Education, Enforcement, Prevention: Life After the Galleon Trial

fcpa enforcementAs we have witnessed the tentacles of the Galleon trial ravage every corner of the financial industry, firms are beginning to address their necessary levels of corporate compliance. Companies need to understand that complacency is no longer accepted lest they desire negative financial, reputational and legal exposure.

To adhere to the varying levels of compliance, firms need to embrace education. Executives and employees must understand the acceptable guidelines of corporate behavior as outlined in the Foreign Corrupt Practices Act, Sarbanes-Oxley and, eventually, the Dodd-Frank bill (to name a few). It may seem like a daunting exercise of time and resources for officers of a company to flush out all of these guidelines and explain them to their employees, but the risk of not doing so is too great to ignore.

The Galleon trial proved that insider trading and malfeasance in general is not limited to a few individuals. Over twenty people have pled guilty to participating in the insider-trading scheme. These people were not just Galleon employees; the guilty parties have spanned from consultants to hedge funders to lawyers. This shows that education of the legality of business practices is only valuable when it is properly enforced. Companies need to employ skilled corporate compliance officers to regulate and navigate the operations of a company.

Once financial institutions and corporations have accepted that awareness of permissible practices is critical to the success of a company, they should also consider prevention. The most obvious and proactive approach to avoiding fraud is the implementation of a hotline. Sarbanes-Oxley requires publicly traded companies to have some sort of whistleblower component in place. For private firms, a hotline is an ideal resource to give executives, investors and others a chance to prevent fraud of any kind. The hotline allows firms to have a mechanism in place that addresses complaints or concerns about unethical behavior, anything from insider trading to sexual harassment and unsafe work conditions. Not only does a hotline show regulators that a company strives for compliance but also shows employees that the board, management, investors and others care as much about the workplace as they do the balance sheet.

Independent ethics hotlines allow employees, vendors and others to anonymously report wrongdoing to an independent third-party that monitors the complaints and reports to outside counsel or board members about any potentially problematic issues that surface. This then enables the officers and directors of a company to appropriately address the problems before they spiral out of control and potentially end up in the hands of regulators.

The Galleon trial has illuminated the otherwise quiet reality that the network of informal sharing of information is no longer acceptable or a reliable means for promotion. In order to avoid vulnerability to a Galleon-like situation, firms need to examine and strengthen their compliance efforts. The first and most basic step in this endeavor is to educate on the rules of approved business practices. The next is to enforce these standards and ensure they become a fundamental component of operations. Lastly, firms should recognize that prevention is the best way to avoid involvement in, or exposure to, fraud and introducing a hotline is a productive means to that end.

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About the Author

Kenneth Springer

About the Author
Kenneth Springer, CFEKenneth Springer, a Certified Fraud Examiner, is president and founder of Corporate Resolutions Inc. and co-author of “Digging for Disclosure: Tactics for Protecting Your Firm’s Assets from Swindlers, Scammers and Imposters” (FT Press; January 2011). A former special agent of the Federal Bureau of Investigation, Mr. Springer has conducted business-related investigations and intelligence gathering for over thirty years. Corporate Resolutions Inc. conducts background checks and business intelligence globally and offers a suite of other specialized investigative services, to include an Ethics Hotline. The company is headquartered in New York with offices in Hong Kong, London, Miami and Boston.