In the great book of corporate compliance program failures, one of the most important stories is from the Bankers Trust derivatives marketing scandal of the mid-1990s. In that case, the bank – a major U.S. financial institution that was bought by Deutsche Bank shortly after the events in question here – was sued by both the government and various counterparties for deceptive practices in selling highly complex derivative instruments. (In some ways, the matter could be seen as a “prequel” to aspects of the financial meltdown of 2008.)
In connection with one of those cases, the government appointed an independent counsel to determine what the causes of the bank’s compliance failure were, and interestingly he found that the bank did have policies and other compliance measures in place addressed to marketing derivatives appropriately. What the bank lacked was a key single piece for any compliance system: the designation of an individual to make sure those measures were in fact being followed.
Given the horrific consequences to Bankers Trust of this lapse, the story calls to mind, “For want of a shoe a nail was lost,” and so on up to the loss of a kingdom. It also suggests a need to “think small” – and to practice “nano compliance.”
What is nano compliance? It is a local focus on the most risk-variable elements of a compliance and ethics program. By “risk-variable elements,” I mean those addressed to setting standards, training and communications, auditing/monitoring and the various types of internal controls discussed in an earlier article. Other elements – e.g., investigations – can, but are less likely to, have a local dimension. And by “local,” I mean not only using a geographic dimension but also analyzing risk by focusing on product and service lines or staff functions.
So, to illustrate, using the broad risk area of competiton law, one would:
This can be a significant undertaking, as can the process of monitoring the mitigation. But, at least for some complex organizations – particularly decentralized ones – it can help prevent the kingdom from being lost.
About the Author
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Jeffrey Kaplan, a partner in the Princeton, New Jersey office of Kaplan & Walker LLP, has practiced law in the compliance and ethics field since the early 1990’s.
Mr. Kaplan is also former adjunct professor of business ethics at NYU’s Stern School of Business, co-editor (with Joseph Murphy) of Compliance Programs and the Corporate Sentencing Guidelines (West Thomson), former counsel to the Ethics and Compliance Officer Association and co-author of a study by the Conference Board on the use of compliance and ethics program criteria in government enforcement decisions.