Some C&E risk assessments are focused entirely on what might be called the “supply side,” meaning on matters internal to a company giving rise to risk. But for most businesses, a full accounting of risk should also include the “demand side,” meaning the risk creating impact of law enforcement priorities. Indeed, understanding the demand side may be key, at least in some organizations, to identifying “the risk around the corner.”
At its most obvious, a demand side risk factor would be the government’s perceived need to “make an example” of companies and/or individuals in a high priority area of law. The current focus on bringing FCPA prosecutions in the life sciences industry may be a reflection of this.
A less obvious but increasingly important demand side factor is that governments increasingly need money. And, in some instances, criminal prosecutions can be a non-trivial source of revenue for governments.
What does this mean from a C&E risk perspective? First, as a general matter, we are likely to continue to see the sort of “mega fines” described in an earlier post, which suggests in an across-the-board way the need for heightened attention to C&E.
Second, and more specifically, it could mean a greater focus on the types of criminal prosecutions or other proceedings that have the potential to result in large fines or other payments from companies. Chief among these is competition law/antitrust, and indeed we already seem to be in the midst of a significant expansion of competition law enforcement globally.
Competition law is also a good area for targeted risk assessment, because the risks here can vary dramatically by geography and product/service line. And – at least for some companies – it is a good area for additional mitigation such as training, because understanding of competition law rules, and of the severity of penalties for violations, is far from universal.
What other risks might become more significant due to this demand side phenomenon? Presumably, tax-related ones will. Indeed, in the past year the U.S. government has sharply increased its tax enforcement efforts in various ways, and it is hard to imagine that other countries (and other jurisdictions, such as state governments) will fail to do the same (because, as Willie Sutton said of his reason for robbing banks, “That’s where the money is.”)
Of course, few, if any, C&E officers have primary responsibility for tax compliance at their respective organizations. However, a fair – for some companies, important –question for C&E officers to ask as part of a risk assessment is whether the organization’s tax practices are consistent with its overall approach do doing business in an ethical manner.
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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.