The Evolution of Compliance: Structural Changes Which Led to Compliance 2.0

by Thomas Fox
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If there was one theme from Compliance Week 2016 it was the continued evolution of the Chief Compliance Officer (CCO) role and the compliance profession. Long gone are the days when someone is sent over from a legal department into the compliance department or worse, some lawyer who is just given the title of CCO and this is considered to be a best practice or even sufficient. In the opening keynote presentation, representatives from the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) made clear they expect a CCO to know more than simply the laws of anti-corruption, they must actually work to do compliance in an organization. A key metric of doing compliance is the independence of the CCO and compliance function.

The conference was bookended by the keynote session “The Maturing of a Profession: The Rise of Compliance 2.0” which laid out the structural changes that have occurred for the CCO and compliance profession as a whole over the past 10 years or so. The starting point for the compliance profession was when the Sentencing Guidelines were made effective in the early 1990s. Because this function was borne out of essentially a criminal law enactment, in the form of the Sentencing Guidelines, it seemed to make sense at the time to respond with a legalistic approach such as having a General Counsel (GC) also be the CCO or having the compliance function in the legal department. The response to the accounting scandals of the early 2000s led to the passage of the Sarbanes-Oxley Act (SOX), which mandated more robust compliance programs, thereby enhancing the role of the CCO. There were later updates to the Sentencing Guidelines, which also helped to change the structure of compliance.

As with most legalistic approaches, such as those to the Sentencing Guidelines, it began by corporations setting out their internal rules and regulations; first in the form of a Code of Conduct and certainly after Opinion Release 04-02 in 2004 with the implementation of a written compliance program in the form of policies and procedures. Then training, incentives and punishments were put in place. Of course such an approach did not take into account third parties and perhaps that is why the majority of Foreign Corrupt Practices Act (FCPA) cases over the past 12 years have involved third parties.

Yet now the above structure is no longer sufficient. That is reason for the nomenclature of Compliance 2.0 as a true structural change has occurred moving the compliance function out from under the legal department and separating the CCO from the GC. What are the changes in this structural component? The final keynote of Compliance Week 2016 presented five key transformations.

  1. Empowerment

Here the CCO is empowered by charter or Board direction to carry out their duties. A CCO does not have to ask the GC for permission as they are more generally reporting directly to the Board or the Audit Committee of the Board. Further, the CCO position is now a senior corporate level role, often in the C-Suite. In the corporate world titles and position matter and if your position is seen as being on the level of the corporate brass it will give you more weight to carry the day.

  1. Independence

The key change here is the independence of the mandate of compliance from that of the legal department. The legal department has and always will exist to defend the company. It is asked to opine on whether a particular act is legal; in other words can we do it, not should we do it? The compliance function exists to prevent, detect and remediate problems, in other words fix things. The compliance function also differs from the legal function in that it has a non-discretionary escalation of issues through its unfiltered access to a company’s Board of Directors, through a direct reporting line.

  1. Seat at the table

Here the key is that compliance is seen as collaborative with legal and not subordinate. Yet this takes work and agreement by both legal and compliance to carve out their respective roles so that toes are not stepped on or even worse in the corporate world, feelings are not bruised. It also entails both the CCO and the compliance function being involved in the company’s strategic planning meetings so that compliance can be proactive and not simply reactive. Of course this means involvement in risk management meetings, operational reviews and budget reviews, as that is where the corporation sets its priorities.

  1. Line of sight

This is probably the biggest change in the structure of compliance. The CCO and compliance function should be able see into the business functions directly, not through the eyes or even the lens of the legal department. Yet it also means compliance should work towards an understanding through the integration of compliance risk areas for review, with unfettered access to information. It also means the business functions need to report up to compliance through regular reporting channels. Finally, all of this, by necessity requires the tearing down of silos so that compliance has visibility up and down the chain in this line of sight.

  1. Resources

As was made clear by both Andrew Weissmann from the DOJ and Stephen Cohen from the SEC in the opening keynote, the resources made available to the CCO and compliance function are becoming a more key metric for regulatory review. Fortunately this is also a key structural change moving to Compliance 2.0. Resources most generally mean two things: budget and head count.

For budgeting the change in Compliance 2.0 is that the compliance function has its own standalone budget, which should be sufficient to fulfill the compliance mandate. I think that it is beyond obvious to state that a strong compliance budget is always less expensive than a FCPA fine and penalty so the investment is sound. Head count is the corporate term for staffing but here it is more than simply bodies. It requires true subject matter experts (SMEs) either through professional experience or internal training. It also means compliance personnel reporting up to the CCO. If a company uses non-compliance department compliance champions, these folks should at least have dotted line reporting to the CCO.

I have laid out these structural changes in some detail so that you can benchmark your compliance program to see if there are gaps, which you might wish to remediate from a structural perspective. For those of you who did not feel there has not been enough evolution of the compliance function; not to worry as there is a lot more to talk about in Compliance 3.0. Stay tuned…

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

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