It is always interesting to learn how companies handle specific compliance issues. Years ago, I could always tell when a compliance department was lacking in stature and independence in a company. Typically, I observed three important indicators – a compliance department that was stuck in the legal department reporting to the general counsel; mired in detailed gifts, meals and entertainment reviews and approvals; and devoted extensive resources to conflicts of interest and follow ups.
Things have changed significantly since those early days in the growth of compliance programs. One area that has grown in importance, in my view, is conflicts of interest. I have assisted companies in investigating potential conflicts of interest, and many of these investigations grow into a much more serious matter. In several cases, what started as a conflict of interest investigation mushroomed into a fraud investigation where several actors, often relatives, were stealing from the company.
In today’s world of blurring ethical lines, it is important for companies to devote resources to identifying and investigating potential conflicts of interest. Many companies depend on a self-reporting system to identify potential conflicts of interest. Employees are asked if they have any family members or friends who conduct business with the company, and employees are expected to respond truthfully. In some cases, employees fail to report the potential conflict.
Interestingly, I have observed conflict of interest issues being reported on a company’s hotline. A company employee may report a conflict because a colleague may be bragging or benefiting about an ongoing relationship or scam. The hotline reports often turn out to be substantiated and lead to more serious issues to investigate.
The problem with the reporting system as it exists right now in many companies is that there are a number of potential conflicts that are escaping review by compliance staff. A more robust system is needed to unearth conflicts.
First, I am not suggesting that a company jettison a self-reporting form. However, I recommend that this information is a good starting point to verify the accuracy of the disclosure and an investigation of any potential conflict.
Second, companies that automate due diligence program should consider using the due diligence tool for its own employees where there is a suspicion or an allegation of potential conflicts. Such an investigation should be conducted in consultation with human resources to ensure compliance with applicable labor and employee laws and regulations.
Third, and perhaps most importantly, a conflict of interest risk assessment should be conducted to identify potential positions and functions where managers and employees have discretion to make purchases, recommend vendors/suppliers, and are susceptible to conflicts of interest that could have a financial impact on the company’s operations.
With all the priorities and tasks sitting in front of a CCO, it is hard to take conflicts of interest and make it a high priority. However, it is important to recognize how damaging a significant conflict can be to employee morale and belief in the company’s integrity.
If employees observe other employees scamming the company with family-related business opportunities and benefits, you can bet that the observing employees will be frustrated with the company’s failure to identify the conflict. Employees who observe ongoing misconduct m ay not bother to report the conflict if they do not believe the company will take action.
A company has to make a real commitment to enforcing its conflicts of interest policy at every level of the company, from the C-Suite down to basic vendor/supplier contracts and purchases. A commitment to identification and enforcement of a conflicts of interest policy is a basic requirement for employees to trust and believe in the company’s commitment to its ethics and compliance program.