What Are Your Risks?

Thomas Fox

Thomas Fox - Compliance Evangelist

What are the largest risks to a corporation? How have those risks continued to morph and change? What are some of the top enforcement priorities of agencies and regulators? Finally, what is the compliance response to both business risks and legal challenges. 

This white paper will explore some of the topics and more as we consider what business and legal risks companies should prepare for and how to manage those risks going forward. 

A. Global Risks

In its Global Risks Report 2019, (WEF Report) the World Economic Forum laid out risks in several categories including political and geopolitical risks, technology risks, economic risks and environmental risks. These risks all inter-relate and their solutions inter-play, requiring a level of intelligence, leadership and cooperation not currently seen on the world political stage. It will fall to business leaders, who through commerce will have to address, mitigate and manage these risks as governments abandon their traditional leadership roles. 

The technological risks center around the vulnerabilities to hacking and the issues around maintaining data privacy. As the WEF Report noted, “There were further massive data breaches in 2018, new hardware weaknesses were revealed, and research pointed to the potential uses of artificial intelligence to engineer more potent cyber- attacks. Last year also provided further evidence that cyber-attacks pose risks to critical infrastructure, prompting countries to strengthen their screening of cross-border partnerships on national security grounds.”

Economic risks turn on the continued vulnerability of the global economy. Here financial market volatility is compounded by slowed global economic growth. Overlaid on these two factors are the significant increase in government and corporate debt and rising interest rates has “placed a particular strain on countries that built up dollar-denominated liabilities while interest rates were low.”

Clearly environmental risks continue to increase with wide swings in climate which has led to highly divergent weather patterns. When you overlay those risk, with those persons who have buried their collective heads in the sand to this problem, it has led to the “failure of climate-change mitigation and adaptation”. You also see a “loss affecting health and socioeconomic development, with implications for well-being, productivity and even regional security.” For corporations this risk is only compounded by all of the above. 

The political instability of western governments and the lack of political consensus, together with leaders who cannot articulate any coherent policy framework, has made it both difficult to even discuss many of the world’s leading problems and risks. The WEF Report stated, “Against this backdrop, it is likely to become more difficult to make collective progress on other global challenges—from protecting the environment to responding to the ethical challenges of the Fourth Industrial Revolution. Deepening fissures in the international system suggest that systemic risks may be building. If another global crisis were to hit, would the necessary levels of cooperation and support be forthcoming?” As the current US government has ceded leadership in these areas, particularly in the area of ethical leadership, US companies have been and will continue to be required to step up to not only manage these ethical risks but provide global leadership. A robust culture of ethics and compliance is quickly becoming a must have from a commercial perspective rather than simply in response to a legal requirement. 

B. Business Risk

The Allianz Risk Barometer-Top Business Risks For 2019 (Business Risk Report) is designed to articulate the corporate risks for this year and beyond based upon a survey of over 2400 risk management experts. It supplements the WEF Report by drilling down to a lower strategic level, down to the tactical level for many companies to consider their risks going forward. It lists risks based for US and non-US based companies in wide variety of geographic locations, literally across the globe. 

The Business Risk Report identified four general areas of primary risk to businesses. The first is in business interruption. The second is in natural catastrophes. The third centers on legislative and regulatory change. The fourth and final general area is around technology. Most interestingly technology is seen as way to help to manage risk but the blow back for its misuse or failure can bring high costs to an organization. 

Obviously, business interruption can be caused by a wide variety of factors and risk. However, when you pair it with the burgeoning category of cyber incidents, including cyber-crime, data breaches and IT failures and outages, you begin to see the scope of the risk. Add to this the more traditional potential risks of fire, supply chain interruption or other similar risk and you begin to see the problem. Moreover, many of the highest risks for financial loss can occur from scenarios which do you require physical damage. The Business Risk Report stated, “Breakdown of core IT systems, product recall or quality incidents, terrorism and political violence events or riots, environmental or pollution incidents or even regulatory change can bring businesses to a temporary or prolonged standstill  and have a devastating effect on revenues.”

While every insurance market will always be sensitive to natural catastrophes, the potential damage to organizations is also increasing. Obviously rain storms and hurricanes are seen as such natural catastrophes but the increase in global warming has led to a plethora of wild fires in areas not previously prone to such events. This can not impact direct services but also have indirect impact through third parties, supply chains and even offsite backup servers and storage. 

In the age of Trump perhaps no area is more volatile than legal and regulatory. Economic sanctions can literally change daily. They can even be implemented and within 24 hours be withdrawn by Presidential fiat via Twitter. Protectionism is certainly on the rise and blow back against US by EU regulators and those from other countries due to the Trump Administration’s weaponization of economic sanctions, trade laws and anti-corruption legislation has certainly increased risk to US companies for legal wrangles at home and abroad. 

Finally, is the area of technology. While noting that technology will always be a part of the solution, the Business Risk Report acknowledges that “new technologies also bring risk, sometimes with unexpected consequences.” The Business Risk Report pointed to the drone incident at Gatwick airport around Christmas in December 2018 as one such example. Another area is in data collection and its sale. Certainly, Facebook and Google have faced challenges in this area but every US company has personal data, certainly on its employees but perhaps a wide range of others such as customers or potential customers. 

C. Key Enforcement and Regulatory Priorities

In order to manage the legal and regulatory risks, companies must be aware of changing priorities of regulators going forward. In a 2016 speech noted that then Attorney General Jeff Sessions, “signaled that he would be more than willing to go after foreign companies that may be issuing bribes to undermine US competitors.” Sessions then went on to state, “Our department wants to create an even playing field for law-abiding companies. We will continue to enforce the FCPA and other anti-corruption laws. Companies should succeed because they provide superior products and services, not because they have paid off the right people.” 

This means the Justice Department will continue to be vigilant in its pursuit of FCPA violators. This was most clearly seen in the recent MTS FCPA settlement where the largest Russian telecom company paid $850 million in FCPA fines and penalties for its actions in Uzbekistan. There was little US involvement (although enough to create legal jurisdiction) and it was yet another clear signal that the Justice Department would vigorously pursue non-US domiciled companies which engage in bribery and corruption to win business away from American companies legitimately pursuing business interests outside the US. 

Beginning with the introduction of the Yates Memo, in September 2015, the Justice Department moved a focus to pursuing individual prosecutions. The Memo noted that to obtain any cooperation credit, a company had to turn over information on all employees involved in the FCPA violative conduct. This was reinforced by the 2016 FCPA Pilot Program and memorialized with the 2017 FCPA Corporate Enforcement Policy which formalized the Declination enforcement option for companies which (1) self-disclosed; (2) extensively cooperation; (3) remediated the illegal conduct and persons involved; and (4) profit disgorgement. 

In late 2018, Rosenstein gave a speech which modified the Yates Memo and changed some of the requirements of the FCPA Corporate Enforcement Policy. In its original incarnation, the Yates Memo required corporations to investigate all employees involved in any FCPA violations and turn over all information on all employees investigated who might be involved in conduct violating the FPCA. Now companies must focus their efforts on those who were substantially involved. But even with this change, in 2018, the Justice Department announced charges against more than 30 individual defendants in FCPA-related cases, and convictions of 19 individuals.

Former Deputy Attorney General Rod Rosenstein, in a March 2019 speech said, “While pursuit of criminal and civil remedies against corporations is important, we should always focus on the individuals responsible for misconduct. Cases against corporate entities allow us to recover fraudulent proceeds, reimburse victims, and deter future wrongdoing. But the deterrent impact on the individual people responsible for wrongdoing is sometimes attenuated in corporate prosecutions. The most effective deterrent to corporate criminal misconduct is identifying the people who commit crimes and sending them to prison. Absent extraordinary circumstances, a corporate resolution should not protect individuals from criminal liability.”

The results of this change were most dramatically seen in this year’s FCPA enforcement action involving Cognizant Technology where the company received a Declination under the FCPA Corporate Enforcement Policy in the face of C-Suite involvement in the bribery scheme. Concurrently with the Declination, the Justice Department indicted both the CEO and CFO, individually, for violating the FCPA. In the Declination letter, the Justice Department specifically cited the Board of Directors self-disclosing within two weeks of being notified of the FCPA violation and the information turned over on senior management including the persons indicted. 

However, the FCPA has two separate components. The Justice Department enforces the anti-bribery, criminal component. The SEC enforces the Accounting Provisions, books and records and internal controls, most usually from the civil side of enforcement. Here the SEC is focusing more on effective internal controls. Insights into the areas of enforcement on the Accounting Provisions can often be seen from FINRA enforcement priorities and SEC examination priorities. In the PwC First Take article, entitled “Ten key points from FINRA and SEC’s 2019 examination priorities there are several areas which anti-corruption compliance practitioners can see potential SEC enforcement focus under the FCPA Accounting Provisions. 

Some of these include internal control effectiveness, where companies must be able to demonstrate the effectiveness of compliance controls. This means you need to not have a robust internal controls system in place but test and also benchmark against it using the COSO 2013 Internal Controls Framework or some other generally recognized internal control standard. When was the last time you checked your due diligence process, including auditing your current third parties to determine if your due diligence on them was up-to-date? This should also consider due diligence from the AML perspective for both customers and vendors in your supply chain. From the AML perspective, how is your organization monitoring for suspicious activity and suspicious transactions?

Finally, outside of ABC and AML compliance, when was the last time you looked at your cybersecurity policies both from data privacy/data protection perspective but also from the notice and remediation perspective when a breach occurs (not if, but when). If you are doing business in the EU or UK, there is the very short notice provision. Additionally, does your company fall under the new California law? How much training has your organization done around its data privacy/data protection policies and procedures? This could well become a SEC enforcement as well.  

D. Compliance Going Forward

In announcing this year’s World’s Most Ethical companies, Tim Erblich, CEO at Ethisphere, in an article entitled, “The Financial Premium of Ethical Leadership said, “An investment thesis: companies that embrace diversity of thought, people and cultures; operate with simple clear policies based on values and trust; respect and enhance the communities in which they operate; and promote transparency will achieve better financial performance. The good news –the data once again supports this theory. In tracking how the stock prices of the publicly traded World’s Most Ethical Companies® honorees compare to the U.S. Large Cap Index, we found that listed honorees outperformed the large cap sector over five years by 14.4 percent and over three years by 10.5 percent. We call this the “Ethics Premium.””

With nearly 15 years of data behind its World’s Most Ethical company awards, Ethisphere has consistently demonstrated that companies committed to robust compliance and ethics do better in the marketplace. On a more tactical, Dr. Kyle Welch, Assistant Professor at George Washington University, released a paper in late 2018, co-authored with Stephen Stubben, Associate Professor from The University of Utah, entitled “Evidence on the Use and Efficacy of Internal Whistleblowing Systems”. In this paper, Welch and Stubben reviewed some 15 years of anonymized data from NAVEX Global, Inc. This data was from the company’s hotline reporting systems. Some of the key findings included that companies with a robust whistleblower and reporting system had greater profitability and workforce productivity as measured by Return on Assets (ROA) and there were fewer material lawsuits brought against the company overall and there were lower settlement costs if a lawsuit did occur. Finally, there were fewer external whistleblower reports to regulatory agencies and other authorities.

Both of these announcements demonstrated something that compliance professional have known anecdotally for some time-effective compliance is good for business. Yet compliance programs still face many challenges going forward. Just as global and business risks morph, a compliance program must adapt to meet these new challenges. One of the most important ways to do so is for a compliance program to connect to all of the functions of an organization. The law firm of Baker McKenzie, discussed this issue in a white paper entitled, “Connected Compliance-the Business Case for Compliance Integration. The report noted four key tenets around the concept connected compliance.

The first is strategy. As the report noted, “It means finding the right balance between strategic growth and compliance practice to increase business value. It also connects compliance and strategy leaders, aligning compliance and commercial goals.” The second is collaboration. Here the report stated, Collaboration “relies on the ability of the whole organization to build relationships, understanding and accountability for compliance across functions – from the boardroom to the frontline.” The third tenet is agility, which the report says, “ensures organizations are able to respond to the regulatory environment by taking steps to reduce internal complexity and fast-track guidance.” The final tenet is effectiveness, which the report delineates that “compliance is streamlined without sacrificing the ability of the compliance team to fulfil its dual function. Cost cutting is balanced, targeting duplication of efforts rather than reducing the scope of compliance services.”

Even in the face of a slowdown in compliance spending, the increased efficiencies and capabilities brought by technology tools and innovations in the compliance landscape have made compliance programs more efficient. It has also made the compliance function more effective. This effectiveness is the key inquiry for the Justice Department when they consider a company under a FCPA investigation. This was highlighted in November 2018, in a speech by Principal Deputy Assistant Attorney General John P. Cronan who spoke at the Practising Law Institute Event in Washington. 

Cronan’s remarks spoke directly to the corporate compliance practitioner. He began by noting the Justice Department continues to strive for more public-private partnership in fighting the global scourge of bribery and corruption. The Justice Department believes it can more effectively do so when companies come in and self-report bribery and corruption they uncover in their organization, stating, “ the importance of law enforcement and private industry working together in pursuit of common, shared objectives. There can be a perception – and I would say, often a misperception – of the Department of Justice and private industry as adversaries. While that certainly is sometimes the case, viewing law enforcement and the private sector in such stark black and white terms all too often is an oversimplification and simply inaccurate. That misperception not only can pose an obstacle to effective law enforcement, but it can also work against the interests of corporations that are victimized by crime or whose employees engage in misconduct.” The law enforcement he is referring to is fighting corruption and the law is the FCPA. 

Moreover, it is the compliance professional and corporate compliance function which “will confront difficult decisions about how to respond to bad actors; what compliance, audit, and ethics programs will look like; what resources will be devoted to those programs; and the level of access that compliance personnel will have to management and the board. It therefore is you to whom we in government want to make our message clear about the incentives for companies to prevent and redress corporate misconduct.”

Finally, and perhaps most importantly, was Cronan’s words on an effective compliance program, not a paper compliance program. He stated, “when we at the Department talk about compliance, we are referring to effective compliance. The Principles of Federal Prosecution of Business Organizations make that clear. Under those Principles, in determining whether to charge a corporation, prosecutors must consider, among other factors, the existence and effectiveness of the corporation’s preexisting compliance program, as well as the corporation’s subsequent remedial actions including efforts to implement an effective compliance program or improve an existing one. In assessing a compliance program, the Principles specifically direct prosecutors to consider “whether a corporation’s compliance program is merely a ‘paper program’ or whether it was designed, implemented, reviewed, and revised, as appropriate, in an effective manner.””

This may well be the most lasting legacy of the Session and Rosenstein led Justice Department. It is one that every compliance professional should celebrate as it elevated the importance of compliance. But with more power comes more responsibility. Compliance programs must be fully operationalized and have demonstrated effectiveness. 

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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