Tag: DOJ

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Daily Compliance News

March 14, 2023 – The $27bn In Corruption Edition

Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance, brings you compliance-related stories to start your day. Sit back, enjoy a cup of morning coffee, and listen to the Daily Compliance News. All from the Compliance Podcast Network. Each day we consider four stories from the business world, compliance, ethics, risk management, leadership, or general interest for the compliance professional.

Stories we are following in today’s edition of Daily Compliance News:

·       Qatar alleged to have spied on Swiss FIFA prosecutor. (Times of Israel)

·       $27bn tax and corruption scandal in Indonesia. (TheStraitsTimes)

·       South African corruption watchdog to clear President Ramaphosa. (NYT)

·       Coal company receives declination. (FCPA Blog)

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31 Days to More Effective Compliance Programs

One Month to More Effective Compliance for Business Ventures – Pre-acquisition Risk Assessment

One of the clearest themes from the original 2012 FCPA Resource Guide was the importance of your pre-acquisition work in any M&A on a target company. In the section on Declinations, the 2012 FCPA Resource Guide provided an example of a company that had received a declination in large part because of its pre-acquisition work, which then served as a basis for its post-acquisition remediation. I find it appropriate to think of the process as a straight line, directly from the pre-acquisition phase to closing and then to remediation, integration, and self-reporting in the post-acquisition phase. These same concepts were brought forward in the 2020 FCPA Resource Guide, 2nd edition.

It should all begin with a preliminary pre-acquisition assessment of risk. Such an early assessment will inform the transaction research and evaluation phases. This could include an objective view of the risks faced and the level of risk exposure, such as best/worst-case scenarios. A pre-acquisition risk assessment could also be used as a mechanism through which to view the feasibility of the business strategy and help to value the potential target.

The pre-acquisition risk assessment can be critical in any M&A work for compliance. Use this opportunity to see where the target might stand on compliance. Your risk assessment can evolve as you obtain greater information. Finally, use this pre-acquisition risk assessment as a base document to plan, resource, and budget for your post-acquisition remediation, integration, and reporting.

Three key takeaways: 

  1. One never has enough time to engage in all the pre-acquisition reviews you might want to do, so optimize your time and resources.
  2. Consider what you can review to put together a preliminary risk assessment on the target.
  3. As with most compliance initiatives, you are only limited by your imagination, so if you are limited in time and scope, try something new and different.
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Blog

The Week That Was in Compliance – The ECCP: Part 2 – Consequence Management

In addition to the speeches presented at the ABA’s 38th Annual National Institute on White Collar Crime, by Deputy Attorney General Lisa Monaco (2023 Monaco Speech) and Assistant Attorney General Kenneth A. Polite (Polite Speech); there was the release of the 2023 U.S. Department of Justice Criminal Division Evaluation of Corporate Compliance Programs (ECCP). Today we review another new addition to the ECCP, that being ‘consequence management’. This certainly includes clawbacks but there is also other language which compliance professionals will need to incorporate into their compliance program beyond clawbacks.

The Department of Justice (DOJ) has been talking about clawbacks for some time now. However, the revised language of the ECCP puts more rigor around what the DOJ is now mandating. This section begins by noting that financial penalties as well as financial incentives can influence employee behavior and that prosecutors are now required to consider both aspects. It states:

“By way of example, prosecutors may consider whether a company has publicized disciplinary actions internally, where appropriate and possible, which can have valuable deterrent effects. Prosecutors may also consider whether a company is tracking data relating to disciplinary actions to measure effectiveness of the investigation and consequence management functions. This can include monitoring the number of compliance-related allegations that are substantiated, the average (and outlier) times to complete a compliance investigation, and the effectiveness and consistency of disciplinary measures across the levels, geographies, units or departments of an organization…Some companies have also enforced contract provisions that permit the company to recoup previously awarded compensation if the recipient of such compensation is found to have engaged in or to be otherwise responsible for corporate wrongdoing. Finally, prosecutors may consider whether provisions for recoupment or reduction of compensation due to compliance violations or misconduct are maintained and enforced in accordance with company policy and applicable laws…Compensation structures that clearly and effectively impose financial penalties for misconduct can deter risky behavior and foster a culture of compliance.”

Clawbacks

With the Pilot Program and other announcements in the Monaco and Polite speeches, the DOJ has made clear that companies need to seek to recover amounts paid out to executives which were illegally received as corporate compensation. This could include both salary, stock options or similar payments or discretionary bonuses. Regarding your corporate clawback protocol itself, the ECCP poses the following questions:

  • 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 cancelled) as a result of compliance and ethics considerations?

All of this means every compliance program will need to analyze each of these components as set out. It will also require a review of executive contracts to determine if there are clawback provisions set out in each employment contract. If there are no such provisions, they will need to be inserted. Finally, what “specific examples of actions taken” does a company have to show to the DOJ should they come knocking?

Consequence Management

The DOJ also mandated that compliance programs take a deeper dive into their entire financial incentive program; both incentives and dis-incentives. While not previously discussed in speeches, these new requirements seem to flow from the general statements made by both Monaco and Polite over the past year. In this area, the ECCP mandates the following inquiries:

  • How has the company ensured effective consequence management of compliance violations in practice?
  • What insights can be taken from the management of a company’s hotline that provide indicia of its compliance culture or its management of hotline reports?
  • How do the substantiation rates compare for similar types of reported wrongdoing across the company (i.e. between two or more different states, countries, or departments) or compared to similarly situated companies, if known?
  • Has the company undertaken a root cause analysis into areas where certain conduct is comparatively over or under reported?
  • What is the average time for completion of investigations into hotline reports and how are investigations that are addressed inconsistently managed by the responsible department?
  • What percentage of the compensation awarded to executives who have been found to have engaged in wrongdoing has been subject to cancellation or recoupment for ethical violations?
  • Taking into account the relevant laws and local circumstances governing the relevant parts of a compensation scheme, how has the organization sought to enforce breaches of compliance or penalize ethical lapses?
  • How much compensation has in fact been impacted (either positively or negatively) on account of compliance-related activities?

Obviously, there is some overlap with the clawback language but there is quite a bit new in these questions. The DOJ ties hotline and speak up reports directly to a company’s culture of compliance. This is almost a direct tie back to the findings of Kyle Welch in his seminal work on a speak up culture. But the DOJ goes on to ask about substantiation rates, closure rates, consistent and fair application of discipline (and rewards when called for) and root cause analysis; which are not simply technical aspects of compliance programs but are concrete steps companies can implement to engender trust with employees that their concerns will be taken seriously and then acted upon when they are raised. Once again, as with clawbacks, these are levels of analysis that many compliance programs have not yet taken but are now required to do so.

Join us tomorrow when we consider messaging apps under the revised ECCP.

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Daily Compliance News

March 11, 2023 – The Settlement Ditched Edition

Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance, brings you compliance-related stories to start your day. Sit back, enjoy a cup of morning coffee, and listen to the Daily Compliance News. All from the Compliance Podcast Network. Each day we consider four stories from the business world, compliance, ethics, risk management, leadership, or general interest for the compliance professional.

Stories we are following in today’s edition of Daily Compliance News:

  • JPMorgan sues former exec Jes Staley for Epstein connections. (WSJ)
  • DOJ against USSG changes. (Reuters)
  • Whistleblowers ditch settlement with Texas AG. (Houston Chronicle)
  • Swiss bankers indicted for AML violations. (ICIJ)
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2 Gurus Talk Compliance

2 Gurus Talk Compliance – Episode 1

What happens when two top compliance commentators get together? They talk compliance, of course. Join Kristy Grant-Hart and Tom Fox for their new podcast, 2 Gurus Talk Compliance! But it is not simply Kristy and Tom talking about compliance. In this podcast series, Kristy and Tom also review other top commentators in compliance. In this podcast, we will consider all things compliance, corporate ethics, ESG, governance, and whatever else is on our minds and the minds of other experts in the field. Kristy and Tom explore all of these topics with expertise and wit.

In this inaugural episode, they discuss the latest compliance trends and news, including two Supreme Court cases that have implications for the compliance profession. They also cover the Department of Justice and whistleblower trends, taking a look at Miranda and Upjohn’s warnings and increasing numbers of whistleblower reports to the SEC. They also dive into an article from the Harvard Law School Forum on corporate governance and discuss the Illinois Biometric law. Join the conversation and discover the latest on compliance and regulations with 2 Gurus Talk Compliance.

Highlights Include

The Role of In-House Attorneys in Communication Between Outside Counsel and Businesses [00:05:17]

Supreme Court Decision on the Future of the CFPB [00:09:11]

Impact of the Colorado Draft Regulation on Artificial Intelligence Compliance Programs [00:13:23]

The Benefits of Automated Data Deletion [00:17:23]

A Miranda component to corporate Upjohn Warnings [00:21:25]

The Obligation of Society to Address Climate Change [00:25:33]

The Benefits of Self-Disclosure in the DOJ Justice System [00:29:18]

The Role of the Board in Overseeing Third Parties in High-Risk Countries [00:33:14]

The Impact of Whistleblowers on the SEC [00:40:54]

White Castle’s Violation of Illinois Biometric Law [00:45:05]

Notable Quotes

  1. The DOJ is urging a federal judge to sanction Google’s parent, Alphabet, for its practice of setting employee chats to auto delete despite promising to preserve records.”
  2. “It goes beyond the specifics of this law, something you and I have talked about for several years now, that the compliance function and the CCO is well perhaps the most well-suited corporate discipline to deal with these new initiatives because it’s the basic framework of compliance that you and I have worked with for 15 years.”
  3. “Most compliance programs just don’t have good frameworks for things like AI or for big data even though we’ve been using that word for a long time.”

Resources

  1. Boards and 3rd Party Risk Oversight
  2. CO Draft AI Rules for Insurance
  3. Miranda Warnings in Corp Investigation
  4. Current whistleblowing landscape
  5. Has the stature of the CCO changed? 
  6. Analysis of the DOJ’s update to the self-disclosure program
  7. Supreme Court considering defunding the CFTC
  8. Trends in state privacy law   
  9. Litigation holds and records retention/Google/DOJ  
  10. Individuals charged – first enforcement action 2023 

Connect with Kristy Grant-Hart on LinkedIn

Spark Consulting

Connect with Tom Fox on Linkedin

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Daily Compliance News

March 10, 2023 – The Convicted Edition

Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance, brings you compliance-related stories to start your day. Sit back, enjoy a cup of morning coffee, and listen to the Daily Compliance News. All from the Compliance Podcast Network. Each day we consider four stories from the business world, compliance, ethics, risk management, leadership, or general interest for the compliance professional.

Stories we are following in today’s edition of Daily Compliance News:

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Blog

The Week That Was in Compliance – The ECCP: Part 1 – Incentives

In addition to the speeches presented at the ABA’s 38th Annual National Institute on White Collar Crime, by Deputy Attorney General Lisa Monaco (2023 Monaco Speech) and Assistant Attorney General Kenneth A. Polite (Polite Speech); there was the release of the 2023 U.S. Department of Justice Criminal Division Evaluation of Corporate Compliance Programs (ECCP). Today we will begin a multi-part review of this document by considering financial incentives.

This section begins with a new introduction which makes clear the seriousness in which the Department of Justice (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. Prosecutors may consider whether a company has incentivized compliance by designing compensation systems that defer or escrow certain compensation tied to conduct consistent with company values and policies. Some companies have also enforced contract provisions that permit the company to recoup previously awarded compensation if the recipient of such compensation is found to have engaged in or to be otherwise responsible for corporate wrongdoing. Finally, prosecutors may consider whether provisions for recoupment or reduction of compensation due to compliance violations or misconduct are maintained and enforced in accordance with company policy and applicable laws. Compensation structures that clearly and effectively impose financial penalties for misconduct can deter risky behavior and foster a culture of compliance.”

However, the DOJ reiterated that “providing positive incentives, such as promotions, rewards, and bonuses for improving and developing a compliance program or demonstrating ethical leadership, can drive compliance. Prosecutors should examine whether a company has made working on compliance a means of career advancement, offered opportunities for managers and employees to serve as a compliance “champion”, or made compliance a significant metric for management bonuses. In evaluating whether the compensation and consequence management schemes are indicative of a positive compliance culture.”

Neither of these concepts for incentives are new. Financial incentives were a part of the original 10 Hallmarks of an Effective Compliance Program, as delineated in the 2012 edition of the FCPA Resource Guide. It was brought forward in the 2020 2nd edition. Promotions, rewards and bonuses were also discussed in both of those documents as well as other DOJ pronouncements and formulations over the years. However, this is the first time the DOJ has specifically spelled out the role of the ‘compliance champion’ as both an indicia of a best practices compliance program as well as a mechanism to demonstrate a ‘positive 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. It states:

Incentive System – Has the company considered the implications of its incentives and rewards on compliance? How does the company incentivize compliance and ethical behavior? Have there been specific examples of actions taken (e.g., promotions or awards denied) as a result of compliance and ethicsconsiderations? Who determines the compensation, including bonuses, as well as discipline and promotion of compliance personnel?

Rephrasing these questions, a compliance professional might consider them in the following manner:

  1. How does the company incentivize compliance and ethical behavior?
  2. Has the company considered the implications of its incentives and rewards on compliance?
  3. Who determines the compensation, including bonuses, as well as discipline and promotion of compliance personnel?
  4. Have there been specific examples of actions taken (g., promotions or awards denied) as a result ofcompliance and ethics considerations?

These four questions basically breakdown into the following continuum: (1) Assessment, (2) Analysis, (3) Implementation; and (4) Monitoring.

Incentive program assessment. Here you need to review your corporate incentive program for all employees, most particularly the discretionary bonus program but also your non-financial incentives such as promotion. Is your bonus program only related to individual sales, division sales or other similar metric or overall company performance? You can begin with some questions suggested by the ECCP: What role does the compliance function have in designing and awarding financial incentives at senior levels of the organization? Has the company evaluated whether commercial targets are achievable if the business operates within a compliant and ethical manner?

If you do not have any component for doing business ethically and in compliance, your entire compliance program is probably falling short at this point. You should also see if this is a query for promotion and not simply does an employee.

Incentive program analysis. Here you need to see what perverse incentives may exist in your organization. Obviously if meeting your target numbers is the sole criteria, your program is once again falling short. On the promotion front, you need to analyze patterns of promotion to (1) see if any employees with ethical or compliance program violations have been promoted; and (2) also determine if employees are promoted simply for NOT have any ethical violations. This would lead to a review of whether or not promoted employees have been actively participated in improving or maintaining a culture of compliance. How does the company incentivize compliance and ethical behavior? What percentage of executive compensation is structured to encourage enduring ethical business objectives?

Incentive program implementation. After implementation of the incentive program, it must be monitored. The ECCP suggests an inquiry into the following area: Has the company considered the impact of its financial rewards and other incentives on compliance? Additionally, what role, if any, did the corporate compliance function have in advising on the bonus program or participating in setting the bonus and promotion structures?

Incentive program monitoring. Here there needs to be ongoing monitoring of the incentive program, including has the company ensured effective management of the incentive program? The ECCP suggests a review of how much compensation has in fact been impacted (either positively or negatively) on account of compliance-related activities?

Join me tomorrow where I take a deep dive into discipline or the new formulation, “consequence management.”

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Compliance Into the Weeds

Updated DOJ Mandate on Clawbacks

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 explore a subject. In this episode, Matt and I dive into the hot topic of clawbacks, focusing on Deputy Attorney General Lisa Monaco’s new pilot program and Kenneth Polite’s take on prosecutorial discretion for organizations. Our hosts explore the opportunities for corporate compliance and HR personnel for clawback solutions and the use of the Federation Corrupt Practices Act (FCPA). They also discuss the need for a thorough documentation of personnel involved with and/or accused of illegal conduct and the potential costs to shareholders. Bottom line: Tom Fox and Matt Kelly are here to take you on a deep dive into the complexities of clawbacks and help organizations get compliant and stay compliant.

Key Highlights:

Prosecutorial Discretion and Credit [00:05:24]

Implications of the Foreign Corrupt Practices Act on Corporate Compliance and HR [00:09:41]

The Mathematics of Corporate Policy Development and Management [00:13:59]

Corporate Compliance and the Foreign Corrupt Practices Act [00:17:47]

Balancing Compliance and Risk in Business Practices [00:21:49]

 Notable Quotes:

1.     “It is part of the department’s larger effort to hold individuals more accountable and to have companies be participants in that project and to have companies embrace the culture of compliance; how would you hold individuals accountable if you’re the company, you’d have that clawback clause over their head, and then you would now have more incentive to use it, which is not necessarily an easy thing.”

2.     “What we expect companies that use programs to address not only employees who engaged and wrongdoing a connection with conduct under investigation, but also those who had supervisory authority over the employees or business area engaged in in the misconduct and knew of or were willfully blind to the misconduct.”

3.     “You must have the clawback policies in place at the time of resolution, then get a reserve credit for those clawback compensation moneys that you must successively claw back within the term of the resolution.”

4.     “If you try to recoup the compensation and fail, you’ll still be eligible for up to 25 percent of whatever you were trying to recoup.”

 Resources

Matt in Radical Compliance

Tom in FCPA Compliance and Ethics Blog

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Blog

The Week That Was in Compliance – Clawbacks

We are in the midst of a multipart review of last week’s speeches from the Department of Justice (DOJ) at the recently concluded ABA’s 38th Annual National Institute on White Collar Crime, held in Miami. Compliance professionals, white collar defense lawyers and indeed corporate executives will be talking about the past week in Miami for many moons to come. The speeches were made by Deputy Attorney General Lisa Monaco (2023 Monaco Speech) and Assistant Attorney General Kenneth A. Polite (Polite Speech) and they previewed a number of initiatives by the DOJ which every compliance professional will need to study in some detail. These new initiatives included:

The Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks

Evaluation of Corporate Compliance Programs (ECCP)

Revised Memorandum on Selection of Monitors in Criminal Division Matters

Over this series, I will be taking a deep dive into these speeches and new Evaluation of Corporate Compliance Program, Monitor Selection and Pilot Program on Incentives and Clawbacks. Today we take a deep dive into those portions of the Monaco and Polite Speeches which dealt with clawbacks or in the terminology of the ECCP-consequence management.

Monaco Speech

DAG Monaco discussed the development of the clawback policy to promote “innovative approaches to compensation” which would “shift the burden of corporate malfeasance away from uninvolved shareholders onto those more directly responsible.” She believes “Companies should ensure that executives and employees are personally invested in promoting compliance” as “nothing grabs attention or demands personal investment like having skin in the game, through direct and tangible financial incentives.” This led the Criminal Division to “develop guidance, guidance on how to reward corporations with compliance-promoting compensation programs.”

The clawback initiative has two parts. Monaco said, “First, every corporate resolution involving the Criminal Division will now include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system. Second is the creation of a 3-year pilot program under which the “Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.””

Finally, the DOJ has added some real benefits for companies which follow these prescripts. First is that any company which resolves a Foreign Corrupt Practices Act (FCPA) violation will “pay the applicable fine, minus a reserved credit equaling the amount of compensation the company is attempting to claw back from culpable executives and employees.” Additionally, “If the company succeeds and recoups compensation from a responsible employee, the company gets to keep that clawback money — and also doesn’t have to pay the amount it recovered.” Finally, if the company’s efforts at clawbacks are not successful or completed during the pendency of the investigation up to the settlement “the pilot program will also ensure that those who pursue clawbacks in good faith but are unsuccessful are still eligible to receive a fine reduction.” All of these efforts are designed to “shift the burden of corporate wrongdoing away from shareholders, who frequently play no role in the misconduct, onto those directly responsible.” Monaco concluded, “We intend this program to encourage companies who do not already factor compliance into compensation to retool their programs and get ahead of the curve.”

Polite Speech

 As expected, Polite provided more detail on the new clawback initiative. He said, “As to clawbacks: for companies that fully cooperate with our investigation and timely and appropriately remediate the misconduct, they may receive an additional fine reduction if the company has implemented a program to recoup compensation and uses that program. We expect companies that use these programs to address not only employees who engaged in wrongdoing in connection with the conduct under investigation, but also those who had supervisory authority over the employees or business area engaged in the misconduct, and knew of, or were willfully blind to, the misconduct.” (emphasis mine)

Expanding on the benefits for an organization, he stated, “If the company meets these factors and – in good faith – has initiated the process to recover such compensation at the time of resolution, our prosecutors will accord an additional fine reduction equal to the amount of any compensation that is recouped within the resolution term.” Finally, “if a company’s good faith effort is unsuccessful by the time the resolution term ends, our prosecutors will have discretion to accord a fine reduction of up to 25% of the amount of compensation that has been sought.”

Polite did leave room for companies to weigh a variety of factors in bringing a clawback claim. He noted, “We are not trying to incentivize waste. To the contrary, companies should make an assessment about the potential cost to shareholders and prospect of success of clawback litigation, given any applicable laws, and weigh it against the value of recoupment – and proceed in accordance with their stated corporate policies on executive compensation. This Pilot Program will be in effect for three years, allowing us to gather data and assess its effectiveness and also aid other components and offices in considering this important issue.”

As a recovering trial lawyer, I know that any litigation is always fraught with unknowns, both known and unknown. Given the imbroglio involving the DOJ and Cognizant Technologies Solutions over the DOJ prosecution of former executives, the road to any successful clawback will be fraught with peril. Additionally, it is not clear how far companies or the DOJ will push for clawbacks from “those who had supervisory authority over the employees or business area engaged in the misconduct.” If scope creep comes in it could be a wide group.

Join me tomorrow as I begin an exploration of the updated Evaluation of Corporate Compliance Programs.

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31 Days to More Effective Compliance Programs

One Month to More Effective Compliance for Business Ventures – JV Due Diligence

When you bring two entities together to operate jointly, there are several difficult issues to analyze. For the U.S. company operating under the FCPA, there must be an adequate business justification for a JV with a specific partner, all in writing and approved by an appropriate level of the organization. This is where the due diligence process comes into play. The due diligence process should be built on principles similar to those involving third parties. The procedure should be robust, documented, and address all potential risks. A company should use its due diligence review of the JV partner to properly assess and uncover corruption risks. Using this due diligence and its evaluation, you can move to contractual clauses, certifications, representations, and warranties from a JV partner or insist on other remedial measures to minimize risk exposure.

A U.S. business looking to engage a JV partner must consider the people who make up its JV partner. As you will have to mesh what may be two very different cultures and understandings of compliance, it is important to assess how your potential JV partner will take these obligations before rather than after you ink the JV agreement.

Three key takeaways:

  1. JV’s due diligence must focus on the unique risks.
  2. Ask for a detailed list of information from your potential JV partner.
  3. Be sure to do the onsite investigation of your potential JV partner.