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Compliance Lessons from Venice – Episode 2: The Arsenale and Incentivizing Compliance

In part 2 of the Compliance Lessons from Venice series, we journey to the Arsenale, the historic heart of Venice’s shipbuilding industry. During Venice’s golden age, the Arsenale was a hub of ingenuity, productivity, and loyalty to the state. The Venetian fathers recognized the strategic importance of Arsenale’s workers and implemented a unique mix of incentives and discipline to protect their secrets, maintain a loyal workforce, and create a prototype culture of compliance. This blog post series is the written companion to the podcast series running on the Compliance Podcast Network.

Today, we can draw from Venice’s business expertise to inform our approach to incentivizing compliance. We focus on a blend of rewards and consequences to encourage ethical behavior, adherence to company values, and enhancement of culture. We will examine how Venice’s example aligns with the DOJ’s compliance guidance and offers valuable lessons for modern corporate compliance programs in the areas of incentives and consequences, together with the development of a culture of compliance.

The Arsenale: Venice’s Production Powerhouse

At its peak, the Venetian Arsenale employed around 12,000 workers, nearly 10% of the city’s population. Venice, one of the most powerful economic and military forces of its time, relied on the Arsenale to build, repair, and maintain its fleet. Here, Venice perfected the assembly line method, with workers laboring by hand to create state-of-the-art ships efficiently and at scale. This commitment to quality and security extended beyond production techniques; the shipbuilding secrets developed in the Arsenale were considered so valuable that they were treated as state secrets, with measures in place to protect the knowledge and the workforce’s loyalty.

The Venetian fathers understood that safeguarding this valuable knowledge required both a carrot and a stick approach. They developed a system that incentivized workers to stay loyal while imposing severe penalties for disloyalty or breaches of confidentiality.

Venice’s Approach to Incentives and Disincentives

Venice’s system was designed to support long-term loyalty, stability, and excellence among Arsenale workers, serving as a model for effective workforce management and protection of critical information. Key elements included:

  1. Job Security and Benefits. Workers at the Arsenale enjoyed job security and were compensated if they lost their ability to work due to injury or illness. Upon a worker’s death, the Arsenale provided funeral expenses and continued to support the family through stipends or alternative job placements for family members. This created a robust and personal investment in the success of the Arsenale, Venice’s population, and the entire city.
  2. Strict Confidentiality and Non-Compete Policies. Venice enacted strict measures to protect its intellectual property. Skilled workers were forbidden from leaving Venice to work for rival cities, effectively instituting one of the earliest forms of a non-compete clause. The penalties for violating this policy were harsh, including torture and execution. Although we have come a long way from such extreme punitive measures, the principle remains relevant in compliance today: a company’s success is closely tied to maintaining the confidentiality of its processes, intellectual property, and proprietary information.

The DOJ’s Guidance on Incentives and Discipline

The DOJ emphasized the importance of both incentives and disincentives to drive ethical behavior in the 2024 Evaluation of Corporate Compliance Programs (2024 ECCP). Venice’s approach aligns closely with this approach, and compliance professionals can look to Arsenale for lessons in incentivizing compliance.

Incentives for Ethical Conduct

The DOJ has recognized that positive incentives can drive compliant behavior. Incentives can be financial—bonuses, salary increases, or promotions—or non-financial, such as recognition and personal acknowledgment. This was reinforced in the 2024 ECCP, which stated, “Has the company considered the impact of its financial rewards and other incentives on compliance?” Some companies have implemented programs incorporating ethics and compliance metrics into performance evaluations. Other companies have awarded annual cash bonuses for outstanding ethical behavior, demonstrating the company’s commitment to integrity.

Making compliance part of the company’s core DNA starts with integrating ethical behavior into everyday performance metrics. This means including compliance adherence in bonus structures or linking promotions to ethical performance rather than pure profitability. By embedding compliance into performance reviews, companies send a clear message: ethical behavior is not just expected but rewarded.

Publicizing Disciplinary Actions

Conversely, the DOJ’s guidance recommends that companies communicate the consequences of unethical actions and compliance violations. When employees understand that unethical behavior has swift and predictable repercussions, it reinforces a culture of accountability. Many companies choose to publicize examples of disciplinary actions to underscore the consequences of misconduct. This transparency demonstrates that the organization takes compliance seriously and applies consequences uniformly. Indeed, the 2024 ECCP states, “Prosecutors may consider whether a company has publicized disciplinary actions internally, where appropriate and possible, which can have valuable deterrent effects.”

In Venice, the knowledge of harsh punishments deterred Arsenale workers from betraying the city’s secrets. Today, compliance departments do not need such severe measures, but transparent communication around discipline can serve a similar function, reminding employees of the importance of maintaining integrity.

Building a Compliance Culture Based on Loyalty and Trust

In Venice, loyalty to the Arsenale wasn’t driven by fear alone; workers knew the city valued and protected them. The DOJ emphasizes a similar approach for corporate compliance programs, suggesting that incentives go beyond mere policy compliance. Instead, they should aim to cultivate a culture where ethical conduct is intrinsically linked to loyalty to the company and professional satisfaction.

Consider implementing the following methods to build loyalty and trust in your compliance program:

  1. Job Security and Career Support. Like the Venetian fathers who assured workers of job security and family support, compliance programs can provide employees with stability and purpose. Offering career advancement opportunities, professional development in compliance-related areas, and clear paths to promotion for ethical conduct reinforces a culture where compliance is valued and integral to career success.
  2. Recognition Programs. Recognizing employees who demonstrate ethical behavior is powerful. Recognizing compliance champions through formal awards or public acknowledgment sends a message that ethics and integrity are valued. A simple “thank you” for a job well done can also be incredibly impactful in reinforcing positive behavior.
  3. Integrating Compliance into Performance Metrics. Building on the DOJ’s guidance, integrating compliance into performance reviews ensures employees understand that ethical behavior directly impacts their career progression. By making ethics a part of promotion criteria, companies reinforce the idea that doing business correctly is critical to professional success.
  4. Ethics Training and Resources. Providing ongoing training beyond “checking the box” helps employees understand the why behind compliance. When people know the purpose behind policies and feel they have the resources and support to comply, they’re more likely to internalize ethical behavior in their day-to-day operations.

Lessons from Venice for Modern Compliance Programs

The Venetian Arsenale is a testament to the power of incentivizing loyalty and ethical behavior while establishing a clear system of consequences. Today’s compliance professionals can adapt these principles to build a balanced program that motivates employees to act with integrity, rewards ethical conduct, and enforces accountability.

Venice teaches us that incentivizing compliance is not just about financial bonuses; it’s about creating a work environment that values and rewards ethical behavior at every level. Employees need to feel part of something bigger than themselves—an organization that values their contributions and supports their ethical choices. When employees see that compliance is recognized and rewarded, they’re more likely to engage with the program and make ethical decisions.

The Timelessness of the Arsenale’s Approach

Venice may have faded as a global power, but the lessons from its golden age remain relevant. In the same way that Arsenale’s workers were loyal to their city because of the incentives and protections provided, today’s employees will be more committed to a compliance program that genuinely values and supports them.

As compliance professionals, we can create a culture where employees are encouraged, recognized, and rewarded for doing the right thing. The DOJ’s guidance underscores the importance of balancing incentives with disciplinary measures, and Venice shows us how this balance can be achieved to build a compliant, loyal workforce.

Join us tomorrow as we conclude our series with a look at Venice’s “Into the Lion’s Mouth“ whistleblower program, a true precursor to the modern whistleblower protections that support transparency and accountability in compliance programs.

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Compliance Into the Weeds

Compliance into the Weeds: Analyzing The Trump Conviction: Compliance Lessons from an Unprecedented Case

The award-winning Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to more fully explore a subject.

Looking for some hard-hitting insights on compliance? Look no further than Compliance into the Weeds!

In this episode of ‘Compliance Into the Weeds’, Tom and Matt take a deep dive into last week’s trial verdict against Donald Trump in NYC and lessons for the compliance professional.

We explore the importance of internal controls, consistent consequence management, and effective leadership. They also delve into how compliance officers can learn from the storytelling strategies used in the trial and emphasize the application of the rule of law.

Key Highlights:

  • Overview of Trump’s Criminal Conviction
  • Internal Controls and Compliance Lessons
  • Consequences Management and Consistent Enforcement
  • Ethical Leadership and Communication
  • Who is your audience? Storytelling in Compliance
  • Final Thoughts and Rule of Law

Resources:

Matt on Radical Compliance

 Tom 

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Albemarle FCPA Enforcement Action: Part 5 – Lessons Learned

Over the past several blog posts, I have been exploring the Albemarle FCPA enforcement action.  We have explored in some detail the DOJ Non-Prosecution Agreement (NPA) and the SEC Administrative Order(Order). In this final blog post on the series, I want to suss out some lessons for the compliance professional.

Consequence Management

When Kenneth Polite announced the Pilot Program in conjunction with the 2023 Evaluation of Corporate Compliance Programs (ECCP), the focus was largely on clawbacks. However, the relevant section in the ECCP was entitled “Consequence Management,” indicating a broader focus on both incentives to do business ethically and in compliance as well as disincentives. The ECCP asked a series of questions:

  • Has the company considered the impact of its financial rewards and other incentives on compliance?
  • Has the company evaluated whether commercial targets are achievable if the business operates in a compliant and ethical manner?
  • What role does the compliance function have in designing and awarding financial incentives at senior levels of the organization?
  • How does the company incentivize compliance and ethical behavior? What percentage of executive compensation is structured to encourage enduring ethical business objectives?
  • Are the terms of bonus and deferred compensation subject to cancellation or recoupment, to the extent available under applicable law, in the event that non-compliant or unethical behavior is exposed before or after the award was issued?
  • Does the company have a policy for recouping compensation that has been paid where there has been misconduct?
  • Have there been specific examples of actions taken (e.g., promotions or awards denied, compensation recouped, or deferred compensation canceled) as a result of compliance and ethics considerations?

The NPA noted that Albemarle engaged in holdbacks, as they did not pay bonuses to certain employees involved in the conduct or those who had oversight. The NPA stated, “The Company withheld bonuses totaling $763,453 during its internal investigation from employees who engaged in suspected wrongdoing.” The illegal conduct involved those 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.” The significance of this effort was vital as it qualified Albemarle for an additional fine reduction of a dollar-for-dollar credit of the amount of the withheld bonuses under the Criminal Division’s March 2023 Compensation Incentives and Clawbacks Pilot Program.

Indeed, Deputy Attorney General Lisa Monaco, in a recent speech, said, “The pilot program also rewards companies that claw back or withhold incentive compensation from executives responsible for misconduct – or attempt to do so in good faith. For every dollar that a company claws back or withholds from an employee who engaged in misconduct – or a supervisor that knew of or turned a blind eye to it – the Department will deduct a dollar from the otherwise applicable penalty that the resolving company would pay.”

She specifically cited the Albemarle FCPA resolution, where “the company received a clawback credit for withholding bonuses of 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.”

 Remediation During Investigation

The NPA cited several remedial actions by the company that helped Albemarle obtain the superior result in terms of 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 and restructured 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
  • We are engaged in continuous testing, monitoring, and improvement of all aspects of its compliance program, beginning almost immediately following the identification of misconduct.

Two of the factors are relatively new and certainly are noteworthy for the compliance professional. The first is the change in the company’s approach to sales and their sales teams. Obviously, it was corrupt third-party agents that brought the company to such FCPA grief. Many of the quotes in the NPA and Order make it clear that Albemarle executives had an aversion to paying bribes but had greater moral flexibility when a third-party agent was involved. This led to the company moving away from third-party agents to a direct sales force.

Moving to a direct sales force does have its risks, which must be managed, but those risks can certainly be managed with an appropriate risk management strategy, monitoring of the strategy, and improvement; those risks can be managed. Yet there is another reason, and more importantly, a significant business reason, to move towards a direct sales business model. Every time you have a third-party agent or anyone else between you and your customer, you risk losing that customer because your organization does not have a direct relationship with the customer. By having a direct sales business model, your organization will have a direct relationship with your customer and, therefor, the ability to develop it further.

The NPA also specifically called out the Company’s use of data analytics in two ways. The first was to monitor the Company’s compliance program, and the second was to measure the compliance program’s effectiveness. While this language follows a long line of DOJ pronouncements, starting with the 2020 Update to the Evaluation of Corporate Compliance Programs, about the corporate compliance functions’ access to all company data, this is the first time it has been called out in a settlement agreement in this manner. Moreover, although not specifically tied to the lack of a required corporate Monitor, it would appear that by using data analytics, Albemarle was able to satisfy the DOJ requirement for implementing controls and then effectively testing them throughout the pendency of the DOJ investigation.

Internal Controls Over Commission Increases

According to the SEC Order, the Company failed to devise and maintain a sufficient system of internal accounting controls with respect to commission rates and deviations from contracted rates. In other words, even though there were internal controls in place for the setting of third-party agents’ commissions, they could be overridden at will. The Order concluded by noting, “As a result, sales personnel were able to increase agents’ commission rates in multiple countries – including Vietnam, India, China, and UAE – despite certain Albemarle personnel having knowledge of red flags indicating the agents would use a portion of the commission to make bribe payments to obtain contracts, influence tender specifications, or obtain nonpublic information concerning competitors’ bids.”

Every compliance professional should review their company’s controls over agents’ commission rates to make sure the business unit personnel alone cannot raise commission rates. While business units can always make the business case, this enforcement action drives home the message that the compliance function is not ‘one and done’ when an agent is approved but must be monitored throughout the third-party relationship lifecycle. Any requested change to a commission rate must go through the same analysis and approval process as the original approval.

Timely Self-Disclosure

There was a significant discussion in the NPA around Albemarle’s voluntary self-disclosure to the DOJ. However, NPA noted that “the disclosure was not “reasonably prompt” as defined in the Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy and the U.S. Sentencing Guidelines.” The NPA reported that Albemarle learned of allegations regarding possible misconduct in Vietnam approximately 16 months before disclosing it to the DOJ. Interestingly, the SEC Order only stated, “Albemarle made an initial self-disclosure to the Commission of potential FCPA violations in Vietnam following its completion of an internal investigation of such conduct and, at the same time, self-reported potential violations it was investigating in India, Indonesia, and China. Albemarle later self-disclosed to the Commission potential violations in other jurisdictions as part of an expanded internal investigation.”

This meant the self-disclosure “was not within a reasonably prompt time after becoming aware of the misconduct in Vietnam,” and it means that Albemarle did not meet the standard for voluntary self-disclosure under the Criminal Division Corporate Enforcement and Voluntary Self-Disclosure Policy. While the DOJ “gave significant weight” to the Company’s voluntary, even if untimely, disclosure of the misconduct, it is undoubtedly cautionary.

What the DOJ wants is self-disclosure as soon as possible. One only needs to recall the case of Cognizant Technologies, where the company received a complete Declination where there were allegations of C-Suite involvement in the bribery schemes. This Declination was provided in large part because the company made its self-disclosure only two weeks after the information filtered up to the Board of Directors. While Cognizant Technologies may be the gold standard, it shows that if a company timely self-discloses, it can be considered for a full Declination.

The Albemarle FCPA resolution documents are chocked full of solid information that every compliance professional can use in the future. They are well worth a deep dive—finally, a kudos to Albemarle for obtaining this superior result.