Tag: root cause analysis

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Ten Top Lessons from Recent FCPA Settlements – Lesson No. 4, Start with a Root Cause Analysis

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 provide insight for the compliance professional into what the DOJ expects in a best practices compliance program on an ongoing basis.

Over a 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 4, Root Cause, Risk Assessment, and Gap Analysis. Your remediation should begin with a root cause analysis. From there, move on to a risk assessment and gap analysis, and then you are ready to start your complete remediation.

SAP

The SAP Deferred Prosecution Agreement (DPA) laid out the best example of how this works in practice. The DPA reported extensive remediation by SAP, and the information provided in the DPA is instructive for every compliance professional. SAP engaged in a wide range of remedial actions. It all started with a root cause analysis. Root Cause analysis was enshrined in the FCPA Resource Guide, 2nd edition, as one of the Hallmarks of an Effective Compliance Program. It stated, “The truest measure of an effective compliance program is how it responds to misconduct. Accordingly, for a compliance program to be truly effective, it should have a well-functioning and appropriately funded mechanism for the timely and thorough investigations of any allegations or suspicions of misconduct by the company, its employees, or agents. An effective investigation’s structure will also have an established means of documenting the company’s response, including any disciplinary or remediation measures taken.”

This means a company should respond to the specific incident of misconduct that led to the FCPA violation. This means your organization “should also integrate lessons learned from misconduct into the company’s policies, training, and controls. To do so, a company will need to analyze the root causes of the misconduct to timely and appropriately remediate those causes to prevent future compliance breaches.” The SAP DPA noted that SAP engaged in the following steps based on these factors:

1. Conducted a root cause analysis of the underlying conduct, then remediated those root causes through enhancement of its compliance program;
2. Conducted a gap analysis of internal controls, remediating those found lacking;
3. Undertook a “comprehensive risk assessment focusing on high-risk areas and controls around payment processes and enhancing its regular compliance risk assessment process”;
4. SAP documented using “comprehensive operational and compliance data” in its risk assessments.

In addition to having a mechanism for responding to the specific incident of misconduct, the company’s compliance program should also integrate lessons learned from any misconduct into the company’s policies, training, and controls on a go-forward basis. To do so, a company will need to analyze the root causes of the misconduct and remediate those causes promptly and appropriately to prevent future compliance breaches. This SAP did it during its remediation phase.

Albemarle

Albemarle also received credit “because it engaged in extensive and timely remedial measures.” This remedial action began based on the company’s root cause analysis of its FCPA violations.
This root cause analysis led to a risk assessment, which led to remediation. All of 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.

ABB

ABB also did an excellent job in its remedial efforts. According to the ABB Plea, ABB “engaged in extensive remedial measures, including hiring experienced compliance personnel and following a root-cause analysis of the conduct,” which led to the FCPA enforcement action. More on the ABB remediation later.

Each entity worked diligently to rebuild its compliance programs from the ground up. Whatever the faults of their prior compliance programs, each company was quite diligent in revamping their compliance regimes. While each company builds out a program based on its own risk, there is quite a bit of guidance you can draw from if your company finds itself in this position.

Here, the DOJ communicates that your remedial measures should start with a root cause analysis of the FCPA violation. From there, move to a risk assessment and internal control gap analysis to create a clear risk management strategy.

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31 Days to More Effective Compliance Programs

31 Days to a More Effective Compliance Program: Day 31 – Using a Root Cause Analysis for Remediation

The 2023 ECCP re-emphasized the need for both performing a root cause analysis but equally importantly using it to remediate your compliance program. It stated, “a hallmark of a compliance program that is working effectively in practice is the extent to which a company is able to conduct a thoughtful root cause analysis of misconduct and timely and appropriately remediate to address the root causes.” It went on to state, what additional steps the company has taken “that demonstrate recognition of the seriousness of the misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risk.”

When you step back and consider what the DOJ was trying to accomplish with its 2023 ECCP, it becomes clear what the DOJ expects from the compliance professional. Consider the structure of your compliance program and how it inter-relates to your company’s risk profile. When you have a compliance failure, use the root cause analysis to think about how each of the structural elements of your compliance program could impact how you manage and deal with that risk.

 Three key takeaways:

1. The key to using a root cause analysis is objectivity and independence.

2. The critical element is how did you use the information you developed in the root cause analysis?

3. The key is that after you have identified the causes of problems, consider the solutions that can be implemented by developing a logical approach, using data that already exists in the organization.

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Using a Root Cause Analysis for Remediation

The 2023 ECCP re-emphasized the need for both performing a root cause analysis but equally importantly using it to remediate your compliance program. It stated, “a hallmark of a compliance program that is working effectively in practice is the extent to which a company is able to conduct a thoughtful root cause analysis of misconduct and timely and appropriately remediate to address the root causes.”

It went on to state, what additional steps the company has taken “that demonstrate recognition of the seriousness of the misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risk”).” The following questions were then posed:

Root Cause Analysis—What is the company’s root cause analysis of the misconduct at issue? Were any systemic issues identified? Who in the company was involved in making the analysis?

Prior Weaknesses—What controls failed? If policies or procedures should have prohibited the misconduct, were they effectively implemented, and have functions that had ownership of these policies and procedures been held accountable?

You should begin with the question of who should perform the remediation; should it be an investigator or an investigative team which were a part of the root cause analysis? Jonathan Marks, believes the key is both “independence and objectivity.” It may be that an investigator or investigative team is a subject matter expert and “therefore more qualified to get that particular recourse”. Yet to perform the remediation, the key is to integrate the information developed from the root cause analysis into the solution.

Marks further noted that the company may also have deficiencies in internal controls. More importantly, the failure to remediate gaps in internal controls “provides the opportunity for additional errors or misconduct to occur, and thus could damage the company’s credibility with regulators” by allowing the same or similar conduct to reoccur. Finally, with both the 2023 ECCP and FCPA Corporate Enforcement Policy, the DOJ has added its voice to prior SEC statements that regulators “will focus on what steps the company took upon learning of the misconduct, whether the company immediately stopped the misconduct, and what new and more effective internal controls or procedures the company has adopted or plans to adopt to prevent a recurrence.”

As required under the 2023 ECCP, from the regulatory perspective, the critical element is how did you use the information you developed in the root cause analysis? Every time you see a problem as a CCO, you should perform a root cause analysis. Was something approved or not approved before the untoward event happened? Was any harm was done? Why or why not? Why did that system fail? Was it because the person who is doing the approval was too busy? Was it because people didn’t understand? It is in answering these and other questions which have been developed through a root cause analysis that you can bring real value and real solutions to your compliance programs.

The key is that after you have identified the causes of problems, consider the solutions that can be implemented by developing a logical approach, using data that already exists in the organization. Identify current and future needs for organizational improvement. Your solution should be a repeatable, step-by-step processes, in which one process can confirm the results of another. Focusing on the corrective measures of root causes is more effective than simply treating the symptoms of a problem or event and you will have a much more robust solution in place. This is because the solution(s) are more effective when accomplished through a systematic process with conclusions backed up by evidence.

When you step back and consider what the DOJ was trying to accomplish with its 2023 ECCP, it becomes clear what the DOJ expects from the compliance professional. Consider the structure of your compliance program and how it inter-relates to your company’s risk profile. When you have a compliance failure, use the root cause analysis to think about how each of the structural elements of your compliance program could impact how you manage and deal with that risk.

Categories
Blog

What is a Root Cause Analysis?

One of the biggest changes in the 2020 FCPA Resource Guide, 2nd edition, is the addition of a new Hallmark, entitled, Investigation, Analysis, and Remediation of Misconduct, which reads in full:

The truest measure of an effective compliance program is how it responds to misconduct. Accordingly, for a compliance program to be truly effective, it should have a well-functioning and appropriately funded mechanism for the timely and thorough investigations of any allegations or suspicions of misconduct by the company, its employees, or agents. An effective investigations structure will also have an established means of documenting the company’s response, including any disciplinary or remediation measures taken.

In addition to having a mechanism for responding to the specific incident of misconduct, the company’s compliance program should also integrate lessons learned from any misconduct into the company’s policies, training, and controls on a go-forward basis. To do so, a company will need to analyze the root causes of the misconduct to timely and appropriately remediate those causes to prevent future compliance breaches.

There are many interesting aspects to this Hallmark, not the least that it begins with “The truest measure of an effective compliance program is how it responds to misconduct.” This builds upon the language found in the “Confidential Reporting and Internal Investigations Hallmark, which stated, “once an allegation is made, companies should have in place an efficient, reliable, and properly funded process for investigating the allegation and documenting the company’s response,”. Now beyond being properly funded, you must have a “well-functioning mechanism” for the “timely and thorough investigations of any allegations or suspicions of misconduct by the company, its employees, or agents.”

This clearly mandates that once an allegation or even suspicion comes to the attention of compliance, it must be properly triaged, your investigation protocol should kick in with a detailed and effective investigation that is completed in a reasonable time and provide a response to the investigative findings. Moreover, an investigation is not the ending point and should be followed with a robust root cause analysis. This builds upon several sources.

The 2023 ECCP also raised the following questions under “Root Cause Analysis—What is the company’s root cause analysis of the misconduct at issue? Were any systemic issues identified? Who in the company was involved in making the analysis?”

Well known fraud investigator Jonathan Marks, partner at BDO, defined a root cause analysis as “research based approach to identifying the bottom line reason of a problem or an issue; with the root cause, not the proximate cause the root cause representing the source of the problem.” He contrasted this definition with that of a risk assessment which he said “is something performed on a proactive basis based on various facts. A root cause analysis analyzes a problem that (hopefully) was previously identified through a risk assessment.” He went on to note, “Root cause analysis is a tool to help identify not only what and how an event occurred, but also why it happened. When we are able to determine why an event or failure occurred, we can then recommend workable corrective measures that deter future events of the type observed.”

However, there is no one formula for performing a root cause analysis. One protocol, articulated by Health COMPass, advocates a four-step process which includes:

Step 1: Identify possible causal factors. Using the incident(s) to identify causal factors—things that cause or contribute to the compliance failure. It includes asking such questions as:

• What sequence of events leads to the problem?

• What conditions allow the problem to occur? [e.g., traditional values and practices]

• What problems co-exist with the central problem and might contribute to it? [e.g., lack of health facilities]

• Identify as many causal factors as possible. Start with the problem and brainstorm causal factors for that problem by asking “Why?” The root cause analysis team can also ask themselves (based on their own experience) and stakeholders “why” or “so what” questions to identify causal factors.

Step 2: Identify the root cause. To find root causes—the primary sources of the compliance violation—start with the causal factors and ask why. Root causes are seldom found in the most obvious causes. It is important to dig deeper and continue to ask “Why?” until nearly all responses have been exhausted or roots that seem important to address are reached. There are several useful methods for identifying root causes. One is to construct a root cause tree. Start with the problem and brainstorm causal factors for that problem by asking why. Connect them in a logical cause and effect order until arriving at the root of the problem.

Step 3: Identify communication challenges. Now ask which root causes are challenges that compliance can and should address and which are not. Share findings about other root causes with local authorities and leaders or organizations that might be able to address them.

Step 4: Prioritize compliance challenges. If root cause analysis identifies more than one compliance failure, decide which failure to address first. Rank root causes in order, starting with the main cause. To determine rank, consider:

• The potential impact of addressing the compliance failure. The greater the potential impact, the more important it is to address.

• How difficult it will be to reach the audience associated with the compliance failure.

• The mandate attached to the funding.

• If more than one causal factor is linked to the root cause. When a root cause is the source of multiple causal factors, it indicates that addressing the root cause can have far-reaching effects.

Another approach articulated by Marks is the Five Why’s approach. As he explained “Early questions are usually superficial, obvious; the later ones more substantive.” Borrowing from Six Sigma, the folks at iSixSigma.com believe this approach contemplates that “By repeatedly asking the question “Why” (five is a good rule of thumb), you can peel away the layers of symptoms which can lead to the root cause of a problem. Very often the ostensible reason for a problem will lead you to another question. Although this technique is called “Five Whys,” you may find that you will need to ask the question fewer or more times than five before you find the issue related to a problem.”

To use this approach, iSixSigma.com suggests the following protocol. Begin by writing down the specific problem, which assists you to formulate the issue or problem. Then begin asking, “Why?” Ask why the compliance failure occurred write the answer down below the problem. But do not stop there if this first response does not “identify the root cause of the problem that you wrote down in Step 1, ask why again and write that answer down. Loop back to step 3 until the team is in agreement that the problem’s root cause is identified. Again, this may take fewer or more times than five whys.”

Ultimately, performing a root cause analysis is not simply a matter of sitting down and asking a multitude of questions. You need to have an operational understanding of how a business operates and how they have developed their customer base. Overlay the need to understand what makes an effective compliance program, with the skepticism an auditor should bring so that you do not simply accept an answer that is provided to you, as you might in an internal investigation. As Marks noted, “a root cause analysis is not something where you can just go ask the five whys. You need these trained professionals who really understand what they’re doing.”

Categories
31 Days to More Effective Compliance Programs

Day 31 – Using a Root Cause Analysis for Remediation

The 2020 Update re-emphasized the need to perform a root cause analysis and, equally importantly, use it to remediate your compliance program. It stated, “a hallmark of a compliance program that works effectively in practice is the extent to which a company can conduct a thoughtful root cause analysis of misconduct and timely and appropriately remediate to address the root causes.”
It went on to state what additional steps the company has taken “that demonstrate recognition of the seriousness of the misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risk”).”

The key is that after you have identified the causes of problems, consider the solutions that can be implemented by developing a logical approach using data already in the organization. Identify current and future needs for organizational improvement. Your solution should be a repeatable, step-by-step process in which one method can confirm the results of another. Focusing on the corrective measures of root causes is more effective than simply treating the symptoms of a problem or event, and you will have a much more robust solution in place. This is because the solution(s) are more effective when accomplished through a systematic process with conclusions backed up by evidence.

When you step back and consider what the DOJ was trying to accomplish with its 2020 Update, it becomes clear what the DOJ expects from the compliance professional. Consider the structure of your compliance program and how it inter-relates to your company’s risk profile. When you have a compliance failure, use the root cause analysis to think about how each of the structural elements of your compliance program could impact how you manage and deal with that risk.

Three key takeaways:

  1. The key is objectivity and independence.
  2. The critical element is how you used the information you developed in the root cause analysis.
  3. The key is that after you have identified the causes of problems, consider the solutions that can be implemented by developing a logical approach using data already in the organization.
Categories
31 Days to More Effective Compliance Programs

Day 30 – What is a Root Cause Analysis?

One of the most significant changes in the 2020 FCPA Resource Guide, 2nd edition, was the addition of a new Hallmark entitled “Investigation, Analysis, and Remediation of Misconduct,” which reads in full:

The truest measure of an effective compliance program is how it responds to misconduct. Accordingly, for a compliance program to be truly effective, it should have a well-functioning and appropriately funded mechanism for the timely and thorough investigations of any allegations or suspicions of misconduct by the company, its employees, or agents. An effective investigations structure will also have an established means of documenting the company’s response, including any disciplinary or remediation measures taken.

In addition to having a mechanism for responding to the specific incident of misconduct, the company’s program should also integrate lessons learned from any misconduct into the company’s policies, training, and controls. To do so, a company will need to analyze the root causes of the misconduct to timely and appropriately remediate those causes to prevent future compliance breaches.

Ultimately, performing a root cause analysis is not simply sitting down and asking many questions. It would be best if you had an operational understanding of how a business operates and how they have developed its customer base. Overlay the need to understand what makes an effective compliance program with the skepticism an auditor should bring so that you do not simply accept an answer provided to you, as you might in an internal investigation. Marks noted that “a root cause analysis is not something where you can ask the five whys. You need these trained professionals who understand what they’re doing.”

Three key takeaways:

  1. A root cause analysis is required if you have a reportable compliance failure.
  2. There is no one process for performing a root cause analysis. You should select the one which works for you and follow it.
  3. To properly perform a root cause analysis, you need trained professionals who understand what they’re doing.
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Innovation in Compliance

Corporate Case Management in the Era of the DoJ’s Monaco Memo: Episode 5 – Data Drives Prevention

Welcome to a special podcast series, Corporate Case Management in the Era of the DoJ’s Monaco Memo, sponsored by i-Sight Software Solutions. Over this five-part podcast series, I visit with Jakub Ficner, Director of Partnership Development at i-SIght. This series considers how the Monaco Doctrine and Monaco Memo have impacted compliance in several key areas. In this concluding Part 5, we consider how data and data analytics are even more critical after the Monaco Memo and how using data can drive prevention and detection.

Highlights include:

  • How does ongoing monitoring lead to continuous improvement, and how does it relate to investigations?
  • How your investigative protocol can supplement ongoing monitoring.
  • How the outlays for your investigative process are a critical step going forward.
  •  Employing root cause analysis, corrective actions, and preventative action recommendations can provide valuable data from a holistic perspective.

For more information, check out i-Sight here.

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31 Days to More Effective Compliance Programs

Day 31 | Using a root cause analysis for remediation


The 2020 Update re-emphasized the need for both performing a root cause analysis but equally importantly using it to remediate your compliance program. It stated, “a hallmark of a compliance program that is working effectively in practice is the extent to which a company is able to conduct a thoughtful root cause analysis of misconduct and timely and appropriately remediate to address the root causes.”
It went on to state, what additional steps the company has taken “that demonstrate recognition of the seriousness of the misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risk”).”
The key is that after you have identified the causes of problems, consider the solutions that can be implemented by developing a logical approach, using data that already exists in the organization. Identify current and future needs for organizational improvement. Your solution should be a repeatable, step-by-step processes, in which one process can confirm the results of another. Focusing on the corrective measures of root causes is more effective than simply treating the symptoms of a problem or event and you will have a much more robust solution in place. This is because the solution(s) are more effective when accomplished through a systematic process with conclusions backed up by evidence.
When you step back and consider what the DOJ was trying to accomplish with its 2020 Update, it becomes clear what the DOJ expects from the compliance professional. Consider the structure of your compliance program and how it inter-relates to your company’s risk profile. When you have a compliance failure, use the root cause analysis to think about how each of the structural elements of your compliance program could impact how you manage and deal with that risk.
Three key takeaways:

  1. The key is objectivity and independence.
  2. The critical element is how did you use the information you developed in the root cause analysis?
  3. The key is that after you have identified the causes of problems, consider the solutions that can be implemented by developing a logical approach, using data that already exists in the organization.
Categories
31 Days to More Effective Compliance Programs

Day 30 | What is a root cause analysis?


One of the biggest changes in the 2020 FCPA Resource Guide is the addition of a new Hallmark, entitled “Investigation, Analysis, and Remediation of Misconduct”, which reads in full:
The truest measure of an effective compliance program is how it responds to misconduct. Accordingly, for a compliance program to be truly effective, it should have a well-functioning and appropriately funded mechanism for the timely and thorough investigations of any allegations or suspicions of misconduct by the company, its employees, or agents. An effective investigations structure will also have an established means of documenting the company’s response, including any disciplinary or remediation measures taken.
In addition to having a mechanism for responding to the specific incident of misconduct, the company’s program should also integrate lessons learned from any misconduct into the company’s policies, training, and controls. To do so, a company will need to analyze the root causes of the misconduct to timely and appropriately remediate those causes to prevent future compliance breaches.
Ultimately, performing a root cause analysis is not simply a matter of sitting down and asking a multitude of questions. You need to have an operational understanding of how a business operates and how they have developed their customer base. Overlay the need to understand what makes an effective compliance program, with the skepticism an auditor should bring so that you do not simply accept an answer that is provided to you, as you might in an internal investigation. As Marks noted, “a root cause analysis is not something where you can just go ask the five whys. You need these trained professionals who really understand what they’re doing.”
Three key takeaways:

  1. A root cause analysis is now required if you have a reportable compliance failure.
  2. There is no one process for performing a root cause analysis. You should select the one which works for you and follow it.
  3. To properly perform a root cause analysis, you need trained professionals who really understand what they’re doing.