What Does an Effective Compliance Program Look Like? – The Regulators' Perspective

This article was republished with permission from Tom Fox’s FCPA Compliance and Ethics Blog.

What does an effective compliance program look like? Is it one that follows the 10 Hallmarks of an Effective Compliance Program as set out in the 2012 FCPA Guidance? How about one that uses the Six Principals of Adequate Procedures relating to the UK Bribery Act as its guideposts? Or should a company follow the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance? More importantly, for anti-corruption enforcement under the Foreign Corrupt Practices Act (FCPA), what does the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) look for when assessing a compliance program?

Over the years, we have heard various formulations of inquiries that regulators might use when reviewing a compliance program. While not exactly a review of a compliance protocol, one of my favorites is what I call McNulty’s Maxims or the three questions that former U.S. Deputy Attorney General and Baker & McKenzie LLP partner Paul McNulty said were three general areas of inquiry that he would assess regarding an enforcement action when he was at the DOJ. They are: first, “What did you do to stay out of trouble?” Second, “What did you do when you found out?” And third, “What remedial action did you take?”

Paul’s former partner at Baker & McKenzie, Stephen Martin, who still runs Baker & McKenzie Compliance Consulting LLC, said that an inquiry he might make was along the lines of the following. First he would ask someone who came in before the DOJ what the company’s annual compliance budget was for the past year. If the answer started with something like, “We did all we could with what we had ($100,000, $200,000, name the figure), he would then ask, “How much was the corporate budget for Post-It Notes last year?” The answer was always in the seven-figure range. His next question would then be, “Which is more business critical for your company, complying with the FCPA or Post-It Notes?” Unfortunately, it has been Martin’s experience that most companies spent far more on the Post-It Notes than they were willing to invest into their compliance program.

Last week at Compliance Week 2014, Andrew Ceresney, Director of the Division of Enforcement of the SEC, gave one of the keynote addresses. In his remarks he talked about the importance that the SEC is putting on compliance. He said “I start from the premise that the companies that have done well in avoiding significant regulatory issues, typically have prioritized legal and compliance issues and developed a strong culture of compliance across their business lines and throughout the management chain. This is something I observed firsthand while in private practice and have come to fully appreciate from my perch at the SEC.”

But, more importantly, he said that he has “found that you can predict a lot about the likelihood of an enforcement action by asking a few simple questions about the role of the company’s legal and compliance departments in the firm.” He then went on to detail some rather straightforward questions that he believes can show just how much a company is committed to having a robust compliance regime:

Are legal and compliance personnel included in critical meetings?
Are their views typically sought after and followed?
Do legal and compliance officers report to the CEO and have significant visibility with the Board?
Are the legal and compliance departments viewed as an important partner in the business and not simply as support functions or a cost center?

Beyond simply going into the DOJ or SEC and claiming that your company is very ethical and does business in compliance with the FCPA, how can a company demonstrate the above? This is where the Tom Fox Mantra of Document, Document and Document comes into play. No matter how much input the compliance function has into the above suggested inquiries, if the inputs are not documented, it is if they did not exist. So for meetings, you should keep attendance sheets or notations. A compliance representative can put a short, three-to-four-sentence memo into the file about the recommendations and the response thereto. If the compliance department advice was not followed, there should be a business reason documented for the decision. Moreover, if there is a rejection of the compliance function advice and the course of action leads to some type of FCPA issue, it may well be assumed the company knew or should have known that the course of action taken could reasonably lead to an FCPA issue, if not a full-blown violation. As to the issues of compliance visibility at the Board level, once again the documentation of any presentation and their substance can provide evidence to answer the query in the affirmative. But the key to all of these questions is whether there is documentation to prove the assertions that they actually occurred.

Near the end of his presentation, Ceresney said that “Far too often, the answer to these questions is no, and the absence of real legal and compliance involvement in company deliberations can lead to compliance lapses, which, in turn, result in enforcement issues. When I was in private practice, I always could detect a significant difference between companies that prioritized legal and compliance and those that did not. When legal and compliance were not equal partners in the business and were not consulted as a matter of course, problems were inevitable.”

McNulty’s Maxims, Martin’s question on budget and now Ceresney’s questions all provide significant guideposts to how regulators think about FCPA compliance programs. For me, I think the point is that companies which actually do compliance are easy to spot. For all the gnashing of teeth about how hard it is to comply with what the DOJ and SEC want to see in FCPA compliance, when the true focus can be distilled into whether a company actually does compliance as opposed to saying how ethical they are, I think it simplifies the inquiry and the issues senior management and a Board of Directors really need to pay attention to.

For a copy of the full text of Director Ceresney’s remarks, click here.

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