.

The response should follow the evidence. Revise an impractical requirement where warranted, communicate the change, and preserve the underlying control objective. Where the rule is appropriate, address unauthorized departures. Employees should be able to understand how the company reaches these conclusions without needing personal access to influential decision-makers.

Testing Fairness and Reporting It to the Board

Fairness should be examined through case review and data. The ECCP addresses disciplinary transparency and monitors consistency in investigations and discipline. This is Institutional Justice in practice. For the same misconduct, does an employee in Brazil face the same consequences as your top salesperson in the United States? A practical review can compare similar matters while preserving the factual differences needed to interpret outcomes.

Start with a defined category, such as deliberate expense falsification. Compare findings, disciplinary history, role responsibilities, sanctions, and the reasons recorded for departures from the usual approach. Also review investigation duration and decision ownership. An unexplained delay involving an influential leader can warrant scrutiny even before determining a sanction.

Differences in outcomes signal the need for inquiry. Small samples, different legal requirements, and materially different conduct can make aggregate comparisons misleading. A dashboard should help reviewers identify questions that require examination of the underlying cases. It should not assign a fairness score that disguises unresolved factual distinctions.

The board needs visibility into material exceptions and management’s response to unexplained disparities. Directors should ask whether a disciplinary recommendation involving a senior leader was changed, who changed it, and why. The answer should include the relevant evidence and the standard applied, with appropriate protection for confidential information.

Communication with employees also deserves deliberate attention. The company can explain its decision criteria and use carefully anonymized examples without exposing private case details. When confidentiality limits disclosure, explain the process that supports accountability. Leaving employees to infer the rules from departures and rumors weakens the company’s ability to demonstrate fairness.

Five Key Rawls Takeaways for the Compliance Professional

  1. Test policies without assuming your own position. Ask whether you would accept a process as a junior employee, reporter, witness, or accused executive. Use the answers to identify protections that should not depend on influence.
  2. Define the reasons that justify different outcomes. Document relevant distinctions such as intent, responsibility, prior conduct, and legal requirements. Examine claims of commercial indispensability with particular care.
  3. Protect the integrity of the investigation. Identify conflicts, assign appropriate independence, examine contradictory evidence, and provide a fair opportunity to respond. Record the reasons for significant procedural departures.
  4. Review exceptions as evidence about the program. Determine whether they expose a policy defect or selective enforcement. Correct flawed rules transparently and address departures that lack a defensible basis.
  5. Give the board a clear account of consistency. Present material disparities, executive exceptions, and corrective actions with sufficient context to assess them. Use case evidence to explain what aggregate measures cannot resolve.

Rawls gives the compliance professional a demanding question: could we justify this rule before knowing whom it would benefit? For boards, the corresponding test is whether the company applies standards it would defend to employees at every level. The program’s credibility depends on the answers demonstrated in actual decisions.

In Part 4, we will turn to Jürgen Habermas and the role of reasoned dialogue in corporate compliance. Having examined fair institutional rules with Rawls, we will consider how employees can question those rules, challenge decisions, and have their concerns meaningfully considered. That discussion takes us into speak-up culture and the governance of disagreement.

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The Clippers Investigation: Part 4 – Consequence Management at the Top

The Clippers penalties demonstrate that discipline is not the end of a compliance process. They are a public test of whether rules apply to powerful people. The Clippers investigation demonstrates why conflict controls must follow influence, economic benefit, and interconnected transactions, not merely financial ownership. In this Part 4 of a five-part series, we consider the consequences of cheating and not following the rules and regulations your organization agrees to comply with going forward. Every organization claims that no one is above the rules. Consequence management determines whether that statement is true.

The test does not come when a junior employee commits an obvious policy violation. It comes when the conduct involves a founder, controlling owner, senior executive, star performer, or other person viewed as essential to the business. The investigation into the LA Clippers and Kawhi Leonard presents that test in unusually clear terms. The independent investigators’ report of the Clippers’ NBA salary cap circumvention (Wachtell Report) attributed primary responsibility to Clippers owner Steve Ballmer, President of Business Operations Gillian Zucker, and President of Basketball Operations Lawrence Frank. It also found violations by Leonard through the conduct of his uncle and then-business manager, Dennis Robertson (Uncle Dennis).

The NBA responded with organizational, financial, individual, competitive, and monitoring consequences. For compliance professionals, the case provides a framework for considering who should be held accountable, for what conduct, and through what mechanism.

From Punishment to Consequence Management

Punishment looks backward. It asks what sanction should follow a violation. Consequence management is broader. It identifies misconduct, investigates responsibility, calibrates discipline, addresses supervisory failures, remediates control weaknesses, and communicates the organization’s expectations. All of this brings me to one of my favorite compliance phrases: consequence management.

The DOJ’s Evaluation of Corporate Compliance Programs (ECCP) introduces consequence management procedures as procedures to identify, investigate, discipline, and remediate violations of law, regulation, or policy. It goes on to state that every organization must enforce them consistently across the organization and ensure the procedures are commensurate with the violations. It concludes: Prosecutors should also assess the extent to which the company’s communications convey to its employees that unethical conduct will not be tolerated and will bring swift consequences, regardless of the employee’s position or title. 

Consequence Calibration

The report provides several categories for assessing responsibility.

  1. Direct participation. Investigators concluded that Zucker initiated, facilitated, and induced endorsement agreements involving Leonard and four Clippers business partners. They found that Ballmer knowingly sought to help Leonard obtain outside income and approved the Forum agreement after learning that Aspiration had tied it to Leonard’s endorsement arrangement. Frank conveyed Robertson’s demands and approved impermissible personal expenses.
  2. Supervisory responsibility. The report concluded that Ballmer failed to supervise the organization’s most senior business executive and failed to create conditions supporting compliance with the circumvention rules.
  3. Reporting responsibility. Investigators found that Ballmer, Zucker, and Frank did not report Robertson’s improper demands, despite an NBA rule requiring those reports even when the solicitation was rejected.
  4. Personal or represented conduct. The report concluded that Leonard, through Robertson, pressured the team to help obtain outside income and failed to reimburse certain personal expenses. Robertson allegedly made the demands and applied the pressure.

A defensible consequence decision should map each individual to the conduct, knowledge, authority, benefit, supervisory obligation, and missed opportunity to intervene. Titles alone should neither establish nor eliminate responsibility.

Credibility and Cooperation Matter

The report did something particularly useful for compliance officers: it distinguished among witness behavior. Investigators wrote that Zucker made statements inconsistent with contemporaneous documents and other witnesses, professed limited recollection on significant issues, placed responsibility on subordinates, and provided inconsistent versions of events.

By contrast, they reported that Frank discussed his conduct openly, recalled important details, accepted responsibility for subordinates, and remained generally consistent across interviews. The investigators stated that cooperation and credibility, or their absence, should factor into determining consequences.

Cooperation does not erase underlying conduct. It should, however, affect how consequences are calibrated. An employee who preserves documents, provides candid information, accepts responsibility, and assists remediation presents a different risk from one who misleads investigators or shifts blame.

The organization should define cooperation before an investigation begins. Employees should understand that cooperation requires truthful, complete, and timely responses; preserving relevant information; correcting prior inaccuracies; and no retaliation or interference. It does not require surrendering legitimate legal rights.

Prior Misconduct Changes the Analysis

The Clippers had previously been penalized for a salary-cap circumvention violation involving an endorsement opportunity. The NBA had also investigated demands made during Leonard’s 2019 free agency and provided specific training to Clippers leaders.

Prior history matters because it changes what the organization and its leaders reasonably should have done. A first incident may reveal an unrecognized risk. A repeated incident following investigation, rule clarification, and training raises questions about culture, supervision, remediation, and willingness to comply.

The Sentencing Guidelines identify prior organizational history as relevant to culpability and direct organizations to consider similar misconduct when designing an effective program. DOJ likewise asks whether policies, training, controls, and risk assessments incorporate lessons from prior incidents.

Remediation that ends with training is incomplete. The organization must test whether behavior, decision rights, escalation pathways, and controls changed.

The NBA’s Consequence Framework

The NBA’s official action included multiple forms of individual accountability. The box score of individual consequences reads as follows:

Person Relationship Consequence
Steve Ballmer Owner: LA Clippers Fine and one-year ban
Gillian Zucker Clippers President of Business Operations One-year unpaid suspension
Lawrence Frank Clippers President of Basketball Operations 6-month Unpaid Suspension
Kawhi Leonard Clipper Player $700K fine
Uncle Dennis Leonard Representative 5-Year Ban from NBA

These measures address different risks. For corporate compliance programs, the equivalent toolkit may include termination, suspension, bonus reduction, clawbacks where legally available, promotion restrictions, written warnings, removal of approval authority, enhanced supervision, vendor termination, and mandatory remediation. Consequences need not be identical, but the process must be consistent. Consistency means applying the same decision factors to similarly situated people. It does not mean imposing the same outcome regardless of role, intent, cooperation, history, or responsibility.

Practical Takeaways

CCOs, human resources leaders, and boards should consider the following:

  • Adopt written consequence-management procedures before a significant investigation occurs.
  • Use a consistent decision matrix covering conduct, intent, seniority, authority, benefit, cooperation, prior history, and supervisory responsibility.
  • Separate factual findings from disciplinary decisions, and ensure decision-makers understand the evidentiary record.
  • Document why similarly situated individuals received similar or different outcomes.
  • Apply financial consequences where permitted and align future compensation with compliance performance.
  • Communicate substantiated outcomes internally with enough detail to reinforce expectations while respecting legal and privacy constraints.
  • Track disciplinary data by level, function, geography, and type of misconduct to identify inconsistency.
  • Require independent board oversight when senior management is implicated.

Consequence management is where culture becomes measurable. If the organization protects its most powerful people, employees will understand that performance outranks integrity. If it applies a fair, independent, and proportionate process, employees will understand that compliance is part of how the business operates.

In our final blog post, we will bring the series together and develop a practical framework for CCOs, boards, and risk leaders seeking to build a compliance program that can say no to the star.

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31 Days to More Effective Compliance Programs

31 Days to a More Effective Compliance Program: Day 2 – The ECCP on Incentives, Consequences, and Clawbacks

Welcome to 31 Days to a More Effective Compliance Program. Over this 31-day series in January 2026, Tom Fox will post a key component of a best-practice compliance program each day. By the end of January, you will have enough information to create, design, or enhance a compliance program. Each podcast will be short, at 6-8 minutes, with three key takeaways that you can implement at little or no cost to help update your compliance program. I hope you will join each day in January for this exploration of best practices in compliance. Today, we look at what the ECCP has to say on incentives, consequences, and clawbacks.

Key highlights:

  • Starting with Incentives and Consequences
  • Incentive Program Breakdown
  • Consequence Management Deep Dive

Resources:

Listeners to this podcast can receive a 20% discount on The Compliance Handbook, 6th edition, by clicking here.

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Greetings and Felicitations

Compliance Lessons from Venice – Episode 2, The Arsenale and Creating a Culture of Compliance

Welcome to a short podcast series on doing compliance with a Venetian twist. This week, we will examine three areas where Venice’s time-honored methods inform modern compliance practices. Over the next 3 episodes, we will consider going back to basics in your compliance regime, the use of incentives and consequences to drive a culture of compliance, and how the Lion’s Mouth informs your modern-day whistleblower program. In episode 2, we see how Venice used financial and non-financial incentives and consequence management to create a culture of compliance in Venice’s largest business operation, Arsenale.

The Arsenale district in Venice was known for its shipbuilding prowess from the 1200s to the 1400s. By examining how Venice managed its critical shipbuilding workforce through both incentives and discipline, Tom draws valuable parallels to modern corporate compliance programs. He highlights that Venice implemented job security and compensatory incentives to promote loyalty while enforcing strict non-compete clauses and severe punishments for leaking state secrets. Tom emphasizes the importance of balancing positive incentives with clear disciplinary actions, aligning this historical example with contemporary guidance from the DOJ and SEC. These principles support recognizing compliance efforts through promotions, bonuses, and acknowledgments, which can foster ethical behavior and improve overall organizational integrity.

Key highlights:

  • Arsenale and Incentivizing Compliance
  • Historical Context and Compliance Insights
  • Punishments and Incentives in Venice
  • Modern Compliance Practices

For more information on the Ethico Toolkit for Middle Managers, available at no charge, click here.

Check out the full 3-book series, The Compliance Kids, on Amazon.com.

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Compliance Tip of the Day

Compliance Tip of the Day: Leveraging Compensation to Drive Compliance

Welcome to “Compliance Tip of the Day,” the podcast where we bring you daily insights and practical advice on navigating the ever-evolving landscape of compliance and regulatory requirements.

Whether you’re a seasoned compliance professional or just starting your journey, our aim is to provide you with bite-sized, actionable tips to help you stay on top of your compliance game.

Join us as we explore the latest industry trends, share best practices, and demystify complex compliance issues to keep your organization on the right side of the law.

Tune in daily for your dose of compliance wisdom, and let’s make compliance a little less daunting, one tip at a time.

Today, your compliance program must fully incentivize compliance and impose consequences for negative actions by senior management.

 

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Lessons on Incentives and Discipline from Star Trek: Mirror Mirror

Last month, I wrote a blog post on the tone at the top, exemplified in Star Trek’s Original Series episode, Devil in the Dark. Based on the response, some passionate Star Trek fans are out there. I decided to write a series of blog posts exploring Star Trek: The Original Series episodes as guides to the Hallmarks of an Effective Compliance program set out in the FCPA Resources Guide, 2nd edition. Today, I will continue my two-week series by looking at the following Hallmarks of an Effective Compliance Program laid out by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in the FCPA Resources Guide, 2nd edition. Today, we look at lessons on financial incentives and disciplinary measures in a best practices compliance program from the episode Mirror Mirror.

The episode Mirror, Mirror offers a unique and insightful perspective on the importance of financial incentives and disciplinary measures in shaping organizational culture. Through the lens of a parallel universe where the Federation’s values are inverted, this episode provides valuable lessons for compliance professionals on how incentives and disciplinary measures can influence behavior and promote ethical standards.

In Mirror, Mirror, Captain Kirk, Dr. McCoy, Scotty, and Uhura are accidentally transported to a parallel universe due to a transporter malfunction. A brutal Terran Empire stands for the United Federation of Planets in this “mirror universe.” Here, officers advance through assassination, and disobedience is met with severe punishment. The stark contrast between this universe and the ethical Federation highlights the significance of well-structured incentives and disciplinary measures in fostering a culture of compliance.

Lesson 1. The Role of Incentives in Promoting Ethical Behavior

Incentives motivate employees to adhere to compliance standards and ethical behavior. The episode illustrates the impact of perverse incentives and how they can drive unethical actions. You must work to align your financial and non-financial incentives with your organization’s ethical values. Businesses should design incentive structures that promote compliance and ethical behavior. This can include recognition programs, bonuses for ethical conduct, and career advancement opportunities for those who demonstrate integrity. Celebrating and rewarding employees who adhere to compliance standards reinforces the importance of ethical behavior and encourages others to follow suit.

Through this episode’s ‘mirror’ structure, we can use examples of perverse incentives to gain insight into the incentives that will work in 2024.  In the mirror universe, officers are incentivized to commit acts of violence and treachery to earn promotions and power. This system rewards unethical behavior and creates a toxic environment of fear and mistrust. Now, contrast these actions with the universe, which encompasses the United Federation of Planets (UFP) and promotes values of cooperation, integrity, and mutual respect. This contrast emphasizes aligning incentives with ethical standards to foster a positive organizational culture.

Lesson 2. Fair and Consistent Discipline

Disciplinary measures are essential for maintaining accountability and addressing non-compliance. However, they must be implemented fairly and consistently to avoid creating a culture of fear. Every compliance function must ensure that disciplinary actions are consistent, fair, and proportionate to the severity of the violation. This approach helps maintain trust in the compliance program and encourages accountability. Moreover, it creates an environment where employees feel comfortable reporting non-compliance without fear of retaliation. This requires clear communication about the disciplinary process and assurance of confidentiality.

Once again, in the alternative universe our Enterprise crew finds itself in, we can learn from the converse of that from the UFP. In the mirror universe, there is severe punishment, and discipline is maintained through fear and harsh punishment. As a result, people develop a toxic culture where self-preservation takes precedence over commitment to moral behavior. Our universe’s Enterprise’s approach to discipline emphasizes accountability and correction rather than punishment, illustrating how fair disciplinary measures can support a healthy compliance culture.

Lesson 3. The Influence of Leadership on Incentives and Discipline

Leadership is critical in shaping the effectiveness of incentives and disciplinary measures. Leaders set the tone for organizational culture and can influence employee behavior through actions and decisions. Top management should lead by example.  Business leaders should model ethical behavior and demonstrate a commitment to compliance through their actions and decisions. This sets a positive example for employees and reinforces the organization’s values. In addition to leading by example, the C-Suite and Board of Directors should actively support compliance initiatives, including developing and promoting incentive and disciplinary systems that align with ethical standards.

In both universes, Captain Kirk’s leadership style is a key factor in influencing the behavior of his crew. In the prime universe, his commitment to ethical standards and fair treatment promotes a culture of integrity. In the mirror universe, the universe’s leadership at all levels encourages treachery and violence, demonstrating how leaders can perpetuate a toxic culture through negative incentives and harsh discipline.

Lesson 4. Designing Effective Incentive and Disciplinary Systems

To create a culture of compliance, organizations must carefully design their incentive and disciplinary systems to align with ethical standards and organizational values. First and foremost, your incentives and discipline must align with your organizational values and goals. This helps reinforce the importance of compliance and ethical behavior. When it comes to incentives, they are not simply financial but non-financial incentives. Your organization should offer a variety of incentives, such as financial rewards, recognition programs, and career development opportunities, to appeal to different motivations and preferences.

To design appropriate incentives and discipline, you should start with clear and transparent policies governing the incentive and disciplinary program. These policies should be well-defined, communicated, and easily accessible to all employees. This includes the specific rewarded or penalized behaviors, the criteria for determining appropriate incentives or disciplinary actions, and the appeal and review processes.

Lesson 5. Continuous Monitoring and Improvement

Your compliance team should continuously solicit employee feedback on the effectiveness and fairness of the incentive and disciplinary programs. This is a part of any Speak Up culture, as you want to encourage open communication channels for employees to raise concerns or suggest improvements. Metrics are a part of every system used to track the program’s performance, including incident rates, consistency and fairness of disciplinary actions, and employee satisfaction and trust in the program. Benchmarking against industry trends can also be a critical piece of information.

Always remember that unintended consequences can negatively impact every compliance program. Therefore, you should proactively identify and address any unintended consequences or perverse incentives that may arise from the program. Finally, adjust and improve your program to mitigate potential negative impacts on employee behavior or organizational objectives.

Mirror, Mirror provides a powerful illustration of the impact of incentives and disciplinary measures on organizational culture. By learning from the stark contrasts between the mirror and the prime universe, compliance professionals can design systems that promote ethical behavior and foster a culture of compliance. Incorporating these lessons into your compliance strategy can help ensure that your organization is prepared to navigate the complexities of today’s regulatory environment while upholding the highest ethical standards. As the episode demonstrates, the right incentives and disciplinary measures can make all the difference in creating a positive and compliant organizational culture.

Join us tomorrow as we consider the lessons from the Star Trek episode The Omega Glory on dealing with third parties.

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The NBA, Data Driven Compliance and Jontay Porter

One of the best examples I have recently seen of the power of data-driven compliance is playing out in real-time in the NBA. It is the Jontay Porter betting scandal. This event drove home why transparency and robust data analytics can help identify illegal acts in real time, moving compliance from detective to proactive.

Background

The background to the story is both sad and tragic. As reported by ESPN, betting sites grew suspicious when a large amount of money was made on prop bets for Porter. The bets were: “In the game on Jan. 26 against the LA Clippers, there was increased betting interest on the under for Porter props, which for the night were set at around 5.5 points, 4.5 rebounds, and 1.5 assists. There was also an over/under for Porter’s made 3-pointers, which was 0.5.”

Additionally, “At least one other U.S. sportsbook detected unusual betting interest on the game’s Porter props. A sportsbook industry source told ESPN that multiple betting accounts attempted to bet large amounts, upward of $10,000 and $20,000, on Porter under in the January game against the Clippers. Betting limits on NBA player props vary by sportsbook and customer but are typically around $1,000 to $2,000.

The second part of the suspicious transaction was that in that game itself, “Porter played just four minutes before leaving the game because of what the Raptors said was an aggravation of an eye injury he had suffered four days earlier against the Memphis Grizzlies. Porter did not score against the Clippers but had three rebounds and one assist, and he did not attempt a 3, meaning the under-hit on all of the props.” According to the Draft Kings, the under on Porter’s 3-pointers was the biggest money winner for bettors of any NBA player props from games that evening.

A second set of anomalous information came in on March 20. In a game on that night, “Porter played just three minutes before exiting because of what the Raptors said was an illness and did not return. He did not score after attempting one shot and had two rebounds.

Sportsbooks had his over/under set at around 7.5 points and 5.5 rebounds. The next day, DraftKings Sportsbook reported in a media release that Porter’s prop bets were the No. 1 moneymaker from the night in the NBA.”

Anomalous Data

Another ESPN article reported that “the NBA’s investigation found that Porter revealed information about his health to a known sports bettor ahead of a March 20 game against the Sacramento Kings. According to the NBA, another bettor who was privy to the information placed a $80,000 same-game parlay bet featured under Porter’s statistics and would win $1.1 million. Porter played for three minutes before leaving the game with an illness. The bet, which was placed at DraftKings, was not paid.” This is in addition to multiple Sportsbooks that “reported a spike in betting interest on the under on several of Porter’s statistics ahead of a Jan. 26 game against the Los Angeles Clippers.”

Finally, and most damningly, Porter was also betting on NBA games. “The league investigation revealed Porter placed at least 13 bets on NBA games using an associate’s online betting account. According to the league, the bets ranged from $15 to $22,000, totaling $54,094. The NBA said the total payout from those bets was $76,059, with net winnings of $21,965. None of the bets involved any in which Porter played. Three bets were parlays, including one that included a bet on the Raptors to lose. All three bets lost, according to the NBA.”

 Lessons for Compliance

  1. Transparency

There are several key lessons for compliance in this sordid tale. The first is around transparency. It is not about the legalization of gambling; gambling on NBA games has always occurred. It is about the oversight that legalization has brought about. In other words, gambling has moved out of the shadows and into the light of day. There is increased regulatory oversight and reporting. The NBA itself noted that “it was alerted to the suspicious activity by licensed sportsbooks and an organization that monitors legal betting markets. Las Vegas firm U.S. Integrity, which works with sportsbooks, leagues, and state gaming regulators, monitored Porter’s abnormalities and said it is “proud to continue to support the NBA in initiatives relating to regulated sports betting.”

The legalization of gambling has increased the amount of money involved. However, having that much money means more oversight and better processes for determining anomalous patterns. Why? Because it is a business for these Sportsbooks and sites like Draft Kings. Not only is it a business, but its customers must have faith that the games are not crooked, which is exactly what the NBA demands.

  1. Data Analytics

The second, equally important lesson is about data analytics. Data analytics did not determine that Porter had illegally revealed information about his health. Data analytics determined an unusual pattern of betting on small bets on a minor player, all in a very big way. In other words, the data identified anomalies that could be further investigated. Every data analytics program should crunch massive GTE spending, marketing spending, charitable donations, third-party spending, and any other place funds could be generated to determine if a pot of money is needed to fund a bribe.

Moreover, once your data program is set up, you can monitor these areas in real-time. This will allow you to spot any unwarranted trends and patterns. Based on the investigation, you can suspend the activities. If further action is necessary, you can then take it. But it all begins with data analytics.

  1. Consequence Management

We now move to the tragic part of this story. As a direct consequence of his actions, Jontay Porter has been banned from playing in the NBA for life. For the compliance professional, the lesson is that the Department of Justice demands swift action, including termination and clawbacks for executives who are part of a bribery or corruption scheme.

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Ten Top Lessons from Recent FCPA Settlements – Lesson No. 8, Enhancing Your Compliance Program

Over the past 15 months, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have made clear, through three Foreign Corrupt Practices Act (FCPA) enforcement actions and speeches, their priorities in investigations, remediations, and best practices compliance programs. Every compliance professional should study these enforcement actions closely for the lessons learned and direct communications from the DOJ. They should guide not simply your actions should you find yourself in an investigation but also how you should think about priorities.

The three FCPA enforcement actions are ABB from December 2022, Albemarle from November 2023, and SAP from January 2024. Taken together, they point out a clear path for the company that finds itself in an investigation, using extensive remediation to avoid monitoring and providing insight for the compliance professional into what the DOJ expects in an ongoing best practices compliance program.

Over this series of blog posts, I will lay out what I believe are the Top Ten lessons from these enforcement actions for compliance professionals who find themselves in an enforcement action. Today, we continue with Number 8, Enhancement of Compliance. The DOJ has clarified that any company undergoing an FCPA enforcement action must significantly enhance its compliance program with a budget, headcount, and expertise in reporting, investigations, and consequence management processes.

Albemarle

The Albemarle NPA cited several remedial actions by the company that helped Albemarle obtain superior results regarding the discounted fine and penalty. These steps were taken during the pendency of the DOJ investigation so that when the parties were ready to resolve the matter, Albemarle had built out an effective compliance program and had tested it. The NPA provided that Albemarle

  • Strengthening its anti-corruption compliance program by investing in compliance resources, expanding its compliance function with experienced and qualified personnel, and taking steps to embed compliance and ethical values at all levels of its business organization;
  • Transformed its business model and risk management process to reduce corruption risk in its operation and to embed compliance in the business, including implementing a go-to-market strategy that resulted in eliminating the use of sales agents throughout the Company, terminating hundreds of other third-party sales representatives, such as distributors and resellers, and shifting to a direct sales business model;
  • Provided extensive training to its sales team, restructuring compensation and incentives so that compensation is no longer tied to sales amounts;
  • Used data analytics to monitor and measure the compliance program’s effectiveness and
  • It engaged in continuous testing, monitoring, and improvement of all aspects of its compliance program, beginning almost immediately after identifying misconduct.

The NPA noted that Albemarle engaged in holdbacks, as they did not pay bonuses to certain employees involved in the conduct or those with oversight. The NPA said, “During its internal investigation, the Company withheld bonuses totaling $763,453 from employees suspected of wrongdoing.” The illegal behavior involved people who “(a) had supervisory authority over the employee(s) or business area engaged in the misconduct; and (b) knew of, or were willfully blind to, the misconduct.” This effort was important because it allowed Albemarle to get an extra fine reduction of a dollar for every dollar they spent on the investigation.

Indeed, Deputy Attorney General Lisa Monaco cited the Albemarle FCPA resolution: “The company received a clawback credit for withholding bonuses for employees who engaged in misconduct. Not only did Albemarle keep the bonuses that would have gone to wrongdoers, but the company also received an offset against its penalty for the same amount. That’s money saved for Albemarle and its shareholders—and a concrete demonstration of the value of clawback programs.”

SAP

SAP did an excellent job in its remedial efforts to build out its compliance program. In addition to the prior discussions of SAP’s remedial efforts, the DOJ also pointed out the company’s Enhancement of Compliance. Here, the company significantly increased the budget, resources, and expertise devoted to compliance, restructuring its Offices of Ethics and Compliance to ensure adequate stature, independence, autonomy, and access to executive leadership; enhancing its code of conduct and policies and procedures regarding gifts, hospitality, and the use of third parties; and improving its reporting, investigations, and consequence management processes.

Next were the holdback actions SAP engaged in. The DPA noted SAP withheld bonuses totaling $109,141 during its internal investigation from employees who engaged in suspected wrongdoing in connection with the conduct under investigation or who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and (b) knew of, or were willfully blind to, the misconduct, and further engaged in substantial litigation to defend its withholding from those employees, which qualified SAP for an additional fine reduction in the amount of the withheld bonuses under the DOJ’s Compensation Incentives and Clawbacks Pilot Program.

ABB

According to the ABB Plea Agreement, ABB “took a lot of corrective actions,” such as hiring experienced compliance staff and, after figuring out what caused the behavior described in the Statement of Facts, spending a lot more money on compliance testing and monitoring across the whole company; putting in place targeted training programs and extra case-study sessions on-site; and continuing to test and monitor to as This final point was expanded on in the SEC Order, which reported that all employees involved in the misconduct were terminated.

Additionally, ABB essentially created its monitoring program to test its compliance program and report to the DOJ. In a section entitled “Written Work Plans, Reviews, and Reports,” ABB agreed to conduct a first review and prepare a first report, followed by at least two follow-up reviews and reports. But more than simply reporting, ABB decided to create and submit for review a work plan for this ongoing testing of its compliance program, as the program was detailed in the DPA. The DPA specified, “No later than one (I) year from the date this Agreement is executed, the Company shall submit to the Offices a written report setting forth:

  • a complete description of its remediation efforts to date;
  • a complete description of the testing conducted to evaluate the effectiveness of the compliance program and the results of that testing; and
  • It proposes to ensure that its compliance program is reasonably designed, implemented, and enforced so that the program is effective in deterring and detecting violations of the FCPA and other applicable anti-corruption laws.”

The bottom line is that all these companies worked very hard to significantly enhance their compliance programs, with a budget, headcount, and expertise in their reporting, investigations, and consequence management processes. None of the actions by these companies were particularly new or even innovative, as with the innovations around data analytics programs. Indeed, these strategies have been available from the DOJ since at least the first edition of the FCPA Resource Guide in 2012. It was, however, the work of each company to understand the deficiencies in their compliance programs and their superior efforts to upgrade them.

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31 Days to More Effective Compliance Programs

31 Days to a More Effective Compliance Program: Day 2 – 2023 Evaluation of Compliance Programs: Incentives and Consequences

The 2023 ECCP had significant changes regarding compliance-based incentives, both financial and non-financial; consequence management; messaging apps; and ancillary matters.

I.    Incentives

This section begins with a new introduction that makes clear the seriousness in which the DOJ views incentives, both financial and other types of incentives. The ECCP states, “The design and implementation of compensation schemes play an important role in fostering a compliance culture.”

The ECCP also added a new section on financial incentives, which directs prosecutors to specifically evaluate how a company designs and applies financial incentives. These four questions basically breakdown into the following continuum: (1) Assessment, (2) Analysis, (3) Implementation; and (4) Monitoring.

II.   Consequence Management

The DOJ has been talking about clawbacks for some time now. However, the revised language of the ECCP puts more rigor into what the DOJ is now mandating.

 a.   Clawbacks

The DOJ has made it clear that companies need to seek to recover amounts paid out to executives that were illegally received as corporate compensation. This could include both salary, stock options, similar payments, or discretionary bonuses. All of this means every compliance program will need to analyze each of these components as set out.

b.    Consequence Management

The DOJ also mandated that compliance programs take a deeper dive into their entire financial incentive program—both incentives and disincentives. While there is some overlap with the clawback language, there is quite a bit of newness in these areas. The DOJ’s hotline and speak-up reports directly relate to a company’s culture of compliance.

Three key takeaways:

1. The 2023 ECCP brought significant changes to both financial incentives and negative consequences as well.

2. The new financial incentive analysis is: (1) Assessment; (2) Analysis, (3) Implementation; and (4) Monitoring.

3. Clawbacks and Consequence Management are related but separate parts of a best practices compliance program.

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Blog

Compliance Lessons from Venice: Incentives, Consequences and Compliance

This week I am running a three-part blog post series and three-part podcast series on compliance lessons from one of the most beautiful cities on earth, Venice. We will consider how construction in Venice can inform your compliance program, how the Venice ship building and repair business located in the Arsenale inform both corporate culture and your compliance program and how Venice created the first modern day hotline reporting system. In this second blog post and accompanying podcast we look at the Venetian ship building and ship repair industry centered in the Arsenale District and how they created a culture of compliance with the workers and implemented strategies which informed modern day compliance programs.

The Arsenale district in Venice serves as a historical example of the implementation of a corporate culture and implementation of a compliance program. This district was a significant maritime hub from the mid-1200s to the mid-1400s, known for its innovative shipbuilding techniques, which were considered state secrets. To protect this valuable intellectual property, the Venetian Fathers established a series of incentives and punishments that can inform best practices in compliance programs today.

One of the key takeaways from the Arsenale district is the importance of balancing incentives and discipline in a compliance program. This concept is emphasized by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Companies can learn from this historical example by implementing clear procedures and consequences for violations, publicizing disciplinary actions as a deterrent, and offering positive incentives to encourage adherence to ethical business practices.

On the consequence side, the Venetian Fathers forbade skilled workers from leaving the city to work in neighboring or rival cities, establishing the first non-compete agreement. Additionally, those caught sharing state secrets faced summary execution after excruciating torture. While these specific punishment techniques may not be applicable in modern corporate America, they highlight the need for severe consequences for violations.

In terms of incentives, the Arsenale district focused on job security. Layoffs were unheard of, and if someone lost their job due to injury or mishap, they received enough compensation to sustain themselves in the city. Furthermore, the company provided funeral expenses and assistance to the family of a deceased worker, ensuring their well-being.

The dual focus on keeping shipbuilding secrets within the city and incentivizing loyalty among workers aligns with the DOJ and SEC’s emphasis on incorporating both incentives and discipline into compliance programs. According to the guidance provided by these regulatory bodies, companies should have clearly defined procedures that are applied reliably and promptly, with punishments commensurate with the violation. Publicizing disciplinary actions internally, where appropriate, can serve as a deterrent and demonstrate the consequences of unethical actions.

However, the guidance also highlights the importance of positive incentives. The DOJ and SEC recognize that rewards for following a company’s internal code of conduct and conducting business ethically can drive compliant behavior. These incentives can take various forms, such as personal evaluations, promotions, rewards for improving compliance programs, and recognition for ethical behavior.

Companies can integrate incentives into their DNA through the hiring and promotion process. Senior management hires and promotions should include a compliance component, ensuring that individuals who prioritize compliance are recognized and rewarded. By making compliance evaluations a part of every employee’s overall evaluation, companies can further incentivize compliance.

The Arsenale district serves as a valuable historical example of the tradeoffs involved in balancing incentives and discipline in a compliance program. While severe punishments were imposed to protect state secrets, the district also prioritized job security and support for workers and their families. This approach highlights the importance of considering the impact on employees when making decisions about compliance program implementation.

In conclusion, the Arsenale district in Venice provides valuable insights into the implementation of a compliance program. By balancing incentives and discipline, companies can establish clear procedures and punishments for violations, publicize disciplinary actions as a deterrent, and offer positive incentives to drive compliant behavior. The historical example of the arsenal district emphasizes the importance of considering the impact on employees when making decisions about compliance program implementation.