Important Background


Being Passionate About Integrity

MONEY DOWN THE DRAIN
Typically companies lose between 2% and 10% of turnover through fraud and corruption. Effective controls do not increase profits; but they avoid throwing those that have already been hard earned down the drain.
Companies should be passionate about integrity; not simply to comply with regulations but to optimise performance, to maintain and leverage exemplary corporate citizenship while presenting a hard target for opponents.  
 
Effective controls are not a brake on commercial performance, but are the essential safety equipment that empowers companies to go faster and further along roads that are considered too hazardous for others to travel.

 
The Framing of Compliance
 
THE FIRST RULE OF HOLES
When you are in a hole and need to get out….
STOP DIGGING
“Compliance” is a negative word, implying that someone has to be led by the nose into doing things he or she would otherwise not do. It assumes that those doing the leading are better qualified than those being led.

However, repeated regulatory failures show compliance does not work its present form.

 
Our approach is different and it works…


The Dangers of Regulatory Silos

DANGERS OF REGULATORY SILOS
In January 2013, the Danish company - Norvo Nordisk -was fined $3 million by the Russian authorities for anti-competition violations based on the argument that its requirement that potential agents must submit to due diligence reviews and other measures necessary to comply with the Foreign Corrupt Practices Act were restrictive and were not fair under Russian law. The Russians, effectively, demanded that Novo abandon its anti-bribery compliance program.
International companies are bound by a never ending and constantly shifting battery of laws, regulations and rules; enforced by hundreds of agencies, each one assuming that its own interest stake priority.
Instructions and guidelines are issued in silos that sometimes conflict, are rarely coordinated, seldom indexed or cross referenced and often not even dated. Companies have to navigate their way through a regulatory labyrinth, try to tick every box and avoid every red flag.  If they fail at any turn, criminal and civil sanctions may result.


Corporate Liability

Until Section 7 of the UK Bribery Act (UKBA) came into force, America was the only country that held companies vicariously liable for the wrongdoing of their employees when working within the scope of their jobs and with the intention of organisational gain.  Regulators and prosecutors prefer chasing after companies because they are far more likely than individuals not contest cases – and pay up - even when they believe themselves innocent. Companies are soft targets and the more willing they are to capitulate to regulatory pressure, the softer they become.

 
Asserting the right to manage: honestly…

 
The Dangers of Uncertainty

It is doubtful whether many companies fully understand their international regulatory profile. This is especially true of laws and regulations (such as the UKBA and American Foreign Corrupt Practices Act) which are unclear and where uncertainties - over what is and is not permissible - are only resolved after the event through prosecutorial discretion. Uncertainty means that – to stay clear of an undefined and moving red line- critical business decisions default to extreme safety. Companies may become so chronically risk averse that genuinely honest commercial opportunities are needlessly abandoned in the name of compliance. Campaigns based on Inspired Integrity fly above box ticking uncertainty: they empower managers to take decisions, safely.

 
Inspired Integrity empowers entrepreneurial decision making…


Anti-bribery Laws

Corporate Liability and Adequate Procedures

The UK Bribery Act (UKBA) – which came into force in July 2011 – created renewed interest - if not near paranoia - over compliance and the supposed need for companies to document “adequate procedures” to defend the vicarious, corporate liability offence under Section 7.  The UKBA is based on a model of “improper performance” rather than principal -agent relationship of earlier laws. Thus there are no binding judicial precedents to clarify the Act’s many uncertainties: such as what is acceptable corporate entertaining and what is not. Regulators say: “not to worry as we will use our prosecutorial discretion”. This is of absolutely no use to companies who must take decisions in real time.

It has become obvious that the Serious Fraud Office (SFO: which is the lead agency for the UKBA) is keen to mimic the established American enforcement model involving Deferred Prosecution Agreements (DPAs), plea bargaining, civil disposals, confiscation and disgorgement of profits. For this reason, American prosecutorial decisions involving expansive interpretations are universally relevant. Besides that, many British companies are also bound by American extra-territorial laws; not least of which are all embracing charges of conspiracy.

The DOJ and SEC were quick to exploit UKBA’s psychosis by hyperbolising the importance of the Foreign Corrupt Practices Act (FCPA) for all companies that have even the remotest American connection and the requirement for Effective Compliance and Ethics Programs (EPECs) to reduce the risks of corporate prosecution and to mitigate penalties.

A problem for companies bound by both UK and American legislation is the serious deficiency in the six principles of adequate procedures set out in the “Guide for Commercial Organisations”(GCO) issued by the Ministry of Justice(MOJ) and their misalignment with (among other things) the:
  • US Federal Sentencing Guidelines (FSG);
  • The Resource Guide on the FCPA issued by the DOJ and SEC in 2012;
  • The terms of Deferred Prosecution Agreements negotiated by the DOJ and SEC which contain compliance requirements that bear little relationship to the FSG;
  • Speeches made (some behind closed doors and never made public) and guidelines issued (with some subsequently withdrawn) by the SFO on its interpretation of the Act;
  • Financial Services Authority, SEC rules and codes and accounting standards;
  • UK corporate governance standards and Sarbanes-Oxley;

as well as the new whistle blowing and bounty payment provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act, which have the potential to subvert internal compliance programs.

Worse still, other countries, national, federal and state agencies not to mention non-governmental organisations have issued further guidance, again in uncoordinated silos. Currently in the anti-bribery field there are over thirty different guidelines, any one of which regulators could use to argue that a company’s procedures are inadequate.


The Skewed Picture

The UKBA is the most comprehensive response – some would say an over-reaction- to the OECD Convention on the Bribery of Foreign Public Officials in International Business Transactions.  It badly skewed towards punishing bribe payment overseas and fixates on trivia (in the wider scale of crime) such as facilitation payments, entertaining and small gifts.
 
Figure 1: The Bias of the UK Bribery Act and Guidance for Commercial Organisations
The figure represents the six principles of the MOJ GCO and illustrates their lack of concern with extortion, internal and competitive corruption. It is chronically one dimensional.



Neither the Act, the Guide for Commercial Organisations (GCO), Federal Sentencing Guidelines(FSG) nor any other official guideline has anything meaningful to say about bribe extortion, political, stratospheric, academic, media, internal or blue collar corruption and nothing whatsoever to help honest companies deal with bribery by competitors most of whom are not bound by extra-territorial laws similar to those imposed by the UK and USA.


The Obligation to Self-disclose

There is no obligation under the FCPA or UKBA for companies to make a disclosure to regulators if they suspect an associated person has paid or extorted bribes. However, companies supervised by the Financial Services Authority (FSA), SEC,  or which are in the regulated sector for the purposes of the Proceeds of Crime Act are required to make disclosures which effectively result in mandatory reporting of bribery offences5.

A delusion has been created (often by those in whose commercial interest it is to hyperbolise self-disclosure) that companies who don’t voluntarily report even the most trivial suspicions of bribe payment will be hammered by omnipotent regulators.


The Supposed Benefits of Adequate Procedures

The other side of the delusion is that voluntary disclosure followed by proof of EPECs (or adequate procedures under the UKBA) will result in prosecutorial sympathy, declinations to indict, reduced penalties and avoidance of supposed mandatory debarment from government contracts. The delusion is the ultimate stick and carrot, intended to frighten companies into self-disclosure when there is no legal (and even less moral) requirement that they should do so.

THE AVAILABILITY CASCADE
Blogs and publications by some “Cottage Industry” firms repeatedly cascade worrying views about the dangers of non-disclosure and the “sharpening of knives” by omnipotent regulators.
The headlines in a recent blog stated something along the lines of “Self-reports to the SFO Double”. Later in the article it became clear that the doubling was from 7 cases in 2011 to 12 in 2012.
This is not exactly a landslide given the number of businesses in the UK. Neither did it point out - with the SFO’s dramatic change of strategy following the appointment of a new Director – that the 12 firms might not escape prosecution, after all.
The motivation for the stick and carrot is glaringly obvious. Without self-disclosure, regulators would have little to do and what they did have would require them to bear the risks of difficult and expensive investigations which are as likely to fail as to succeed.
Under the self-disclosure regime, regulators delegate responsibility, costs and risks of proxy investigations to the corporate offender’s legal and other advisers.

It is no wonder that regulators fixate on self-disclosureand that some professional firms - who pick up multi-million pound fees by advising their Clients to self-disclose - should support the delusion.


Some Facts Not Usually Discussed

When the facts (which are rarely publicised) are examined a different picture emerges:


Not so Omnipotent regulators;
  • Regulators rarely detect bribery offences. The upsurge of cases in 2009-2010 is largely explained by the Oil for Food program, where access to the Iraqi government’s records made around 2,300 companies sitting ducks;
  • Between  2004 and 2011,  the  SEC  and  the DOJ were  involved  in  around 280 enforcement  actions  for  bribe payment. This average of 40 a year involves serious double (and sometimes multiple) counting;
  • 95% of DOJ and SEC cases were settled out of court often by companies who considered themselves innocent (or had a good defence) but capitulated because it appeared to be the cheapest and quickest option; many wish they had not done so;
  • There was not a single UK prosecution for overseas bribery between 2002 - when an extra-territorial offence was created under the Anti-terrorism and Security Act - and 2011
  • Prosecutors have a poor track record in contested fraud and bribery trials;
  • Only one company has ever been debarred from American government contracts as a result of a bribery conviction;
  • The Dodd Frank Act has been hyperbolised, to generate even more anxiety that thousands of whistle blowers will come forward to claim bounties for FCPA (and thus UKBA) offences. In fact bounties are payable only when information relates to an “issuer” of US securities. Most FCPA violations will not qualify for any reward.

Self-disclosure results in reduced penalties;
  • Negotiated penalties for companies which disclosed were 42% higher than those whose skulduggery emerged by other means6
  • US regulators typically give small mitigation credits under the FSG for self-disclosure but these are insignificant compared with the much larger upward adjustments that can be contrived through highly creative loss and gain calculations. The truth appears to be that regulators blag the maximum penalty they believe will be tolerated;
  • When the few cases that were contested reached court, judges typically slashed the sentences sought by the DOJ or SEC by between 30% and 200%;
  • DPAs require publication of a Statement of Facts which cannot be disputed under any circumstances. They are goldmines for other regulatory agencies, commercial litigants and class actions;
  • The idea that self-disclosure brings problems to a speedy end is also a fiction: cases often drag on for years and once a company has appeared on the regulatory radar, it stays there.

The credit for EPEC;
  • Not one case can be validated where either the DOJ or SEC declined to prosecute when there was sufficient evidence and it was in the public interest to do so7;
  • The US Sentencing Commission reported that in the 20 years that the FSG has been in effect 3,433 organisations were sentenced for a variety of federal offences of which only 5 received any credit whatsoever for their compliance programs
  • The DOJ Anti-trust Division refuses to recognise EPEC when deciding whether or not to prosecute or to mitigate sentences;

Bias against foreign companies and individuals;
THE OECD PHASE III REPORT
In March 2012 – the OECD Phase III Report  into the UK’s compliance with the Convention stated that the Ministry of Justice Guidance on adequate procedures has no ‘legal standing or force of law’, carries no more weight than an ‘academic text’ and is not binding on prosecutors or courts. Some judges told the OECD that government statements about legislation are ‘normally not of great relevance’. Thus even total adherence to the Guidance is not a safe harbour defence. So, what is the point of worrying about adequate procedures?
  • The probability of a non-American company being pursued by the DOJ or SEC is estimated as 7 times greater than for a domestic equivalent;
  • In 1991 less than one per cent of firms sanctioned by the DOJ were foreign: by 1999 it had risen to over 50% and that was before the recent cluster of multi-billion dollar cases involving UK and European banks for LIBOR and money laundering skulduggery;
  • Negotiated penalties imposed on foreign companies were 22 times greater than for their domestic counterparts;
  • The average fine imposed on a foreign firm for a violation of federal laws was $38,112,00 and $7,540,000 for an American company;
  • 90% of DOJ  and 100% of SEC of prosecutions of individuals were against foreign nationals
ADEQUATE PROCEDURES AND EPECs
Adequate Procedures (in the UK) and EPECs (in the USA) should be considered by prosecutors when deciding whether or not to institute criminal proceedings. But there the similarity ends.

Adequate procedures will be evaluated by juries when assessing evidence to defend charges under section 7 of the Act. EPECs have no bearing on the evidence in American prosecutions but may be taken into account by a judge in sentencing
It is likely that the SFO will follow the American lead and that proof of adequate procedures will be far from a safe harbour. This is especially likely given that:
  • Most of the warm and friendly “Come to Jesus” statements made by Richard Alderman, the former SFO Director, have been rescinded(and rightly so) by David Green CB, QC his successor. Mr Green has stated that self-disclosure will be noted in deciding whether or not to prosecute but will not be determinative;
  • Making a Suspicious Activity Report to the FSA, Serious Organised Crime Agency (SOCA), SEC or DOJ of money laundering is unlikely to qualify as a voluntary disclosure for UKBA purposes;

The restricted modules examine the significance of the self-disclosure delusion.


The Bottom Line

The bottom line is that companies who believe that self-disclosure, adequate procedures or EPECs will save their skins – after controls have demonstrably failed - could be in for a nasty shock. A much more sensible objective is to fly high above box ticking compliance and avoid problems in the first place. This is what Inspiring Integrity is all about.


Bribery in a Commercial and Regulatory Context

Despite the apparent fixation on the bribery silo it is but one of many problems confronted by commercial managers on a daily basis, the most important being sustaining their businesses in a fiercely difficult world and against organised criminal gangs, professional fraudsters and  competitors who will continue to bribe on a grand scale.

There are no consolidated or accurate statistics on the scale of fraud or international regulatory priorities8. However, figures produced by the US Sentencing Commission puts FCPA enforcement in context9:
 
Figure 2American Regulatory Actions
Note that FCPA actions account for only 2.87% of the total. It is by no means the most important regulatory silo.



Taking the above figures as a starting point and:
  • Extrapolating UK and European Union enforcement actions;
  • Updating American figures to include recent settlements with ING, Barclays, HSBC, Standard Chartered, RBS and Rabobank et al;
  • Adding class actions and civil litigation;
  • Including estimates of financial losses from fraud, corruption etc;
and then consolidating the results to an annualised financial and regulatory impact, the risk profile for the world’s top 50,000 companies indicates that losses from fraud are seven times more damaging than the all of the potential regulatory penalties from bribery.

Admittedly, the calculation is little more than an informed guess but it shows that the common denominator of fraud and regulatory violations is always a perverted decision and that one that is bad can result in multiple problems.

Figure 3: Multiple Consequences of a Single Bad Decision


The lesson, therefore, is for companies to pay much more attention to decision making and to be able to prove that their objectives were with honest intent.



Decision Centricity



5 But not unsubstantiated suspicions
6 See the paper by Bruce Hinchey http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1650925.
7 Regulators point to the case of Morgan Stanley in China as a declination: the restricted modules show that it was no such thing
8 For example, the SFO admits that its statistics are incomplete!
9 Based on a brilliant analysis by Brandon L Garrett, Professor of Law at the University Of Virginia School Of Law. See the Virginia Law Review Volume 97 December 2011.



 

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