GCs Focus on Global Corruption and Compliance Challenges

Friday, November 4, 2016 - 13:27

As part of our 2016 series examining global risk, Metropolitan Corporate Counsel convened a roundtable dinner on September 15 at Daniel in New York City to discuss legal and business issues related to combating corruption at home and abroad. It was the third of four planned dinners on the broader topic of global risk that the publication is co-hosting this year with Clifford Chance, one of the world’s leading international law firms.

To help promote candor and a valuable exchange of ideas that the participants and MCC readers can benefit from, the series has been limited to a dozen general counsel and chief legal or compliance officers of large, multinational corporations. A precondition for their participation was respect for their anonymity as well as the anonymity of their companies.

The 12 companies attending this year’s Global Risk Roundtable series have combined revenues of $250 billion. They represent a broad swath of industries, including pharmaceuticals, energy, transportation, manufacturing, heavy equipment and consumer and retail goods and services.

MCC publisher Kristin Calve kicked off the discussion by introducing Clifford Chance partners David DiBari (Americas head of Litigation & Dispute Resolution) and Guy Norman (global head of Corporate), who are serving as her co-hosts this year. After brief remarks, they ceded the floor to Luke Tolaini, a London-based partner in Clifford Chance’s Litigation and Dispute Resolution practice and a lead member of the firm's Global Risk Team.

Balancing Compliance and Culture

"Bribery risk is a function of what a business does and where a business does it. The starting point has to be how you decide on the places where you’ll do business,” Tolaini began. "If a culture’s business values are not a good match for your company’s model," he noted, "then compliance needs to be enhanced to rebalance the risk."

Of particular interest to the participants was the line Tolaini drew between UK- and U.S.-domiciled companies based on the different emphases they place on the types of corruption against which the authorities take a stand.

“In the U.S., it’s public officials abroad,” he said. “In the U.K., it’s commercial bribery as well.”

This distinction stems from different laws governing a company's activities in the host country: the U.S. Foreign Corrupt Practices Act of 1977 and the analogous UK Bribery Act of 2010. (Later in the discussion, the situation of non-Western parent companies operating in the United States was raised. One participant lamented how headquarters-country executives learn about anti-corruption practices during expatriate assignments but “retain no memory when they return to their home country. This highlighted the still persisting issue of different views and approaches to corruption in even advanced business cultures.")

Ensuring Compliance

In either case, though, Tolaini’s prescription for avoiding both extraneous expense and regulators’ ire is the same. The first step is to ensure that compliance policies are documented and in place. From there, the company must formalize processes that provide not only positive steps to implement those policies, but also formidable and thoroughly communicated penalties for violations. These processes must also allow for monitoring and feedback.

A “whistleblower hotline” was a common tool to many of the companies represented, notwithstanding its imperfections.

“Sometimes [employees] call them just because they hate their boss,” one participant noted. “But sometimes it’s something substantive.”

After office staffs have been properly trained in these anti-corruption processes – both online and in-person, and repeated as turnover necessitates – testing becomes critical to success.

A company's compliance culture should also reflect worldwide the values of the country that regulates its anti-corruption policies. “You have to motivate individuals to work the way they work back home,” Tolaini said.

And the way U.S. business works is open to challenge, just as in any other country. DiBari cited the example of one large institution, in which senior executives denied any knowledge of the corrupt practices taking place below them, and the middle managers, who were closer to the activity, bore the brunt of the responsibility. “All too often we find that a root cause of serious enforcement issues for a company is a culture in which senior executives have made it clear that they don't want to hear about problems." DiBari noted, though, that under today's enforcement policies, the senior executives responsible for cultivating that culture also are being held accountable.

He also pointed out that the current regulatory environment in the United States is focused less on companies and more on individuals at both the direct contributor and managerial levels. He referred to the Department of Justice’s 2015 Yates Memorandum, a common thread throughout the Global Risk Roundtable series, which had the effect of triggering the DOJ’s emphasis on what DiBari called “personal culpability up the chain.”

Engaging Clients and Employees

Tolaini turned to the importance of due diligence on your commercial partners.

"It's important, but the process of collecting information – say, a passport or a utility bill – is not nearly as important as an employee being sensitized to the risk that this process is aimed at mitigating. Process must not be a box-ticking exercise; employees must be thoughtful.

Correct motivation is also key. If the penalty for missing a sales goal is worse than that for making a questionable payment – or there is little likelihood of getting caught – employees may be more likely to make the convenient choice. The company must, according to Tolaini, ensure that an individual will not be financially penalized for correct behavior.

The form such penalties take was a point of disagreement at the table. Some favored mentioning the names of culpable employees publicly and prominently, as Jack Welch did during his tenure as General Electric’s CEO. Others cited subsequent employment law disputes and considered it an ill-advised option in the current environment. Some in the latter camp agreed that it might be edifying to take real-world examples and then sanitize them into case studies for training purposes.

Even the most diligent companies face the prospect that an employee will go rogue. But it is equally true that some mistakes will inevitably be made out of carelessness, and some rules might be vaguely worded.

“Most people are trying to do the right thing,” Tolaini said. "When faced with the question of 'going for the money' or 'going for strict compliance,' the right answer often is: We don’t need the business.”

Taking Action As GC

Ensuring that compliance programs adequately manage risk, while also furthering a company's business interests, requires active participation from the general counsel’s office. “If you have an opportunity to make a big deal in Mexico, but it requires you to pay someone under the table, let that business go. Let us in legal know so we can cover you,” one participant advised a hypothetical sales manager. “And it has to be us. It can’t be local or outside counsel.”

Another participant suggested GC “ride-alongs” with local company representatives to better understand the marketplace, competition and individual clients. “I’d ask [the local manager], ‘What are your top three compliance risks?’” the GC continued. “If they don’t know, you can’t really help them.”

Norman added that the operations/legal relationship “is a two-way street. On-site visits are opportunities for local staff to help legal understand local issues, which then enables legal to describe the relevancy of compliance policies in a real-life context.”

Another participant noted potential benefits to getting the GC involved in local deals. We might slow down the process, but we also will ensure compliance and could even augment return on investment.

“I told [the CEO] we would save $150,000 a year” by ensuring compliance in this manner, he said. “We saved a million.”

Culture Is Not Absolute

“Paying government officials off isn’t an intention to break the law” in many countries, one participant observed. “It’s part of the culture of those countries – simply how business is done.”

In one participant’s experience, foreign government officials often use cultural misunderstanding as a ruse to shake down foreign businesses. “Sometimes they just want to see if you’ll pay them,” the GC said.

Tolaini noted that this type of corruption need not be an envelope stuffed with cash.

“Official bribery in UK terms refers to any offer or benefit aimed at obtaining influence,” he said. Perversely, this could conceptually cover a social good that does not necessarily benefit the official directly. He cited the example of a transaction that would not be advanced until the parties to the transaction agreed to pay for a new soccer pitch and five new roads in the host municipality. This type of benefit needs careful managing to ensure it does not fall foul of the authorities.

The broad point is that cultural disconnects are a common occurrence, and they are as diverse as the individuals attempting to do commerce across borders. As Norman observed, each variation has its own set of potential pitfalls.

“There are so many risks that, to integrate them all into a single anti-corruption policy, the cost becomes infinite,” he said. “So you have to choose carefully. The solution is to keep guidance simple and practical and ensure the issues and dilemmas can be aired."