In this episode I visit with white collar defense and Qui Tam specialist Joel Androphy about prosecution of whistleblower claims at the federal and state level. Androphy explains what type of evidence is required to file such a claim, have the government take over the action and what a whistleblower may expect. It is a fascinating view from a whistleblower expert counsel at the state and federal level. Joel Androphy can be reached at jandrophy@bafirm.com. For more information about his practice areas, including whistleblower claims, False Claims Act lawsuits and Qui Tam claims; check out the firm website at bafirm.com.
One of the issues in any compliance program is the compensation paid to a third party as FCPA exposure arises when companies pay money - either directly or indirectly - to fund bribe payments. In the traditional intermediary scenario, the company funnels money to the agent or consultant, who then passes on some or all of it to the bribe recipient. Often, the payment is disguised as compensation to the intermediary, and some portion is redirected for corrupt purposes.
When companies grant distributors uncommonly steep discounts, bribes can result either: 1) because the distributor is instructed by the company to use the excess amounts to fund corrupt payments; or 2) because the distributor pays bribes on its own, without the express direction or implicit suggestion from the company to do so, in an effort to gain some business advantage. The 2012 FCPA Guidance, it noted that common red flags associated with third parties include “unreasonably large discounts to third-party distributors”. The distributor enforcement cases offer lessons to combat the scenario, which is where legitimate companies require assistance.
How can risk that distributors present be managed? One mechanism is to install a distributor discount policy and monitoring system tailored to the company’s operational structure. In virtually every business, there exists a range of standard discounts granted to distributors. Under the approach recommended here, discounts within that range may be granted without the need for further investigation, explanation or authorization (absent, of course, some glaring evidence that the distributor intends use even the standard cost/price delta to fund corrupt payments).
Where the distributor requests a discount above the standard range, however, the policy should require a legitimate justification. Evaluating and endorsing that justification requires three steps: (1) relevant information about the contemplated elevated discount must be captured and memorialized; (2) requests for elevated discounts should be evaluated in a streamlined fashion, with tiered levels of approval (higher discounts require higher ranking official approval); and (3) elevated discounts are then tracked, along with their requests and authorizations, in order to facilitate auditing, testing and benchmarking. This process also works to more fully operationalize your compliance regime as it requires multiple and increasingly upper levels of management involvement, approval and oversight.
Capturing and Memorializing Discount Authorization Requests
Through whatever means are most efficient, a discount authorization request (“DAR”) template should be prepared. While remaining mindful of the need to strike a balance between the creation of unnecessary red tape and the need to mitigate risk, the DAR template should be designed to capture a given request and allow for an informed decision about whether it should be granted. Because the specifics of a DAR are critical to evaluating its legitimacy, it is expected that the employee submitting the DAR will provide details about how the request originated (e.g., whether as a request from the distributor or a contemplated offer by the company) as well as explain the legitimate justification for the elevated discount (e.g, volume-based incentive). In addition, the DAR template should be designed to identify gaps in compliance that may otherwise go undetected (e.g., confirmation that the distributor has executed a certification of FCPA compliance).
Evaluation and Authorization of DARs
Channels should be created to evaluate DARs submitted. The precise structure of that system will depend on several factors, but ideally the goal should be to allow for tiered levels of approval. Usually, three levels of approval are sufficient, but this can expanded or contracted as necessary. Ultimately, the greater the discount contemplated, the more scrutiny the DAR should receive. Factors to be considered in constructing the approval framework include the expected volume of DARs and the current organizational structure. The goal is to ensure that all DARs are vetted in an appropriately thorough fashion without negatively impacting the company’s ability to function efficiently. It also mandates the operationalization of this compliance issue into multiple disciplines within your organization.
Tracking of DARs
Once the information gathering, review and approval processes are formulated, there must be a system in place to track, record and evaluate information relating to DARs, both approved and denied. This captured data can provide invaluable insight into FCPA compliance and beyond. By tracking the total number of DARs, companies will find themselves better able to determine where and why discounts are increasing, whether the standard discount range should be raised or lowered, and gauge the level of commitment to FCPA compliance within the company (e.g., confirming the existence of a completed and approved DAR is an excellent objective measure for internal audit to perform as part of its evaluation of the company’s FCPA compliance measures). This information, in turn, leaves these companies better equipped to respond to government inquiries down the road.
Rethinking approaches to evaluating distributor activities is but one of the ways that the increased number of enforcement actions, 2012 FCPA Guidance and Justice Department’s Evaluation of Corporate Compliance Programs document have provided insight into how the government interprets and enforces the FCPA. This information, in turn, allows companies to get smarter about FCPA compliance. With a manageable amount of forethought, companies who rely on distributors can create, install and maintain systems which allow them to spend fewer resources to more effectively prevent violations. Moreover, these systems generate tangible proof of a company’s genuine commitment to FCPA compliance, by more fully operationalizing this aspect of their compliance program.
Many companies have been involved in FCPA enforcement actions because of distributors. This sales side channel does not receive the focus equal to that of commissioned sales agents. Yet it can present an equally large compliance risk. By using this DAR approach, you will have created a well-thought out process which will operationalize your compliance program around distributor compensation, in a manner which documents your decision-making calculus.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
At some point, you will be required to terminate a third-party and there will be multiple legal, compliance and business issues to navigate going forward. If you are stuck doing it in the middle of a Foreign Corrupt Practices Act (FCPA) or Bribery Act investigation, such as Airbus is currently under with the UK Serious Fraud Office (SFO), there may well be some tension to do so and do so quickly. If you have not thought through this issue and created a process to follow before it all hits the fan, you may well be in for a very tough road.
The key theme in termination is planning. The Office of Comptroller of the Currency, OCC Bulletin 2013-29, said that regarding third-party termination, a bank should develop a “contingency plan to ensure that the bank can transition the activities to another third party, bring the activities in-house, or discontinue the activities when a contract expires, the terms of the contract have been satisfied, in response to contract default, or in response to changes to the bank’s or third party’s business strategy.”
In an article entitled “Breaking Up Is Hard To Do”, Carol Switzer related how to avoid pain by planning for the end of a third-party relationship. She said it all should begin with “an exit strategy, a transition plan or a pre-nup—whatever the title, it’s best to begin by planning for the end which, in the case of business at least, will always eventually come. Whether due to contract completion or material breach, turning over responsibility to another party, or abandonment of the contracted activity altogether, contract termination is an inevitable phase in the third-party relationship lifecycle.” Planning for the end is important because, “The more long term and layered the relationship, the more difficult it will be to disentangle. The deeper the third-party is embedded in and uses the confidential information of the company and its customers, the greater the risks presented by failing to design a smooth transition process.”
It should originate with clearly specified contract termination rights but that is only the starting point, “To work out a smooth transition, the plan must also include internal change management processes and policies, designated transition team members, contingencies, and adequate resources and time allowances.” Your corporate values must be protected by “clearly designating the disposition of shared intellectual property and infrastructure assets.” Next you need to think through your transition plan by “ensuring rights to hire or continue use of key contractor employees who have been servicing your account, arranging to bringing new contractors or internal managers up to speed, and filing any regulatory or other required notifications.” Finally, bear in mind that your reputation must be protected during this transition process “by controlling and planning for issuance of public statements and social media postings by terminated contractors or their employees, or the best laid transition plans may be for naught.”
You will also need to consider the business risks around the termination of a third-party, particularly on the sales side of your business. This may mean sitting down with a customer or group of customers to explain the reasons behind the termination. Obviously if your business team has not developed a relationship with the end-using customer, this can be a difficult and very problematic conversation.
Unless you are exiting a business sector or territory, you will need to replace the third-party. This means going through the entire five-step process with any potential sales agent or representative. Such planning needs to be built into your termination strategy. If the reason for termination is a contract violation or worse a FCPA violation, there may well be other notifications which are required, both internally and externally to government regulators. You have also been under some type of contractual nondisclosure language and so consultation with your legal counsel, once again both in-house and outside, may be required. Finally, never forgot the reputation damage by releasing such information, or conversely not disclosing it. Both sets of reasons may hurt your business reputation as well.
In addition to the above steps, there are some specific considerations you should take. In the area of data, data privacy and data accessibility, if a third-party has access to your network and systems, such access must be revoked. If your terminated third-party has physical data, you must plan for the return of your data to you in a format that is acceptable to you and is secure. If your data is confidential, you may want to require that it be returned in an encrypted format and via an encrypted channel. You should lay out the time frame for the return of any data.
Alternatively, you can specify that data be destroyed. If this is the route you take with your third-parties, it should be performed in a way which is secure so the data cannot be reconstructed at a later date, through the use of surreptitiously created backup or duplicate data. You should mandate the third-party provide to you a certificate of destruction that confirms the destruction of your data and the methods used for destruction. Information that must be retained should maintain the data protection requirements currently in place, or stronger if the applicable laws change during the time of retention.
Although rarely considered, the termination of a third-party relationship can be as important a step as any other in the management of the third-party lifecycle. While having the contractual right to terminate is a good starting point, it is only the starting point. You not only need to have a compliance and legal plan in place but a business plan as well. If you do not, the cost in both monetary and potential business reputation can be quite high.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
One area that has bedeviled Chief Compliance Officers (CCOs) and compliance practitioners is how to determine the return on investment (ROI) for your compliance program regarding third parties. While it is still clear that third parties are the greatest risk in Foreign Corrupt Practices Act (FCPA) enforcement actions, senior management often wants to know what is the monetary benefit to the company for this type of risk management.
When you couple the request for ROI with the recent Department of Justice (DOJ) mandate for the operationalization of your compliance program, as articulated in the Evaluation of Corporate Compliance Programs, it may seem like a doubly daunting task. However the requirement for operationalization of your compliance program actually lends itself to formulating ROI around the risk management of third parties. This is because if you move the third-party compliance into the organization as a business process, with a technological solution, the ROI becomes not only clearer but easier to calculate going forward.
I recently read a study by Forrester Research Inc., suggested an approach for the anti-corruption compliance practitioner. In this study, Forrester compared the user experience, leading to a finding of a positive ROI for the technology user around third-party risk management. I found the approach and methodology used persuasive and valuable for the compliance professional to consider in evaluating such a process in your organization.
Some of the key findings readily translate across for the anti-corruption compliance practitioner. The first area was in risk assessments of third parties. If you are able to provide a technological platform, you can enhance both the speed and efficiency of your risk assessments on an ongoing basis. The decrease in time it would take for each risk assessment, both in terms of length and compliance department man-hours will yield an immediate cost saving for your compliance function.
Consider just two of the steps required in the lifecycle management of third parties, the questionnaire and due diligence. Both steps can be not only labor intensive to complete and analyze but the cycles of time spend sending out a questionnaire, receiving a completed form and then inputting the information into a spreadsheet for manual analysis can be quite time consuming. It usually involves the basic tools of spreadsheets, interviews, Internet searches and additional questionnaires. By tailoring your questionnaire to the specific risk areas and using logical question design you can reduce confusion and therefore decrease the cycle of response time. Additionally, in the final step of managing the relationship there is often not only a dearth of data but usually the data is in such a siloed format that (1) it cannot be utilized between corporate functions and (2) there can be no meaningful comparison across the third parties. Through standardized questions and responses, this data can be compared across the spectrum of third parties.
In addition to the increased efficiency in the compliance portion of this analysis, by operationalizing your third-party risk management in this manner, you increase business efficiency by bringing in more dollars more quickly for third parties on the sales side. For third parties on the Supply Chain side, the efficiencies turn on your use of their products or services more quickly in business critical elements of your company. Simply put, approving third parties and incorporating them into your business cycle will not only save your money more quickly and efficiently but also make you money more quickly and efficiently.
Using a tool that incorporates Software-as-a-Service (SaaS) platform would also allow a more comprehensive review of data and information for several reasons. Firstly the various types of data is not siloed but stored in a centralized platform. Second, having this type of data allows for not only an ongoing review of each third-party but also allows you to review historical trends. This enables you to move from detection to prevention and possibly even delivery of a prescriptive solution before an issue arises to a full-blown FCPA violation. You would also be able to garner a better understanding of relationships across industry sectors and countries with a bigger picture look.
Obviously you will need to set the parameters for the risks to be assessed but more clearly in the FCPA they deal with third parties who are or who have, as owners, Politically Exposed Persons (PEPs), the inability to account for discretionary funds such as marketing or other expenses was seen in a recent FCPA enforcement action, payments to offshore locations or unusual commission or other payments tied 100% to sales. Not only would your company have more and greater visibility into such issues but the range of third parties you could monitor would increase, perhaps at an exponential rate. As with the cost savings of the initial risk assessment, there would be similar savings for ongoing monitoring in the area of greater efficiency and need for smaller headcount from the compliance function to perform such ongoing monitoring.
The speed and robustness of this database is a key element in operationalizing your compliance program in the area of third parties. The prevent component of any compliance regime is improved as you would have better visibility into potential non-compliant third parties which you may have to discharge. You would also have the ability to work with non-compliant third parties to remedy any issues before they become legal violations and then recommend extra monitoring as appropriate.
Using the above as a guide the ROI calculation would be something along the lines of the number total number of hours spent on each risk assessment x the total risk assessments performed x the hourly rate of the compliance professional performing the services. So if you spend 20 hours on 50 risk assessments and the hourly rate for your in-house compliance professional is $100, the ROI is $100,000. Now just think of what that number would be around third parties if the SC third parties runs into the thousands. Even with a round number of 1,000 for such third parties, your ROI increases to $2MM. Of course you have to subtract out the cost for any technological solution but with these types of efficiencies, your ROI will still be quite impressive.
There are a wide variety of other factors that could increase your ROI, as detailed in the Forrester report, which include renewal assessments, ongoing monitoring, increase in business efficiencies for both your organization and the third parties, which would all work to uplift your ROI. Most critically you would demonstrate the operationalization of your compliance program into the very fabric of your organization.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
Internal controls are a key tool to operationalize your third party risk management program. Initially, a compliance practitioner should perform an analysis of any third party representative to provide insight into the pattern of dealings with such third parties and, therefore, the areas where additional controls should be considered. The basic internal controls, that should be a part of any financial controls system, include some or all of the following:
There should also be internal control needs based on activities with third party representatives. These could include some or all of the following internal controls:
While that may appear to be an overly exhaustive list, there were four significant controls the compliance practitioner implement initially. They include: (1) Delegation of Authority (DOA); (2) Maintenance of the vendor master file; (3) Contracts with third parties; and (4) Movement of cash / currency.
A DOA should reflect the impact of corruption risk including both transactions and geographic location so that a higher level of approval for matters involving third parties and for fund transfers and invoice payments to countries outside the US would be required inside an organization. Often, a DOA is prepared without much thought given to FCPA risks. Unfortunately once a DOA is prepared it is not used again until it is time to update for personnel changes. Moreover, it is often not available, not kept current, and/or did not define authority in a way even the approvers could understand it. Therefore it is incumbent that the DOA be integrated into a company’s accounts payable (AP) processing system in a manner that ensures all high-risk vendor invoices receive the proper visibility. To achieve this you should identify the vendors within the vendor master file so payments are flagged for the appropriate approval BEFORE they are paid.
Furthermore if a DOA is properly prepared and enforced, it can be a powerful preventive tool for FCPA compliance. For example, consider a wire transfer of $X between company bank accounts in the US might require approval by the Finance Manager at the initiating location and one officer. However, a wire transfer of $X to the company’s bank account in Nigeria, could require approval by the Finance Manager, a knowledgeable person in the Compliance function, and one officer. In this situation, the DOA should specify who must give the final approval for engaging third parties. Moreover, the DOA should address replenishment of petty cash funds in countries outside the US, as well as approval of expense reports for employees who work outside the US (including those who travel from the US to work outside the US).
Some believe the vendor master file, can be one of the most powerful PREVENTIVE control tools largely because payments to fictitious vendors are one of the most common occupational frauds. The vendor master file should be structured so that each vendor can be identified not only by risk level but also by the date on which the vetting was completed and the vendor received final approval. There should be electronic controls in place to block payments to any vendor for which vetting has not been approved. Next manual controls are needed over the submission, approval, and input of changes to the vendor master file. These controls include verification that all vendors have been approved before their information (and the vendor approval date) is input into the vendor master. Finally, manual controls are also needed when “one time” vendors are requested, when a vendor name and/or vendor payment information changes are submitted.
Near and dear to my heart as a lawyer, contracts with third parties can be a very effective internal control which works to prevent nefarious conduct rather than simply as a detect control. I would caution that for contracts to provide effective internal controls, relevant terms of those contracts (commission rate, whether business expenses can be reimbursed, use of subagents, etc.,) should be extracted and available to those who process and approve vendor invoices. If there are nonconforming service descriptions, commission rates, etc., present in a contract such terms must be approved not only by the original approver but also by the person so delegated in the DOA Unfortunately contracts are not typically integrated into the internal control system. They are left off to the side on their own, usually gathering dust in the legal department file room.
One FCPA enforcement action was an excellent example of the lack of internal control over the disbursements of funds and movement of currency because you had the country manager delivering bags of cash to a government official to obtain or retain business. All situations where funds can be sent outside the US (AP computer checks, manual checks, wire transfers, replenishment of petty cash, loans, advances, etc.,) should be reviewed from a compliance risk standpoint. Further, within a company structure you need to identify the ways in which a country manager (or a sales manager, etc.,) could cause funds to be transferred to their control and to conceal the true nature of the use of the funds within the accounting system.
All wire transfers outside the US should have defined approvals in the DOA, and the persons who execute the wire transfers should be required to evidence agreement of the approvals to the DOA and wire transfer requests going out of the US should always require dual approvals. Lastly, wire transfer requests going outside the US should be required to include a description of proper business purpose.
Never forget that internal controls are in reality, simply good financial controls. The internal controls that he detailed for third party representatives in the compliance context will help to detect fraud, which could well lead to the prevention of bribery and corruption.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
Next I consider at how data analytics can be used to help detect or prevent bribery and corruption where the primary sales force used by a company is third parties. A clear majority of Foreign Corrupt Practices Act (FCPA) violations and related enforcement actions have come from the use of third parties. While sham contracting (i.e. using a third party to conduit the payment of a bribe) has lessened in recent years, there are related data analysis that can be performed to ascertain whether a third party is likely performing legitimate services for your company and is not a sham. There are several more complex analytics that can be run in combination to identify suspicious third parties, and some of the simplest can be to look for duplicate or erroneous payments.
A key to moving from detection to prevention is the frequency of review. It is common for organizations to periodically review a year or more of accounts payable invoices at one time for errors or overpayment. Changing this from a one-time annual or biannual event to something that is done daily or weekly dramatically improves the value of such internal controls. This more frequent, preventative analysis is integral to a foundation of third party audits. While many company perform periodic look-back audits, ongoing monitoring also works to accomplish the same queries on a daily or weekly basis. This allows organizations to find duplicate payments or overpayments after the invoice has been approved but prior to its disbursement. So instead of detecting a payment error three or six months after it is made, you prevent the money from leaving the company altogether.
Duplicate invoices are a favorite mechanism of fraudsters. Consider the following scenario, Invoice No. 955-TX, was paid for $10,597.95. Thirty days later the same vendor re-submitted the same invoice due to non-payment, but it was recorded by the payor organization without the hyphen between 955 and TX, consequently it was not detected by the system of payable controls. The problem is the second invoice had slightly different writing on the face of it, but it was for the same services and hence was a duplicate invoice. On the company side, both invoices were scanned into the company’s imaging system and queued for payment. Data analysis can locate such overpayments and identify a second payment should not be made because it is a match of one that had been previously approved.
Another analysis, which a compliance practitioner could compare using vendor name and other identifying information, for example address, country, data from a watch list such as Politically Exposed Persons (PEP) or Specially Designated National (SDN), to names and other identifying information on your vendor file. An inquiry could also be used to test in other ways such as if a vendor has the same surname as a vendor on the specially designated national terrorist list, or a politically exposed person.
Now suppose they share the same name as an elected official down in Brazil. How do we make sure that our vendor or broker is a different John Doe than the John Doe that is a politically exposed person in that country? It is only upon closer inspection where you can determine that the middle names are different and the ages are different, one of has an address is Brasilia and the other is in Sao Paulo. Without further inspection including other demographic information about your vendors, consultants or third parties and the comparing them to watch list individuals, such red flags are present but not cleared. That is what data analytics is designed to do, is to help you go from tens of thousands of “maybes” to a very small number of potential issues which need to be researched individually.
One of the important functions of any best practices compliance program is to not only follow the money but try to spot where pots of money could be created to pay bribes. Through comparison of invoices for similar items among similar vendors, data analytics uncover overcharges and fraudulent billings. Continual transaction monitoring and data analysis can prove its value through more frequent review, as individuals tend to perform better when they know they are being monitored.
The techniques used in transaction monitoring for suspicious invoices can be easily translated into data analysis for anti-corruption. Software allows a very large aggregation of suspicious payments not only by day or by month, but also by vendor or even by employee who may have keyed the invoices into your system. As these suspicious invoices begin to cluster by market, business unit or person a pattern forms which can be the basis of additional inquiry. That is the value of analytics. Analytics allows a compliance practitioner to sort and resort, combine and aggregate, so that patterns can be investigated more fully.
This final concept, of finding patterns that can be discerned through the aggregation of huge amounts of transactions, is the next step for compliance functions. Yet data analysis does far more than simply allow you to follow the money. It can be a part of your third party ongoing monitoring as well by allowing you to partner the information on third parties who might come into your company where there was no proper compliance vetting. Such capabilities are clearly where you need to be heading.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
Auditing of third parties is critical to any best practices compliance program and an important tool in operationalizing your compliance program. This is a key manner in which a company can manage the third party relationship after the contract is signed and one which the government will expect you to engage in going forward.
You should plan out four to six weeks in advance, you should perform the audit with your legal counsel’s lead to preserve privilege, work with the business sponsor to establish key business contacts, discuss audit rights and processes with the third party, you should prepare initial document request lists for financial information queries, take the time to review findings from previous audits and resolutions and also review details of opened and closed internal investigations, if there are any Code of Conduct questionnaires available take care to review and finally be cognizant of any related Department of Justice (DOJ) and Securities and Exchange Commission (SEC) enforcement actions.
The next step is to determine the entry points of foreign government involvement; (1) direct and (2) indirect. The direct category includes: customs and duties, corporate taxes and penalties, social security or national insurance issues for employees, obtaining in-country visas and work permits, public official gifts and entertainment, training of and attendant travel for employees of government owned entities, procurement of business licenses and permits to perform work and, finally, areas around police escort and security. In the indirect category, some of the key areas to review are: customs agents and freight forwarders, visa processors, commercial sales agents, including distributors and, finally, those who might be consultants or other channel partners.
Document review and selection is important for this process, you should ask for as much electronic information as possible well in advance of your audit. It is much easier to get database records for internal audits than audits of third parties. Try and obtain records in database or excel format and not simply in .pdf. Request the following categories of documents; trial balance, chart of accounts, journal entry line items, financial and compliance policies, prior audited financial statements, bank records and statements, a complete list of agents or intermediaries and revenue by country and customer.
Your lead interviewer needs to be culturally sensitive, patient and must negotiate a good working relationship with the forensic auditors on your audit team, who will be reviewing the documents from their professional perspective. Regarding potential interviewees, focus on those who interact with government entities, foreign government officials or third parties, including those personnel involved with:
For the interview topics, there are several lines of inquiry. Remember this is an audit interview, not an investigative interview. You should not play ‘got-cha’ in this format. You should avail yourself of the opportunity to engage in training while you are interviewing people. The topics to interview on included:
In the review of the General Ledger (GL) accounts, you should consider commission payments to agents and representatives, any facilitating payments made, all payments around travel, meals and entertainment, payments made around training, gifts, charitable contributions, political donations and sales and promotion expenses. If there were payments made for customs or freight forwarders and other processing agents, permits, licenses, taxes and other regulatory expenses should be reviewed. Additionally any entries pertaining to community contributions and social responsibility payments should be assessed and, finally, a review of any security payments, extortion payments, payments to legal consultants or tax advisors or fines and penalties should be considered.
Regarding bank accounts and cash disbursement controls, you should review the following:
In the area of cash funds review the following:
For gifts, travel and entertainment, you should explore payments made through employee-reimbursed expenses, scrutinize for any suspicious expenses submitted, expenses lacking adequate documentation, incorrect posting; and identify and review accounts associated with gifts, meals, entertainment, travel, or promotion. In the area of payroll, consider the risks around the use of ghost employees, hiring of relatives of government employees, and the use of bonus payments and be sure to request a payroll listing and review for any such persons.
You should review GL accounts and expenses for related items. In taking a look at payments under local law, you should obtain list of payments to the government required by local laws and identify and review payments to government authorities or employees, customs authorities or agents, income taxes authorities or license requirements. For payments made to third parties, you should review commission and expense payments for compliance with company policy and also trace payments to the third party’s bank account.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
In a speech before the SIFMA Compliance and Legal Society New York Regional Seminar in November 2015, then Assistant Attorney General Leslie Caldwell laid out metrics the Department of Justice would consider in evaluating a corporate compliance program around third parties. Caldwell began with the following question, “Does the institution sensitize third parties like vendors, agents or consultants to the company’s expectation that its partners are also serious about compliance?” This inquiry was brought forward into the Justice Department’s Evaluation of Corporate Compliance Programs.
Management of a Third Party Relationship
Recognizing that most Chief Compliance Officers (CCOs) and compliance practitioners understand the need for a business justification, questionnaire, due diligence and compliance terms and conditions in a contract, I was gratified to see the DOJ focusing on the final step in the lifecycle of a third party relationship as a key metric for its new Compliance Counsel to evaluate. This is because it is the management of third party relationships that continues to be a source of trouble and heartburn for many companies. As Caldwell noted in her remarks, the management of a third party relationship, “means more than including boilerplate language in a contract. It means taking action – including termination of a business relationship – if a partner demonstrates a lack of respect for laws and policies. And that attitude toward partner compliance must exist regardless of geographic location.”
While the 2012 FCPA Guidance itself only provides that “companies should undertake some form of ongoing monitoring of third-party relationships”. This means that you must have an experienced compliance and audit team, actively engaged in the corporate office and in the business units, to ensure that financial controls and compliance policies are followed and that remedial measures for violations or gaps are tracked, implemented and rechecked, as additional detection and prevention. Caldwell noted it is a more encompassing “sensitization” to anti-corruption compliance that is needed. There are several ways for you to do so.
Relationship Manager for Third Parties
The starting point for the management of a third party, is your Relationship Manager for every third party with which your company does business. The Relationship Manager should be a business unit employee who is responsible for monitoring, maintaining and continuously evaluating the relationship between your company and the third party. Some of the duties of the Relationship Manager may include:
Compliance Professional
Just as a company needs a subject matter expert (SME) in anti-bribery compliance to be able to work with the business folks and answer the usual questions that come up in the day-to-day routine of doing business internationally, third parties also need such access. A third party may not be large enough to have its own compliance staff so I advocate a company providing such a dedicated resource to third parties. I do not believe that this will create a conflict of interest or that there are other legal impediments to providing such services. They can also include anti-corruption training for the third party, either through onsite or remote mechanisms. The compliance professional should work closely with the Relationship Manager to provide advice, training and communications to the third party.
Oversight Committee
I advocate that a company should have an Oversight Committee review all documents relating to the full panoply of a third party’s relationship with the company. It can be a formal structure or some other type of group but the key is to have the senior management put a ‘second set of eyes’ on any third parties who might represent a company in the sales side. In addition to the basic concept of process validation of your management of third parties, as third parties are recognized as the highest risk in FCPA or Bribery Act compliance, this is a manner to deliver additional management of that risk.
After the commercial relationship has begun the Oversight Committee should monitor the third party relationship on no less than an annual basis. This annual audit should include a review of remedial due diligence investigations and evaluation of any new or supplemental risk associated with any negative information discovered from a review of financial audit reports on the third party. The Oversight Committee should review any reports of any material breach of contract including any breach of the requirements of the Company Code of Ethics and Compliance. In addition to the above remedial review, the Oversight Committee should review all payments requested by the third party to assure such payment are within the company guidelines and is warranted by the contractual relationship with the third party. Lastly, the Oversight Committee should review any request to provide the third party any type of non-monetary compensation and, as appropriate, approve such requests.
Audit
A key tool in managing the affiliation with a third party post-contract execution is auditing. Audit rights are a key clause in any compliance terms and conditions and must be secured. Your compliance audit should be a systematic, independent and documented process for obtaining evidence and evaluating it objectively to determine the extent to which your compliance terms and conditions are followed. Noted fraud examiner expert Tracy Coenen described the process as (1) capture the data; (2) analyze the data; and (3) report on the data, which is also appropriate for a compliance audit. As a baseline I would suggest that any audit of a third party include, at a minimum, a review of the following:
If you want to engage in a deeper dive you might consider evaluation of some of the following areas:
Tying it all Together
In addition to monitoring and oversight of your third parties, you should periodically review the health of your third party management program. The robustness of your third party management program will go a long way towards preventing, detecting and remediating any compliance issue before it becomes a full-blown FCPA violation. As with all the steps laid out herein, you need to fully document all steps you have taken so that any regulator, and most specifically the DOJ Compliance Counsel, can test your metrics. Caldwell’s remarks around the metrics portended the Evaluation and what the DOJ will be reviewing and evaluating going forward so that it is clear will be expected from your company’s compliance program. You should also use these metrics to conduct a self-assessment on the state of your compliance program.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
What is satisfactory due diligence under the Foreign Corrupt Practices Act (FCPA)? That question seems to be more important after story on Unaoil and the subsequent release of the Panama Papers. However, both of these events largely focused on the “who” part of due diligence and the need to know whom you are doing business with going forward. However there is another important question which does not come up as often in due diligence, which is how?
How does a particular third party perform its services with or for your company? If it is on the sales side of things, how can a third party help you make sales? If a third party comes through the Supply Chain, how do their products or services meet the needs of your company? If the third party has a closer business relationship, such as a joint venture (JV), teaming agreement or other similar arrangement, you may well need a much deeper understand of how this third party does business because the relationship may well become so close you will be intertwined with the party. It may mean more than simply does their how product work but how does this third party conduct themselves and their business?
The questions beyond simply who were made clear in a Wall Street Journal (WSJ) article by Christopher Weaver and John Carreyrou, entitled “Deal With Theranos Haunts Walgreens”. It turns out that Walgreens left a gap by “never fully validating the startup’s technology or thoroughly evaluating its capabilities”. The clear message is if you are going to partner with a technology company which is going to change your business model, you best make sure the technology works. Moreover, if a potential JV partner refuses to show you its technology, how it keeps records, its financials relating to the products and services you are contracting for and generally tries to hide from you the very thing you are buying into; you should not walk but run away from the deal.
This article detailed the lack of steps and miss-steps by Walgreens when entering its partnership with Theranos and how these actions caused Walgreens to consider its $50MM investment in Theranos as something it will never recoup, caused Walgreens reputational damage and potentially subjected it to civil liability. As the reporters noted, “The relationship is now in tatters, making Walgreens an extreme case study of what can go wrong when an established company that craves growth decides to gamble on an exciting and unproven startup.”
One might think that if you are investing in a technology company that provides medical testing, the investor would want to see the laboratory where the testing is performed. It turns out that Walgreens representatives were never allowed to tour, let alone review the labs where the results of Theranos pinprick blood tests were run. A Walgreens consultant, Paul Rust, who was sent to Theranos to do a quality control data review said, “It was a very strange situation. The results were actually really good, but I was never allowed to go into the lab. I have no idea that the results I saw were run on the Edison devices or not.” He went on to say that he was “led to believe that they were being run on the Edison.” Yet even Rust was surprised no Walgreens representatives had been allowed to view Theranos labs.
Interestingly, when Theranos did provide the test results to Walgreens representatives, the results came back with ““low” and “high” values rather than numeric values. As a result, Walgreens couldn’t compare results from the Theranos machine to any commercially available tests.” Once again, this was something which Walgreens should be sought additional information on.
Yet even when Walgreens’ consultants, assisting the company in evaluating Theranos and the proposed transaction, voiced and wrote up their concerns, they were not passed along to Walgreens management. The article reported, “In a report later in 2011, the consultants concluded Walgreens needed more information to assess the partnership. Those findings and reports by other consultants were kept from many Walgreens officials, including some directly involved in the negotiations with Theranos.”
Walgreens made another classic mistake in the due diligence process; they took comfort when a competitor was allegedly considering a similar venture with Theranos. The article said, “Some executives were comforted when Theranos said Safeway Inc. had agreed to host blood-drawing sites at some of its supermarkets. If Safeway trusted Theranos, then Walgreens could, too, the Walgreens officials believed.” How often have your heard that some other company is considering or has approved them through due diligence and a decision was based on the alleged actions of an alleged party.
Walgreens hamstrung itself from managing the relationship after the contract was signed by agreeing to contract terms that prevented Walgreens from auditing or even viewing “Theranos clinical data or financial records”. Finally, and perhaps most damagingly, there was a complete lack of communications between the two companies about the issues that have bedeviled Theranos. The article concluded, “Walgreens shelved the expansion plans after the Journal reported in October that Theranos did the vast majority of tests it offered to consumers on traditional lab machines. The Journal also reported that some former employees doubted the accuracy of a small number of tests run on Edison devices. One of the most recent setbacks came in mid-April when the Journal reported that regulators had 3½ weeks earlier proposed banning Ms. Holmes from the lab-testing industry. The drugstore chain’s senior executives found out from the news report.”
Under the FCPA, most companies understand the need to know with whom they contract for sales or vendor services. They also understand the need to know why they should do business with a proposed third party (IE., a business justification). However the need to perform an investigation into how the third party can actually deliver the contracted services is equally important.
The Walgreens imbroglio around Theranos points out why such clauses are mandatory. If you do not have them, you do not have the ability verify what you may or may not have been told in due diligence. Finally, managing the relationship after the contract is signed is where the rubber hits the road. If you only obtain a due diligence report and insert compliance terms and conditions, you will have done nothing to test whether the third party is performing as it has agreed to under the terms of the contract.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos 3PM accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
The Justice Department Evaluation of Corporate Compliance Programs states in Prong 10, Appropriate Controls – What was the business rationale for the use of the third parties in question? What mechanisms have existed to ensure that the contract terms specifically described the services to be performed, that the payment terms are appropriate, that the described contractual work is performed, and that compensation is commensurate with the services rendered?
You should incorporate compliance terms and conditions into your contracts with third parties. You must have appropriate compliance terms and conditions in every contract with third parties. I would suggest that you prepare a template, which can be used as a starting point for your negotiations. The advantages of such a template are several; they include: (1) the contract language is tested against real events; (2) the contract language assists the company in managing its compliance risks; (3) the contract language fits into a series of related contracts; (4) the contract language is straight-forward to administer and (5) the contract language helps to manage the expectations of both contracting parties regarding anti-bribery and anti-corruption.
What are the compliance terms and conditions that you should include in your commercial contracts with third parties? In the Panalpina Deferred Prosecution Agreement (DPA), Attachment C, Section 12 is found the following language, “Where necessary and appropriate, Panalpina will include standard provisions in agreements, contracts, and renewals thereof with all agents and business partners that are reasonably calculated to prevent violations of the anticorruption laws, which may, depending upon the circumstances, include: (a) anticorruption representations and undertakings relating to compliance with the anticorruption laws; (b) rights to conduct audits of the books and records of the agent or business partner to ensure compliance with the foregoing; and (c) rights to terminate an agent or business partner as a result of any breach of anti-corruption laws, and regulations or representations and undertakings related to such matters.” In the Johnson & Johnson (J&J) DPA, the same language as used in the Panalpina DPA is found in Attachment C, entitled “Corporate Compliance Program”. However, in Attachment D, entitled “Enhanced Compliance Obligations”, the following language is found: “Contracts with such third parties are to include appropriate FCPA compliance terms and conditions including; (i) representatives and undertakings of the third party to compliance; (ii) right to audit; and (iii) right to terminate.”
Mary Jones, in an article in this blog entitled “Panalpina’s World Wide Web”, suggested the following language be present in your compliance terms and conditions:
I believe that compliance terms and conditions should be stated directly in the document, whether such document is a simple agency or consulting agreement or a joint venture (JV) with several formation documents. The compliance terms and conditions should include representations that in all undertakings the third party will make no payments of money, or anything of value, nor will such be offered, promised or paid, directly or indirectly, to any foreign officials, political parties, party officials, candidates for public or political party office, to influence the acts of such officials, political parties, party officials, or candidates in their official capacity, to induce them to use their influence with a government to obtain or retain business or gain an improper advantage in connection with any business venture or contract in which the company is a participant.
In addition to the above affirmative statements regarding conduct, a commercial contract with a third party should have the following compliance terms and conditions in it.
Many do not believe that they will be able to get the third party to agree to such compliance terms and conditions. I have found that while it may not be easy, it is relatively simply to get a third party to agree to these, or similar, terms and conditions. One approach to take is that they are not negotiable. When faced with such a position on non-commercial terms many third parties will not fight such a position. There is some flexibility but the DOJ will require the minimum compliance terms and conditions. But the best position I have found is that if a third party agrees with these terms and conditions, they can then use that as a market differentiator.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos ABAC accelerator, the leading platform for third party risk management. To learn more, go towww.opus.com.
In this episode, I am joined by Eric Feldman, SVP at Affiliated Monitors. Eric is a long time US government employee who now helps to provide companies with monitorship services, in a wide range of areas. These include external monitors after a FCPA enforcement action, monitorships with companies who contract with the federal government, state and local authorities. Eric discusses the strategic use of a monitor in a wide variety of areas, from prevention and detection of legal violations to M&A work. For more on Affiliated Monitors, check out their website by clicking here.
An important part of the job duties of any compliance practitioner is clearing red flags which might appear for a proposed third-party relationship during the due diligence process. It is mandatory that not only must all red flags be cleared but there also be evidence of the decision-making process to show to a regulator if one comes knocking.
The Justice Department Evaluation of Corporate Compliance Program states under Prong 10 the following, “Real Actions and Consequences – Were red flags identified from the due diligence of the third parties involved in the misconduct and how were they resolved?” There is no set formula or guideline for clearing red flags or evaluating due diligence. One approach came from two compliance practitioners at GE Oil & Gas, Flora Francis and Andrew Baird made at the 2014 SCCE Utility and Energy Conference on GE’s third party risk management, where they described the process by which GE reviews the risks around each third party with which it does business.
Some of the factors which GE considers, when evaluating a third party, include the following:
GE takes this information and then break downs the risks down into low risk and high risk. A low risk received a limited review and analysis, while a high risk receives an escalated review and analysis consisting of the following reviews: compliance, legal, business leadership and finance.
But more than simply the level of review, I was interested in the ‘Risk Score Drivers’ that GE has developed. Once again, the speakers emphasized that these are GE’s risk score drivers and have been developed over time through the company’s internal analysis and processes. Nevertheless I found them to be a very useful way to think about third party risk. The risk score drivers listed were:
GE compliance then takes these scoring factors and puts them into an evaluation matrix when determining the amount of risk involved and a Go/NoGo decision whether the company should move forward with a proposed third party.
One approach came from Randy Corley, Executive Vice President (EVP), Global Compliance Officer at Edelmen Inc. I found his questions to be very relevant when considering how far down the chain a company must go.
Step 1: How Much is Enough? Here your goal is to have a realistic process so that it can be effectively managed and still be of sufficient value for the business unit decision makers, who have the ultimate responsibility over the company’s third parties.
Step 2: How Deep Do We Dig? Here I think the question you should consider is how many tiers down you must go in managing your third parties? Clearly you should manage all direct counter-parties in the sales chain and those considered high-risk in the supply chain. Further, in the sales chain, I think you need to know directly if your business representatives are sub-contracting down your business representation, at least through one tier. On the supply chain, if a high-risk truly is a high-risk for bribery and corruption under your internal evaluation system, you should also consider digging down one tier.
Step 3: What Do You Need To Know? While with your first-tier relationships you may scope your review depending on your internal risk assessment and attendant risk ranking, your data collection down the chain may not need to be as robust. For counter-parties further down the chain than tier 2, a list of actual and beneficial owners, coupled with commitments to follow relevant anti-corruption legislation is needed. Such commitments should be secured through each tier’s contract with its counter-parties.
Step 4: What Did We Learn? If there is any information from which Red Flags appear, they must be cleared. If additional information is needed or points clarified, now is the time to do it and not wait until later in the process. Here I would rely on Jan Farley’s proscription not to stretch your compliance program too thin. Focus your training, communication and management on your direct counter-parties and communicate to them that your company expects them to manage their relationships with their direct counter-parties, which would include the clearing of any Red Flags that may have appeared.
Step 5: Then What? After you have made your decision you still need to manage the relationship. This will entail continuing compliance communications with your direct counter-parties on an ongoing basis. Preferably your business unit sponsor will do this but as the compliance practitioner, you should also be mindful of checking in from time-to-time with your third parties. As your compliance program matures, you also reach the point where you will need to consider auditing of your third parties from the compliance perspective. Finally, do not forget the three most important things about your FCPA compliance program: “Document, Document and Document” the entire process.
In the area of third parties, consider what risks you face in both your sales and supply chain. If there is a key player several tiers down the line who creates or builds a key component or delivers a critical service, you may want to put more management around that relationship from the compliance perspective. For anything below a tier 2; you may be able to manage your risks through having your direct tier 1 counter-party take the lead in managing such compliance risks. But make sure that the expectation is communicated to your direct counter-party so that if the government comes knocking you can show that not only did you contractually obligate your direct counter-party to do so but that you provided them the tools and training to do so. Finally, you will need to be able to show that your direct counter-party did so.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos ABAC accelerator, the leading platform for third party risk management. To learn more, go towww.opus.com.
Yesterday I considered the need for due diligence in the management of third parties. Today, I want to take a deeper dive and explore the levels of due diligence. Due diligence is generally recognized in three levels: Level I, Level II and Level III. Each level is appropriate for a different level of corruption risk. The key is for you to develop a mechanism to determine the appropriate level of due diligence and then implement that going forward.
Level I
First level due diligence typically consists of checking individual names and company names through several hundred Global Watch lists comprised of anti-money laundering, anti-bribery, sanctions lists, coupled with other financial corruption & criminal databases. These global lists create a useful first-level screening tool to detect potential red flags for corrupt activities. It is also a very inexpensive first step in compliance from an investigative viewpoint. This basic Level I due diligence is extremely important for companies to complement their compliance policies and procedures; demonstrating a broad intent to actively comply with international regulatory requirements.
Level II
Level II due diligence encompasses supplementing these Global Watch lists with a deeper screening of international media, typically the major newspapers and periodicals from all countries plus detailed internet searches. Such inquiries will often reveal other forms of corruption-related information and may expose undisclosed or hidden information about the company; the third party’s key executives and associated parties. I believe that Level II should also include an in-country data base search regarding the third party. Some of the other types of information that you should consider obtaining are country of domicile and international government records; use of in-country sources to provide assessments of the third party; a check for international derogatory electronic and physical media searches, you should perform both English and foreign-language repositories searches on the third party, in its country of domicile, if you are in a specific industry, using technical specialists you should also obtain information from sector specific sources.
Level III
This level is the deep dive. It will require an in-country ‘boots-on-the-ground’ investigation. According to Candice Tal, founder of Infortal, Level III due diligence investigation is designed to supply your company “with a comprehensive analysis of all available public records data supplemented with detailed field intelligence to identify known and more importantly unknown conditions. Seasoned investigators who know the local language and are familiar with local politics bring an extra layer of depth assessment to an in country investigation.” Further the “Direction of the work and analyzing the resulting data is often critical to a successful outcome; and key to understanding the results both from a technical perspective and understanding what the results mean in plain English. Investigative reports should include actionable recommendations based on clearly defined assumptions or preferably well-developed factual data points.”
But more than simply an investigation of the company, critically including a site visit and coupled with onsite interviews, Tal says that some other things you investigate include “an in-depth background check of key executives or principal players. These are not routine employment-type background checks, which are simply designed to confirm existing information; but rather executive due diligence checks designed to investigate hidden, secret or undisclosed information about that individual.” Tal believes that such “Reputational information, involvement in other businesses, direct or indirect involvement in other law suits, history of litigious and other lifestyle behaviors which can adversely affect your business, and public perceptions of impropriety, should they be disclosed publically.”
Further you may need to engage a foreign law firm, to investigate the third party in its home country to determine the third party’s compliance with its home country’s laws, licensing requirements and regulations. Lastly and perhaps most importantly, you should use a Level III to look the proposed third party in the eye and get a firm idea of his or her cooperation and attitude towards compliance as one of the most important inquiries is not legal but based upon the response and cooperation of the third party. More than simply trying to determine if the third party objected to any portion of the due diligence process or did they object to the scope, coverage or purpose of the FCPA; you can use a Level III to determine if the third party willing to stand up with under the FCPA and are you willing to partner with the third party.
The Risk Advisory Group, has put together a handy chart of its Level I, II and III approaches to integrity and due diligence. I have found it useful in explaining the different scopes and focuses of the various levels of due diligence.
There are many different approaches to the specifics of due diligence. By laying out some of the approaches, you can craft the relevant portions into your program. The Level I, II & III trichotomy appears to have the greatest favor and one that you should be able to implement in a straightforward manner. But the key is that you must assess your company’s risk and then manage that risk. If you need to perform additional due diligence to answer questions or clear red flags you should do so. And do not forget to Document Document Document all your due diligence.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos ABAC accelerator, the leading platform for third party risk management. To learn more, go towww.opus.com.
Most companies fully understand the need to comply with the FCPA requirements around third parties as they represent the greatest risks for an FCPA violation. However, most companies are not created out of new cloth but are ongoing enterprises with a fully up and running business in place. This means they may need to bring resources to bear to comply with the FCPA while continuing operating an ongoing business. This can be particularly true in the area of performing due diligence on third parties. Many companies understand the need for a robust due diligence program to investigation third parties, but have struggled with how to create an inventory to define the basis of third party risk and thereby perform the requisite due diligence required under the FCPA.
Getting your arms around due diligence can sometimes seem bewildering for the compliance practitioner. The information that you should have developed in Steps 1 & 2 of the third party management process should provide you with the initial information to consider the level of due diligence that you should perform on third parties. This leads Step 3 in the five steps of the third-party management-Due Diligence.
Jay Martin, CCO at BakerHughes often emphasizes that a company needs to evaluate and address its risks regarding third parties. This means that an appropriate level of due diligence may vary depending on the risks arising from the relationship. So, for example, the appropriate level of due diligence required by a company when contracting for the performance of Information Technology services may be low, to reflect low risks of bribery on its behalf. Conversely, a business entering the international energy market and selecting an intermediary to assist in establishing a business in such markets will typically require a much higher level of due diligence to mitigate the risks of bribery on its behalf.
Our British compliance cousins of course are subject to the UK Bribery Act. In its Principle IV of an Adequate Procedures compliance program, the UK Ministry of Justice (MOJ) stated, “The commercial organisation applies due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks.” The purpose of Principle IV is to encourage businesses to put in place due diligence procedures that adequately inform the application of proportionate measures designed to prevent persons associated with a company from bribing on their behalf. The MOJ recognized that due diligence procedures act both as a procedure for anti-bribery risk assessment and as a risk mitigation technique. The MOJ said that due diligence is so important that “the role of due diligence in bribery risk mitigation justifies its inclusion here as a Principle in its own right.”
Carol Switzer, writing in Compliance Week related that you should initially set up categories for your third parties of high, moderate and low risk. Based upon which risk category the third party falls into, you can design specific due diligence. She defined low risk screening as “trusted data source search and risk screening such as the aforementioned World Compliance”; moderate risk screening as “enhanced evaluation to include in-country public records…and research into corporate relationships”; high risk screening is basically a “deep dive assessment” where there is an audit/review of third party controls and financial records, in-country interviews and investigations “leveraging local data sources.”
A three-step approach was also discussed favorably in Opinion Release 10-02. In this Opinion Release, the DOJ discussed the due diligence that the requesting entity performed. “First, it [the requestor] conducted an initial screening of six potential grant recipients by obtaining publicly available information and information from third-party sources…Second, the Eurasian Subsidiary undertook further due diligence on the remaining three potential grant recipients. This due diligence was designed to learn about each organization’s ownership, management structure and operations; it involved requesting and reviewing key operating and assessment documents for each organization, as well as conducting interviews with representatives of each MFI to ask questions about each organization’s relationships with the government and to elicit information about potential corruption risk. As a third round of due diligence, the Eurasian Subsidiary undertook targeted due diligence on the remaining potential grant recipient, the Local MFI. This diligence was designed to identify any ties to specific government officials, determine whether the organization had faced any criminal prosecutions or investigations, and assess the organization’s reputation for integrity.”
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos ABAC accelerator, the leading platform for third party risk management. To learn more, go towww.opus.com.
The next step in the five-step process is the Questionnaire. The term ‘questionnaire’ is mentioned several times in the 2012 FCPA Guidance. It is generally recognized as one of the tools that a company should complete in its investigation to better understand with whom it is doing business. The questionnaire should be mandatory step for any third party that desires to work with your company. I tell clients that if a third party does not want to fill out the questionnaire or will not fill it out completely that you should not walk, but run away from doing business with such a party.
In the 2011 UK Ministry of Justice’s (MOJ), discussion of Six Principals of an Adequate Procedures compliance program, they said the following, a Questionnaire, “means that both the business person who desires the relationship and the foreign business representative commit certain designated information in writing prior to beginning the due diligence process.”
One of the key requirements of any successful anti-corruption compliance program is that a company must make an initial assessment of a proposed third party. The size of a company does not matter as small businesses can face quite significant risks and will need more extensive procedures than other businesses facing limited risks. The level of risk that companies face will also vary with the type and nature of the third parties with which it may have business relationships. For example, a company that properly assesses that there is no risk of bribery on the part of one of group of its third parties will require nothing in the way of procedures to prevent bribery in the context of those relationships. By the same token the bribery risks associated with reliance on a third party agent representing a company in negotiations with foreign public officials may be assessed as significant and, accordingly, requires much more in the way of procedures to mitigate those risks.
What should you ask for in your questionnaire? Randy Corey, Executive Vice President (EVP), Global Compliance Officer at Edelmen Inc. said in a presentation at Compliance Week 2012, entitled “3rd Party Due Diligence Best Practices in Establishing an Effective Anti-Corruption Program”, that his company has developed a five-step approach in evaluating and managing their third parties. In Step 3 they ask What Do You Need To Know? Initially, Corley said that the scope of review depends on risk assessment, High Risk, Medium Risk or Low Risk. This risk ranking will determine the level of information collected and due diligence performed. The key element of this step is data collection. The initial step is to have the third party complete an application which should include requests for information on background and experience, scope of services to be provided, relevant experience, list of actual and beneficial owners, references and compliance expertise.
Below are some of the areas which I think you should inquire into from a proposed third party include the following:
One thing that you should keep in mind is that you will likely have pushback from your business team in making many of the inquiries listed above. However, my experience is that most proposed agents that have done business with US or UK companies have already gone through this process. Indeed, they understand that by providing this information on a timely basis, they can set themselves apart as more attractive to US businesses.
The questionnaire fills several key roles in your overall management of third parties. Obviously, it provides key information that you need to know about who you are doing business with and whether they have the capabilities to fulfill your commercial needs. Just as importantly is what is said if the questionnaire is not completed or is only partially completed, such as the lack of awareness of the FCPA, UK Bribery Act or anti-corruption/anti-bribery programs generally. Lastly, the information provided (or not provided) in the questionnaire will assist you in determining what level of due diligence to perform.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos ABAC accelerator, the leading platform for third party risk management. To learn more, go towww.opus.com.
The Evaluation, in Prong 10, Third Part Management asks, “What was the business rationale for the use of the third party in question?” This question is one of the most basic tools to operationalize your compliance program and should form the basis of your third-party risk management process.
It is common sense that you should have a business rationale to hire or use a third party. If that third party is in the sales chain of your international business it is important to understand why you need to have that specific third party representing your company. This concept is enshrined in the 2012 FCPA Guidance, which says “companies should have an understanding of the business rationale for including the third party in the transaction. Among other things, the company should understand the role of and need for the third party and ensure that the contract terms specifically describe the services to be performed.”
The Internal Revenue Service (IRS) also considers a business rationale to be an important part of any best practices anti-corruption compliance regime. Clarissa Balmaseda, a special agent in charge of Internal Revenue Service (IRS) criminal investigation, speaking at a presentation, said that the lack of business rationale to be a Red Flag, indeed the IRS views such lack of business rationale as possible indicia of corruption. With the Department of Justice; Securities and Exchange Commission and IRS all noting the importance of a business rationale, it is clear this is something you should use to operationalize your compliance program.
But the business rationale also provides your company the opportunity to help drive compliance into the fabric of your everyday operations. This is done by requiring the employee who prepares the business rationale to be the Business Sponsor of that third party. The Business Sponsor can provide the most direct means of communication to the third party and can be the point of contact for compliance issues.
Tyco International takes this approach in its Seven Step Process for Third Party Qualification. Tyco breaks the first step into two parts, which include:
What should go into your Business Rationale? At the most basic level, you should craft a document, which works for both you as the compliance practitioner and the business folks in your company. There are some basic concepts which include the following. You need the name and contact information for both the Business Sponsor and the proposed third party. You need to inquire into how the Business Sponsor came to know about the third party because it is Red Flag is a customer or government representative points you towards a specific third party. You should inquire into what services the third party will perform for your company, the length of time and compensation rate for the third party. You will also need an explanation of why this specific third party should be used as opposed to an existing or other third party, is such were considered. All this information should be written down and then signed by the Business Sponsor.
Another way to think about this issue is by considering the competence of foreign business partner to provide services to your organization. Such considerations include a review of the qualifications of the third-party candidate for subject matter expertise, the resources to perform the services for which they are being considered and the third party’s expected activities for your company. More detailed inquiries include requiring the relevant business unit which desires to obtain the services of any third party to provide you with a business rationale including current opportunities in territory, how the candidate was identified and why no currently existing third party relationships can provide the requested services. Your next inquiry should focus on the terms of the engagement, including the commission rate, the term of the agreement, what territory may be covered by the agreement and if such relationship will be exclusive.
Remember, the purpose of the Business Rationale is to document the satisfactoriness of the business case to retain a third party. The Business Rationale should be included in the compliance review file assembled on every third party at the time of initial certification and again if the third-party relationship is renewed. As explained by the Tom Fox Mantra for compliance, this means Document Document Document.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos ABAC Accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
In this episode I visit with John Hanson (AKA 'the Fraud Guy') who is also the founder of the International Association of Independent Corporate Monitors (IAICM). He discusses why he founded the group, the needs it hopes to address, the resources available to members and others and how someone can apply for membership. the Association's website is icicm.org. For additional information you can contract Hanson at jhanson@iaicm.org. Finally, ror more information see my blog post IAICM Shines a Light on Corporate Monitor.
Day 1- The Third-Party Risk Management Process
This month, I will consider the risk management of third parties in an operationalized compliance program. As every compliance practitioner is well aware, third parties still present the highest risk under the Foreign Corrupt Practices Act (FCPA). The Department of Justice Evaluation of Corporate Compliance Programs devotes an entire prong to third party management. It begins with the following:
Risk-Based and Integrated Processes – How has the company’s third-party management process corresponded to the nature and level of the enterprise risk identified by the company? How has this process been integrated into the relevant procurement and vendor management processes?
This first set of queries clearly specifies the DOJ expects an integrated approach that is operationalized throughout the company. This means your compliance must have a process for the full life cycle of third party risk management. There are five steps in the life cycle of third party management.
Over this month, I will be exploring each of these steps in detail so by the end of this month, you will be able to fully operationalize your third party risk management program.
Step 1 - Business Justification
The first step breaks down into two parts:
The purpose of the Business Justification is to document the satisfactoriness of the business case to retain a third party. The Business Justification should be included in the compliance review file assembled on every third party at the time of initial certification and again if the third party relationship is renewed.
Step 2 - Questionnaire
The term ‘questionnaire’ is mentioned several times in the 2012 FCPA Guidance. It is generally recognized as one of the tools that a company should complete in its investigation to better understand with whom it is doing business. I believe that this requirement is not only a key step but also a mandatory step for any third party that desires to do work with your company. I tell clients that if a third party does not want to fill out the questionnaire or will not fill it out completely that you should not walk but run away from doing business with such a party.
One thing that you should keep in mind is that you will likely have pushback from your business team in making many of the inquiries listed above. However, my experience is that most proposed agents that have done business with US or UK companies have already gone through this process. Indeed, they understand that by providing this information on a timely basis, they can set themselves apart as more attractive to US businesses.
Step 3 - Due Diligence
Most compliance practitioners understand the need for a robust due diligence program to investigation third parties, but have struggled with how to create an inventory to define the basis of risk of each foreign business partner and thereby perform the requisite due diligence required under the FCPA. Getting your arms around due diligence can sometimes seem bewildering for the compliance practitioner.
Our British compliance cousins of course are subject to the UK Bribery Act. In its Six Principles of an Adequate Procedures compliance program, the UK MOJ stated, “The commercial organisation applies due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks.” The purpose of this principle is to encourage businesses to put in place due diligence procedures that adequately inform the application of proportionate measures designed to prevent persons associated with a company from bribing on their behalf. The MOJ recognized that due diligence procedures act both as a procedure for anti-bribery risk assessment and as a risk mitigation technique.
After you have completed Steps 1-3 and then evaluated and documented your evaluation, you are ready to move onto to Step 4 - the contract. In the area of compliance terms and conditions, the FCPA Guidance intones “Additional considerations include payment terms and how those payment terms compare to typical terms in that industry and country, as well as the timing of the third party’s introduction to the business.” This means that you need to understand what the rate of commission is and whether it is reasonable for the services delivered. If the rate is too high, this could be indicia of corruption as high commission rates can create a pool of money to be used to pay bribes. If your company uses a distributor model in its sales side, then it needs to review the discount rates it provides to its distributors to ascertain that the discount rate it warranted.
Step 4 - The Contract
You must evaluate the information and show that you have used it in your process. If it is incomplete, it must be completed. If there are Red Flags, which have appeared, these Red Flags must be cleared or you must demonstrate how you will manage the risks identified. In others words you must Document, Document and Document that you have read, synthesized and evaluated the information garnered in Steps 1-3. As the DOJ and SEC continually remind us, a compliance program must be a living, evolving system and not simply a ‘Check-the-Box’ exercise.
Step 5 - Management of the Relationship
I often say that after you complete Steps 1-4 in the life cycle management of a third party, the real work begins and that work is found in Step 5– the Management of the Relationship. While the work done in Steps 1-4 are absolutely critical, if you do not manage the relationship it can all go downhill very quickly and you might find yourself with a potential FCPA or UK Bribery Act violation. There are several different ways that you should manage your post-contract relationship. Here we will explore some of the tools which you can use to help make sure that all the work you have done in Steps 1-4 will not be for naught and that you will have a compliant anti-corruption relationship with your third party going forward.
Final Thoughts
I continually give my Mantra of FCPA compliance, which is Document, Document, and Document. Each of the steps you take in the management of your third parties must be documented. Not only must they be documented but they must be stored and managed in a manner that you can retrieve them with relative ease. The management of third parties is absolutely critical in any best practices compliance program. As you sit at your desk pondering whether this assignment given to you by the CCO is a career-ending dead-end; you should take heart because there is clear and substantive guidance out there which you can draw upon.
Three Key Takeaways
This month’s podcast series is sponsored by Opus. Opus helps free your business from the complexity and uncertainty of managing the risks associated with your customers, vendors, and third parties. By combining the most innovative Third-Party Risk Management and Know Your Customer Compliance SaaS platforms with unparalleled data solutions, Opus turns information into action so your business can thrive. Opus solutions include Hiperos ABAC Accelerator, the leading platform for third party risk management. To learn more, go to www.opus.com.
I conclude my One Month to Operationalizing your Compliance Program series by discussing how you can put your compliance program at the center of corporate strategy. An article in the Harvard Business Review (HBR) by Frank Cespedes, entitled “Putting Sales at the Center of Strategy”, discussed how to connect up management’s new sales plans with the “field realities.” Referencing the well-known Sam Waltonism that “There ain’t many customers at headquarters”; Cespedes believes that “If you and your team can’t make the crucial connections between strategy and sales, then no matter how much you invest in social media or worry about disruptive innovations, you may end up pressing for better execution when you actually need a better strategy or changing strategic direction when you should be focusing on the basics in the field.”
This can be a critical problem when operationalizing compliance because operationalizing compliance is usually perceived as a top-down exercise. The reality that the employee base that must execute the compliance strategy is not considered. Even when there are comments from employees on compliance initiatives they are often derisively characterized as ‘push-back’ and not taken into account in moving the compliance effort forward.
Communicate the Strategy
It can be difficult for an employee base to implement a strategy that they do not understand. Even with a company wide training rollout, followed by “a string of e-mails from headquarters and periodic reports back on results. There are too few communications, and most are one-way; the root causes of underperformance are often hidden from both groups.” Here Cespedes’ insight is that clarification is a leadership responsibility and in the compliance function that means the Chief Compliance Officer (CCO) or other senior compliance practitioner. Moreover, if the problem is that employees do not understand how to function within the parameters of the compliance program, then there is a training problem and that is the fault of the compliance department. I once was subjected to a PowerPoint of 268 slides, which lasted 7.5 hours, about my company’s compliance regime. To say this was worse than useless was accurate. The business guys were all generally asleep one hour into the presentation as we went through the intricacies of the books and records citations to the FCPA. The training was a failure but it was not the fault of the attendees. If your own employees do not understand your compliance program that is your fault.
Continually improve your compliance productivity
Why not do the incentivize productivity around compliance? Work with your Human Resources (HR) department to come up with appropriate financial incentives. Many companies have ad hoc financial awards, which they present to employees to celebrate and honor outstanding efforts. Why not give out something like that around doing business in compliance? Does your company have, as a component of its bonus compensation plan, a part dedicated to compliance and ethics? If so, how is this component measured and then administered? There is very little in the corporate world that an employee notices more than what goes into the calculation of their bonuses. HR can, and should, facilitate this process by setting expectations early in the year and then following through when annual bonuses are released. With the assistance of HR, such a bonus can send a powerful message to employees regarding the seriousness with which compliance is taken at the company. There is nothing like putting your money where your mouth is for people to stand up and take notice.
Improve the human element in your compliance program
This is another area where HR can help the compliance program. More than ongoing assessment of employees for promotion into leadership positions, here HR can assist on the ground floor. HR can take the lead in asking questions around compliance and ethics in the interview process. Studies have suggested that certainly Gen Y & Xers appreciate such inquiries and want to work for companies that make such business ethics a part of the discussion. By having the discussion during the interview process, you can not only set expectations but you can also begin the training process on compliance.
However, this approach should not end when an employee is hired. HR can also assist your compliance efforts by tracking employees through their company career to identify those who perform high in any compliance metric. This can also facilitate the delivery on more focused compliance training to those who may need it because of changes on compliance risks during their careers.
Make your compliance strategy relevant
Cespedes notes, “Most C-suite executives know these value-creation levers, but too few understand and operationalize the sales factors that affect them.” In the sales world this can translate into a reduction in assets to underperforming activities. This is all well and good but such actions must be coupled with an understanding of why sales might be underperforming in certain areas. In the compliance realm, I think this translates into two concepts, ongoing monitoring and risk assessment. Ongoing monitoring can allow you to move from a simple prevent mode to a more prescriptive mode; where you can uncover violations of your company’s compliance program before they become full blown FCPA violations. By using a risk assessment, you can take the temperature of where and how your company is doing business and determine if new products or service offerings increase your compliance risks.
Above all, you need to get out and tell the compliance story. Louis D’Amrosio was quoted for the following, “You have to repeat something at least 10 times for an organization to fully internalize it.” If there is a disconnect between your compliance strategy and how your employee base is implementing or even interpreting that strategy, get out of the office and go out to the field. But you need to do more that simply talk you also need to listen. By doing so, can help to align your company’s compliance strategy with both the delivery and in the field.
Three Key Takeaways
This month’s podcast series is sponsored by Oversight Systems, Inc. Oversight’s automated transaction monitoring solution, Insights On Demand for FCPA, operationalizes your compliance program. For more information, go to OversightSystems.com.
The Evaluation of Corporate Compliance Programs, Prong 6, Incentives and Disciplinary Measures states:
Incentive System – How has the company incentivized compliance and ethical behavior? How has the company considered the potential negative compliance implications of its incentives and rewards? Have there been specific examples of actions taken (e.g., promotions or awards denied) as a result of compliance and ethics considerations?
How can you measure compliance in senior management or evaluate it for the purposes of a bonus calculation? This issue has often been difficult to sustain in a company because the compliance evaluation of whether a senior manager or company leader is often viewed as too subjective. An article entitled, “Integrating Your Compliance Programme Into the Variable Compensation of Executives, addressed these issues and concerns.
The article was built around a case study of the Sorin Group, a healthcare multinational, and the company’s incentive program for its compliance regime. The company created such an incentive program to “influence actual behaviors, and not merely the consequences of any wrong doing that may occur.” Compliance has been made an integral part of each manager’s performance objectives. Members on the company’s Executive Leadership Team (ELT) and the other leaders of all its corporate functions and “business units are directly responsible for the culture, understanding, observance and adoption of the Sorin Code of Conduct, the Sorin United States and international compliance policies and procedures” and their respective health industry codes of practice.
Each of the different functions within the Sorin Group has adopted individual performance objectives specifically regarding compliance. The individualized “compliance objectives are agreed and documented every year for each function and senior manager, and form part of the process of continuous performance review (written reviews twice yearly) managed by Sorin’s human resources team. The responsible executive of each function or group is required to cascade each of the compliance obligations to those employees under them. This ensures that the whole company has compliance integrated into their variable remuneration.”
The company’s evaluation process includes the staff that report to each senior executive who are interviewed by the General Counsel (GC) or other member of the compliance function “to determine their adherence to the compliance objectives.” Additionally, “An assessment is performed alongside line managers and a member of the human resources team to determine whether the obligations have been met, and to what extent.” Lastly, this same system applies to the company’s Board of Directors and Chief Executive Officer (CEO).
The variable compensation awarded at the end of each year can be affected in two ways by this compliance evaluation. The first is for an entire group and “If a group fails to meet expectations for the specific objectives the executive and their whole team will miss out on the entire variable pay for that year.” But “If a group meets some expectations for the compliance objectives they will receive payment of the variable, with the amount dependent on the amount of objectives that have been met.” The same holds true for the individual within the group so that “if an employee fails to meet his or her compliance objectives, the whole bonus for that employee will remain unpaid.”
Some examples of compliance obligations that are measured and evaluated include the following:
For the ELT
For Department Heads
For Country Heads of Sales
The article also speaks of five things to consider when developing such a compliance incentive program. (1) The program needs to be cascaded down the organization so that it applies to all levels in the company. (2) Include both a 360 degree review and mid-year review. (3) To truly incentive senior management, the compliance objectives should be at least 25% of the overall discretionary bonus program. (4) Do not have simply ‘tick-the-box’ incentives but include subject incentives.
As the final item to consider, is you need to have SMART compliance objectives, which are defined as:
The article ends with some insights into lessons learned, including the following:
The Evaluation makes clear that the Department of Justice expects incentives to be operationalized into your compensation structure. While there may always be subjectivity built into any compensation incentive system, that does not mean financial incentives cannot be written into the evaluation of any senior management to help guide ethical business practices.
Three Key Takeaways
This month’s podcast series is sponsored by Oversight Systems, Inc. Oversight’s automated transaction monitoring solution, Insights On Demand for FCPA, operationalizes your compliance program. For more information, go to OversightSystems.com.
Even with a great Tone-At-the-Top and in the middle, you cannot stop. One of the greatest challenges of a compliance practitioner is how to affect the ‘tone at the bottom’. In an article in the Spring 2012 Issue of the MIT Sloan Management Review, entitled “Uncommon Sense: How to Turn Distinctive Beliefs Into Action”, authors explored the “often overlooked, critical source of differentiation is [a] company’s beliefs” and provided techniques on how to tap into these beliefs. The authors listed seven approaches that they have used which I believe that the compliance practitioner can use to not only determine ‘Tone at the Bottom” but to impact that tone. They are as follows:
By engaging employees at this level, you can find out not only what the employees think about the company compliance program but use their collective experience to help design a better and more effective compliance program. Employees want to do business in an ethical manner. Given the chance to engage in business the right way, as opposed to cheating; will win the hearts and minds of your employees almost all the time. By using the protocol suggested by the authors you can not only find out the effect of your company’s compliance program on the employees at the bottom but you can affect it as well.
Mike Volkov said in an article entitled, “Mood in the Middle Versus Tone at the Top” that “Even when a company does all the right things at the senior management level, the real issue is whether or not that culture has embedded itself in middle and lower management. A company’s culture is reflected in the values and beliefs that exist throughout the company.” To fully operationalize your compliance program, you must find a way to articulate and then drive the message of ethical values and doing business in compliance with such anti-corruption laws such as the FCPA from the top down, throughout your organization.
Three Key Takeaways
This month’s podcast series is sponsored by Oversight Systems, Inc. Oversight’s automated transaction monitoring solution, Insights On Demand for FCPA, operationalizes your compliance program. For more information, go to OversightSystems.com.
In this episode I visit with Jonathan Armstrong on his views on the new DOJ Evaluation of Corporate Compliance Programs. Armstrong provides a detailed analysis of some of the key differences between how compliance is operationalized in the US as opposed to the UK and EU countries. He explains how the enhanced requirements for root cause analysis, risk assessments and investigations and the supplemented requirements to tie back into the ongoing compliance monitoring and updating, could run afoul of UK and EU data protection and data privacy requirements. He also considers what a non-US company, subject to the FCPA what should look to as a best practices compliance program to best protect the organization. Finally explores just how far does all of this go? He provides on statistic that puts a huge bow on the difficulties going forward.
For the Cordery Compliance article see the following, US Department of Justice on Evaluation of Corporate Compliance : how does it compare to UK Bribery Act 2010?
The Evaluation of Corporate Compliance Programs makes clear, a company must have more than simply at good ‘Tone-at-the-Top’; it must move it down through the organization from senior management down to middle management and into its lower ranks. This means that one of the tasks of any company, including its compliance organization is to get middle management to respect the stated ethics and values of a company, because if they do so, this will be communicated down through the organization. Adam Bryant, writing in the NYT in an article entitled, “If the Supervisors Respect Values, So Will Everyone Else”; explored this topic when he interviewed Victoria Ransom, the Chief Executive Officer (CEO) of Wildfire, a company which provides social media marketing software.
Ransom spoke about the role of senior management in communicating ethical values when she was quoted as saying “Another lesson I’ve learned as the company grows is that you’re only as good as the leaders you have underneath you. And that was sometimes a painful lesson. You might think that because you’re projecting our values, then the rest of the company is experiencing the values.” These senior managers communicate what the company’s ethics and values are to middle management. So, while tone at the top is certainly important in setting a standard, she came to appreciate that it must move downward through the entire organization. Bryant wrote that Ransom came to realize “that the direct supervisors become the most important influence on people in the company. Therefore, a big part of leading becomes your ability to pick and guide the right people.”
Ransom said that when the company was young and small they tried to codify their company values but they did not get far in the process “because it felt forced.” As the company grew she realized that their values needed to be formalized and stated for a couple of reasons. The first was because they wanted to make it clear what was expected of everyone and “particularly because you want the new people who are also hiring to really know the values.” Another important reason was that they had to terminate “a few people because they didn’t live up to the values. If we’re going to be doing that, it’s really important to be clear about what the values are. I think that some of the biggest ways we showed that we lived up to our values were when we made tough decisions about people, especially when it was a high performer who somehow really violated our values, and we took action.” These actions to terminate had a very large effect on the workforce. Ransom said that “it made employees feel like, “Yeah, this company actually puts its money where its mouth is.””
Ransom wanted to make clear to everyone what senior management considered when determining whether employees “are living up to the company culture.” The process started when she and her co-founder spent a weekend writing down what they believed the company’s values were. Then they sat down with the employees in small groups to elicit feedback. Her approach was to look for what they wanted in their employees.
Ransom had an equally valuable insight when she talked about senior management and ethical values. She believes that “the best way to undermine a company’s values is to put people in leadership positions who are not adhering to the values. Then it completely starts to fall flat until you take action and move those people out, and then everyone gets faith in the values again. It can be restored so quickly. You just see that people are happier.”
What should the tone in the middle be? That is, what should middle management’s role be in the company’s compliance program? This role is critical because the majority of company employees work most directly with middle, rather than top management and consequently, they will take their cues from how middle management will respond to a situation. Moreover, middle management must listen to the concerns of employees. Even if middle management cannot affect a direct change, it is important that employees need to have an outlet to express their concerns. Therefore your organization should training middle managers to enhance listening skills in the overall context of providing training for their ‘Manager’s Toolkit’. This can be particularly true if there is a compliance violation or other incident which requires some form of employee discipline. Most employees think it important that there be “organizational justice” so that people believe they will be treated fairly. He further explained that without organization justice, employees typically do not understand outcomes but if there is perceived procedural fairness that an employee is more likely accept a decision that they may not like or disagree with.
Employees often look to their direct supervisor to determine what the tone of an organization is and will be going forward. Many employees of a large, multi-national organization may never have direct contact with the CEO or even senior management. By moving the values of compliance through an organization into the middle, you will be in a much better position to inculcate these values and operationalizing compliance with them.
Three Key Takeaways
This month’s podcast series is sponsored by Oversight Systems, Inc. Oversight’s automated transaction monitoring solution, Insights On Demand for FCPA, operationalizes your compliance program. For more information, go to OversightSystems.com.
Under the Evaluation of Corporate Compliance Programs, Prong 2, it states:
Conduct at the Top – How have senior leaders, through their words and actions, encouraged or discouraged the type of misconduct in question? What concrete actions have they taken to demonstrate leadership in the company’s compliance and remediation efforts? How does the company monitor its senior leadership’s behavior? How has senior leadership modelled proper behavior to subordinates?
This requirement is more than simply the ubiquitous ‘tone-at-the-top’ as here the Justice Department wants to see a company’s senior leadership actually doing compliance. How can senior management operationalize compliance going forward? One of the best places to start is the article from the Harvard Business Review by Professor Lynn Paine entitled, “Managing for Organizational Integrity”. Larry Thompson, former PepsiCo Senior Vice President of Governmental Affairs, General Counsel and Secretary, discussed the work of Professor Paine in citing five factors, which he believed were critical in establishing an effective integrity program and to set the right “Tone at the Top”.
David Lawler, in his book, Frequently Asked Questions in Anti-Bribery and Corruption boiled it down as follows “Whatever the size, structure or market of a commercial organization, top-level management’s commitment to bribery prevention is likely to include communication of the organization’s anti-bribery stance and appropriate degree of involvement in developing bribery prevention procedures.” Lawler went on to provide a short list of points that he suggests senior management engage in to communicate the type of tone to follow an anti-corruption regime.” I had a CEO of a client, who after I described his role in operationalizing his company’s compliance program observed the following, “You want me to be the ambassador for compliance.” I immediately averred in the affirmative. The following is a list of things that a CEO can do as an ‘Ambassador of Compliance’
Coming at it from a different perspective, author Martin Biegelman provides some concrete examples in his book entitled, “Building a World Class Compliance Program – Best Practices and Strategies for Success”. Biegelman begins the chapter discussed in this posting with the statement “The road to compliance starts at the top.” There is probably no dispute that a company takes on the tone of its top management. In this chapter Biegelman cites to a list used by Joe Murphy of actions that a CEO can demonstrate to set the requisite tone from the Captain’s Chair of any business. The list is as follows:
Many companies struggle with some type of metric which can be used for upper management regarding compliance and communication of a company’s compliance values. One technique might be to require the CEO to post companywide emails or other communications once a quarter on some compliance related topic. The CEO’s direct reports would then also be required to email their senior management staff a minimum of once per quarter on a compliance topic. One can cascade this down the company as far as is practicable. Reminders can be set for each communication so that all personnel know when it is time to send out the message. If these communications are timely made, this metric has been met.
Three Key Takeaways
This month’s podcast series is sponsored by Oversight Systems, Inc. Oversight’s automated transaction monitoring solution, Insights On Demand for FCPA, operationalizes your compliance program. For more information, go to OversightSystems.com.
The Department of Justice Evaluation of Corporate Compliance Programs states, in Prong 10, Third Party Relationships:
Management of Relationships – How has the company considered and analyzed the third party’s incentive model against compliance risks? How has the company monitored the third parties in question? How has the company trained the relationship managers about what the compliance risks are and how to manage them? How has the company incentivized compliance and ethical behavior by third parties?
If you do not manage the relationship it can all go downhill very quickly and you might find yourself with a potential FCPA violation. Now the DOJ has explicitly adopted this approach as a key determination of whether you have operationalized your compliance program. There are several different ways that you should manage your post-contract relationship.
Relationship Manager
There should be a Relationship Manager for every third party which the company does business with through the sales chain. The Relationship Manager should be a business unit employee who is responsible for monitoring, maintaining and continuously evaluating the relationship between your company and the third party. Some of the duties of the Relationship Manager may include:
The Relationship Manager can be the Business Sponsor who prepared the Business Rationale discussed on Day 17. By using the Business Sponsor as the Relationship Manager, your company will further operationalize compliance by continuing to have the business unit lead the front-line relationship, communications and contact with the third party. As noted compliance commentator Scott Moritz has said, “This puts the onus on each stakeholder.”
Compliance Professional
Just as a company needs a subject matter expert (SME) in anti-bribery compliance to be able to work with the business folks and answer the usual questions that come up in the day-to-day routine of doing business internationally, third parties also need such a resource. A third party may not be large enough to have its own compliance staff so any company using third party representatives should provide a dedicated resource to third parties. This will not create a conflict of interest nor are other legal impediments to providing such services. They can also include anti-corruption training for the third party, either through onsite or remote mechanisms. The compliance practitioner should work closely with the relationship manager to provide advice, training and communications to the third party.
Third Party Oversight Committee
A Third Party Oversight Committee further operationalizes compliance. It review all documents relating the full panoply of a third party’s relationship with a company. It can be a formal structure or some other type of group but the key is to have the senior management put a ‘second set of eyes’ on any third party who might represent a company on the sales side. In addition to the basic concept of process validation of your management of third parties, as third parties are recognized as the highest risk in anti-corruption compliance, this is a manner to deliver additional management of that risk.
After the commercial relationship has begun the Third Party Oversight Committee should monitor the third party relationship on no less than an annual basis. This annual audit should include a review of remedial due diligence investigations and evaluation of any new or supplement risk associated with any negative information discovered from a review of financial audit reports on the third party. The Third Party Oversight Committee should review any reports of any material breach of contract including any breach of the requirements of the Company Code of Ethics and Compliance. In addition to the above remedial review, the Third Party Oversight Committee should review all payments requested by the third party to assure such payment are within the company guidelines and are warranted by the contractual relationship with the third party. Lastly, the Third Party Oversight Committee should review any request to provide the third party any type of non-monetary compensation.
Audit
A key tool in operationalizing the relationship with a third party post-contract is auditing the relationship. You should secured audit rights, as that is an important clause in any compliance terms and conditions. Your audit should be a systematic, independent and documented process for obtaining evidence and evaluating it objectively to determine the extent to which your compliance terms and conditions are followed. Noted fraud examiner expert Tracy Coenen described the process as one to (1) capture the data; (2) analyze the data; and (3) report on the data, which is also appropriate for a compliance audit. As a base line, any audit of a third party include, at a minimum, a review of the following:
Three Key Takeaways
This month’s podcast series is sponsored by Oversight Systems, Inc. Oversight’s automated transaction monitoring solution, Insights On Demand for FCPA, operationalizes your compliance program. For more information, go to OversightSystems.com.