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Compliance, Transparency, & Visibility
A Perspective of the US Market:
Cloudy At Best
Michele DeStefano
Professor of Law, University of Miami
Meeting of LAAW e.V. Munich Germany
October 2014
Corporations Around the Globe
Challenges
Changes in Legal Landscape
• Economic Downturn
• Globalization
• Enhanced complexity of regulatory
environment
• Changing corporate criminal liability rules
• Enhanced Federal Sentencing Guidelines
• Aggressive settlement and consent decree
requirements
Despite Budget Freezes . . .
Corporations are Investing in
Managing the Legal Risk of
Business
10/9/2014 DeStefano 5
Questions
1. How Did We Get Here?
2. How is Compliance being managed?
3. What purpose does and should a compliance
department serve at a large publicly traded
corporation?
4. Who SHOULD be responsible for compliance
and what role should the Chief Compliance
Officer play?
5. How do ethics and culture fit in?
6. How should outside law firms be involved?
SEEKING ANSWERS
The Compliance Study
Research & Methodology
The Compliance Study
• Secondary research
• Primary Research:
– Interviewed 70 General Counsels and Chief
Compliance Officers
• @ large publicly traded corporations
• across multiple industries including banking,
petroleum, and pharmaceutical
The Compliance Study
Research Methodology
Stage 1 2006-2007
• 36 brief interviews
– General Counsels of S&P 500 corps
– Banking, pharmaceutical, and petroleum
10/9/2014 DeStefano 9
Stage 2 2010-2012
• 35 in-depth interviews
– General Counsels
– Chief Compliance Officers
• Large, publicly traded corporations in 9
industries:
– Pharmaceutical, Electric/Energy, Health Care,
Consumer Products, Petroleum, Professional
Services, Financial Services, Government,
Transportation & Logistics
10/9/2014 DeStefano 10
The Compliance Study
Research Methodology
Caveats:
1. Sample size is very very low
2. Not a random sample
3. Self-reports by senior executives which
arguably have certain stories to tell
10/9/2014 DeStefano 11
The Compliance Study
Research Methodology
Road Map
1) Background
2) Overview
1) The Compliance Function
2) Role & Challenges faced by CCOs
3) Organizational Structure
3) Trends & Recent Developments
– Hypotheses regarding Departmentalization
4) Conclusion
BACKGROUND
Background: 1960s & 1970s
In response,
other companies
beefed up their
compliance programs
Used strength of compliance
Program as defense against
Antitrust penalties
FCPA 1977 incented robust compliance programs
Background: 1980s & 1990s
OSGs mitigated corp
criminal penalties if orgs
showed effective
compliance program
Fraud by Defense Contractors
led to DOD reqs: written code,
training, procedures
In re Caremark and the Business Judgment Rule
Background: 2000s
Revisions to sentencing
guidelines recommend
ethics & compliance
programs
Sarbanes-Oxley Act change in
focus on individual actors and
corp fines to directing changes
within corporate entity
Deferred Prosecution Agreements require
structural changes to compliance function
Background: 2000s
2013 (2010): public federal
database of payments & gifts
made to physicians & teaching
hospitals by medical device and
pharmaceutical companies
Dodd Frank Act
and the
Whistleblower
Program 2010
More & More Corporate Scandals
Compliance Has Gone
To
OVERVIEW
What Is Corporate Compliance?
10/9/2014 DeStefano 21
“Most people can
articulate what a
lawyer or auditor
does for a living, but
the average
employee may have
difficulty defining
‘compliance.’”
Jose A. Tabuena
Compliance Function
vs Legal
Both Legal and Compliance
rely on
legal expertise and
have a shared goal
to increase compliance
with the law
10/9/2014 DeStefano 23
Compliance Function
vs Legal
Compliance Function
detection, prevention and response policies
+
ethics initiatives
Compliance Function
• Builds policies and procedures
• Trains and educate employees
• Tests employees on adherence
• Reports misconduct
• Remediates
Key Substantive Areas
10/9/2014 DeStefano 26
• Fraud and Corruption
– Gifts, anti-bribery, anticorruption, antifraud, FCPA
compliance, and data protection
• Employment/Labor Law
• Antitrust/Trade Regulation
• Environment/Health and Safety
• Securities Regulation
Challenges for the CCO
Compliance personnel are charged with
communicating and providing training on the
legal and ethical regulations to
employees
around
the world.
Challenges for the CCO
They are also
charged with
risk assessment
and
understanding
risk tolerances
Challenges for the CCO
International training is
important not just to ensure
compliance but “so that we
can explain to the
government,
‘We did all we could: we
went there, we were there in
person, they got online
training, we did risk
assessments. This still
happened, but this is how
we try to show we have an
effective Compliance
Program.’” CCO
Challenges for the CCO
Thus, in addition to audit and internal
controls, training, ethics, and HR
communications, compliance professionals
need to understand politics.
Jack of all Trades:
CCO plays many
roles: from confidant,
to cop, to counselor,
to tattletale
Ideal Compliance Officer Skillset
10/9/2014 DeStefano 31
• Project
Management
• People/personal
• Motivation
• Leadership
• Thick Skin
• Legal?
• Training/Teaching
• HR
• Communication
• Public Relations
• Auditing
• Internal controls
• Risk Taker
Little Uniformity in Organization
10/9/2014 DeStefano 32
Compliance was Part of the Legal
Department and Reported to
General Counsel
10/9/2014 DeStefano 33
Steady Decline in Reporting to GC
2011
To GC
Other
2012
To GC
Other
2013
To GC
Other
Data from PWC annual surveys of over 800 corporate compliance officers
Trend
10/9/2014 DeStefano 35
TRENDS &
RECENT DEVELOPMENTS
Slew of Corporate Misconduct
10/9/2014 DeStefano 37
New Regulations
and Increased Penalties
10/9/2014 DeStefano 38
Voluntary Compliance Initiatives
10/9/2014 DeStefano 39
Involuntary Compliance Initiatives
10/9/2014 DeStefano 40
Although the government
(e.g., OIG of the SEC and the DHHS)
does not
*require*
corporations
to have a separate
compliance department, or
a certain set of
ethics and compliance
programs and training
. . .
10/9/2014 DeStefano 41
. . .
their
unofficial
stance
is
that
they
*should*
10/9/2014 DeStefano 42
Four Examples
10/9/2014 DeStefano 44
2004 – Medicaid Pricing Fraud
$293M
5 Year Corporate Integrity
Agreement
• Reporting hotline
• Develop employee training
• Revamp written codes of conduct
• Designate a chief compliance officer who
would report directly to the Chairman,
CEO, and President of the company.
– The chief compliance officer “shall not be or
be subordinate to the general counsel or chief
financial officer.”
10/9/2014 DeStefano 46
2004 – Fraudulent Revenue Projection
$250 Million
Settlement Agreement
• Develop employee training
• Revamp written codes of conduct
• Designate a chief compliance officer who
would report directly to the Chairman,
CEO, and President of the company.
– The chief compliance officer “shall not be or
be subordinate to the general counsel or chief
financial officer.”
• Corporate Monitor
10/9/2014 DeStefano 48
2009 – Illegal Promotion of Drug Uses
$2.3 Billion
5 Year Corporate Integrity
Agreement
• Develop employee training
• Revamp written codes of conduct
• Designate a chief compliance officer who
would report directly to the Chairman,
CEO, and President of the company.
– The chief compliance officer “shall not be or
be subordinate to the general counsel or chief
financial officer.”
• Corporate Monitor
10/9/2014 DeStefano 50
2010 – Insider Trading Investigation
SEC Saga Continues
• Recommendation – one department with
primary compliance responsibility
– Remained under Office of GC
• But in 2011 . . .
– The SEC GC was named as a defendant in
Madoff bankruptcy suit
– SEC was criticized for organization structure
of compliance
– In response, SEC separates compliance
function to reports to the SEC Chairman
The reaction by the DDHS and SEC
DEPARTMENTALIZATION
10/9/2014 DeStefano 52
10/9/2014 DeStefano 53
• Changes in corporate liability rules
• Some of the Federal Sentencing
Guidelines
• Best Practices developed by
governmental entities
• OIG Compliance Program Guidance
• Institute of Internal Audit
• In-House Counsel Conferences
This Reaction is Consistent with Recent
Guidelines and Recommendations
Inconsistent with other corporate practices
and mandates that put compliance in the
hands of lawyers . . .
10/9/2014 DeStefano 54
Examples
ABA Task Force on
Corporate Responsibility
recommended that
general counsels
oversee compliance
(with direct oversight by
the Board)
And MR 1.6 (may)and
1.13 (must)
10/9/2014 DeStefano 55
Recent Federal Sentencing Guidelines
enable GC to oversee Compliance
SEC §307 of Sarbanes-
Oxley puts the GC in
role of whistle
blower/gatekeeper
2004 Investment
Company Act
'Compliance Rule'
enables GC to oversee
compliance
Despite the debate over who should
play gatekeeper, more and more
corporations are departmentalizing
10/9/2014 DeStefano 56
Review: Government Mandates
• Corporate Reporting
– Sunshine Act
– Dodd Frank
– Sarbanes Oxley
• Internal Policies and Programs
– Revised Written Codes of Conduct and Enhanced
Training
• Corporate Monitorships
• Departmentalization
– CCO separate from GC
– Direct access to the Board
Potential Objectives of Government
Mandates?
• Increase actual compliance with the law (and
prevention of noncompliance)
• Increase transparency externally & internally
– So that company AND government has increased
access to information in order to monitor and
catch noncompliance
• Increase visibility & entrenchment
– To enhance importance of and commitment to
compliance internally
– To demonstrate government has acted
But
Are
the
Objectives
Being
Met?
Hypothesis
Efforts to Increase Compliance
Transparency & Visibility lead to a
result that is cloudy at best
In Other Words:
Preemptive Departmentalization
Hypothesis
Departmentalization may not increase:
– Objective #1: Actual compliance
– Objective #2: Transparency
– Objective #3: Visibility/Entrenchment
OBJECTIVE #1:
INCREASE ACTUAL
COMPLIANCE
May Not Increase Compliance
Separation
May Not Increase Compliance
Tension
May Not Increase Compliance
Turf Wars
May Not Increase Compliance
Viewed As Outsider
May Not Increase Compliance
Watch Dog AND Cost Center
“I think compliance is the
world’s longest four letter word
XXXX
and it initiates a response in
people that is negative.”
- CCO
Interviewee
May Not Increase Compliance
Lack of Power & Influence
‘C’ for ‘Chief’ ≠ Unlock the
Door to the “C-Suite”
“[E]ven if the chief compliance officer reports
to the [board] or CEO, they are going to
have the same problem, because chances
are the CEO is going to want to listen to the
general counsel . . . because they are their
trusted legal advisor. Very rarely is the
compliance officer reporting to a CEO,
because that’s what the CEO wants.”
– CCO/Assoc. GC
May Not Increase Compliance
No Guarantee
Right Professional with Right Skills
May Not Increase Compliance
False Complacency
May Not Increase Compliance
Lack of Responsibility
May Not Increase Compliance
Lawyers Subrogated
. . . Decrease in Gatekeeping Role
May Not Increase Compliance
Revival of the Legal Technician
May Not Increase Compliance
Lawyer Cast of Mind
10/9/2014 DeStefano 76
10/9/2014 DeStefano 77
May Not Increase Compliance
Double Trouble
OBJECTIVE #2:
INCREASE TRANSPARENCY
10/9/2014 DeStefano 79
May Not Increase Transparency
Strengthens Support for
Attorney-Client Privilege
10/9/2014 DeStefano 80
May Not Increase Transparency
May Increase Info Shielded by
Attorney-Client Privilege
10/9/2014 DeStefano 81
May Not Increase Transparency
Organizational Structure
Doesn’t Tell The Real Story
MORAL MAZES
STOP
GAPS
10/9/2014 DeStefano 82
May Not Increase Transparency
Internal Social Networks
Are More Telling
MORAL MAZES
STOP
GAPS
OBJECTIVE #3:
INCREASE VISIBILITY &
ENTRENCHMENT
May Not Increase Visibility & Entrenchment
No Lightening Rod Salesmen
10/9/2014 DeStefano 85
May Not Increase Visibility & Entrenchment
Talismans - Form Over Function
Org Charts Codes Of Conduct
and
Training Manuals
Formal Systems = Weakest Link
10/9/2014 DeStefano 86
10/9/2014 DeStefano 87
May Not Increase Visibility & Entrenchment
Emphasis ≠ Culture
Easy to Control:
Routine Check
the Box
Harder to Control:
Complex, multifaceted,
About ethics and morals
10/9/2014 DeStefano 88
Genuine Motivation is a Combo
Motivation: Carrots? Or Sticks?
10/9/2014 DeStefano 89
Money Can Take the Good
Out of Doing Good
10/9/2014 DeStefano 90
And Penalties Can
Justify Non-Compliance
10/9/2014 DeStefano 91
10/9/2014 DeStefano 92
Compliance
initiatives
do not account
for the reality
that employees
do not necessarily
recognize a dilemma
as an
ethical one
Many Ethical Dilemmas
Result from Blind Spots
10/9/2014 DeStefano 93
10/9/2014 DeStefano 94
. . .
Think Pinto
. . .
Think The Challenger
Or Desensitization and
Ethical Fading
10/9/2014 DeStefano 95
CONCLUSIONS
10/9/2014 DeStefano 97
Conclusions
Look Through the Looking Glass
10/9/2014 DeStefano 98
Conclusions
Look Through the Looking Glass
Recommendations
• Look inward at actual decision making
processes of individuals and at the informal
values, culture, and networks
– Conduct a network analysis to determine
communication flow and critical stopgaps
• Liability mitigation to corporations that make
changes based on internal findings on the
networks and ethical culture that exists
beneath the org chart
10/9/2014 DeStefano 100
"Everything's got a moral,
if only you can find it.”
Lewis Caroll,
Alice’s Adventures in Wonderland
and Through the Looking Glass
10/9/2014 DeStefano 101
Sometimes the hardest task
is not solving but instead,
finding the problem
Compliance, Transparency, & Visibility
A Perspective of the US Market:
Cloudy At Best
Michele DeStefano
Professor of Law, University of Miami
Meeting of LAAW e.V. Munich Germany
October 2014

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DeStefano, Compliance, Transparency, Visibility: A U.S. Perspective: Cloudy At Best

  • 1. Compliance, Transparency, & Visibility A Perspective of the US Market: Cloudy At Best Michele DeStefano Professor of Law, University of Miami Meeting of LAAW e.V. Munich Germany October 2014
  • 2. Corporations Around the Globe Challenges
  • 3. Changes in Legal Landscape • Economic Downturn • Globalization • Enhanced complexity of regulatory environment • Changing corporate criminal liability rules • Enhanced Federal Sentencing Guidelines • Aggressive settlement and consent decree requirements
  • 5. Corporations are Investing in Managing the Legal Risk of Business 10/9/2014 DeStefano 5
  • 6. Questions 1. How Did We Get Here? 2. How is Compliance being managed? 3. What purpose does and should a compliance department serve at a large publicly traded corporation? 4. Who SHOULD be responsible for compliance and what role should the Chief Compliance Officer play? 5. How do ethics and culture fit in? 6. How should outside law firms be involved?
  • 7. SEEKING ANSWERS The Compliance Study Research & Methodology
  • 8. The Compliance Study • Secondary research • Primary Research: – Interviewed 70 General Counsels and Chief Compliance Officers • @ large publicly traded corporations • across multiple industries including banking, petroleum, and pharmaceutical
  • 9. The Compliance Study Research Methodology Stage 1 2006-2007 • 36 brief interviews – General Counsels of S&P 500 corps – Banking, pharmaceutical, and petroleum 10/9/2014 DeStefano 9
  • 10. Stage 2 2010-2012 • 35 in-depth interviews – General Counsels – Chief Compliance Officers • Large, publicly traded corporations in 9 industries: – Pharmaceutical, Electric/Energy, Health Care, Consumer Products, Petroleum, Professional Services, Financial Services, Government, Transportation & Logistics 10/9/2014 DeStefano 10 The Compliance Study Research Methodology
  • 11. Caveats: 1. Sample size is very very low 2. Not a random sample 3. Self-reports by senior executives which arguably have certain stories to tell 10/9/2014 DeStefano 11 The Compliance Study Research Methodology
  • 12. Road Map 1) Background 2) Overview 1) The Compliance Function 2) Role & Challenges faced by CCOs 3) Organizational Structure 3) Trends & Recent Developments – Hypotheses regarding Departmentalization 4) Conclusion
  • 14. Background: 1960s & 1970s In response, other companies beefed up their compliance programs Used strength of compliance Program as defense against Antitrust penalties FCPA 1977 incented robust compliance programs
  • 15. Background: 1980s & 1990s OSGs mitigated corp criminal penalties if orgs showed effective compliance program Fraud by Defense Contractors led to DOD reqs: written code, training, procedures In re Caremark and the Business Judgment Rule
  • 16. Background: 2000s Revisions to sentencing guidelines recommend ethics & compliance programs Sarbanes-Oxley Act change in focus on individual actors and corp fines to directing changes within corporate entity Deferred Prosecution Agreements require structural changes to compliance function
  • 17. Background: 2000s 2013 (2010): public federal database of payments & gifts made to physicians & teaching hospitals by medical device and pharmaceutical companies Dodd Frank Act and the Whistleblower Program 2010
  • 18. More & More Corporate Scandals
  • 21. What Is Corporate Compliance? 10/9/2014 DeStefano 21 “Most people can articulate what a lawyer or auditor does for a living, but the average employee may have difficulty defining ‘compliance.’” Jose A. Tabuena
  • 23. Both Legal and Compliance rely on legal expertise and have a shared goal to increase compliance with the law 10/9/2014 DeStefano 23 Compliance Function vs Legal
  • 24. Compliance Function detection, prevention and response policies + ethics initiatives
  • 25. Compliance Function • Builds policies and procedures • Trains and educate employees • Tests employees on adherence • Reports misconduct • Remediates
  • 26. Key Substantive Areas 10/9/2014 DeStefano 26 • Fraud and Corruption – Gifts, anti-bribery, anticorruption, antifraud, FCPA compliance, and data protection • Employment/Labor Law • Antitrust/Trade Regulation • Environment/Health and Safety • Securities Regulation
  • 27. Challenges for the CCO Compliance personnel are charged with communicating and providing training on the legal and ethical regulations to employees around the world.
  • 28. Challenges for the CCO They are also charged with risk assessment and understanding risk tolerances
  • 29. Challenges for the CCO International training is important not just to ensure compliance but “so that we can explain to the government, ‘We did all we could: we went there, we were there in person, they got online training, we did risk assessments. This still happened, but this is how we try to show we have an effective Compliance Program.’” CCO
  • 30. Challenges for the CCO Thus, in addition to audit and internal controls, training, ethics, and HR communications, compliance professionals need to understand politics. Jack of all Trades: CCO plays many roles: from confidant, to cop, to counselor, to tattletale
  • 31. Ideal Compliance Officer Skillset 10/9/2014 DeStefano 31 • Project Management • People/personal • Motivation • Leadership • Thick Skin • Legal? • Training/Teaching • HR • Communication • Public Relations • Auditing • Internal controls • Risk Taker
  • 32. Little Uniformity in Organization 10/9/2014 DeStefano 32
  • 33. Compliance was Part of the Legal Department and Reported to General Counsel 10/9/2014 DeStefano 33
  • 34. Steady Decline in Reporting to GC 2011 To GC Other 2012 To GC Other 2013 To GC Other Data from PWC annual surveys of over 800 corporate compliance officers
  • 37. Slew of Corporate Misconduct 10/9/2014 DeStefano 37
  • 38. New Regulations and Increased Penalties 10/9/2014 DeStefano 38
  • 41. Although the government (e.g., OIG of the SEC and the DHHS) does not *require* corporations to have a separate compliance department, or a certain set of ethics and compliance programs and training . . . 10/9/2014 DeStefano 41
  • 44. 10/9/2014 DeStefano 44 2004 – Medicaid Pricing Fraud $293M
  • 45. 5 Year Corporate Integrity Agreement • Reporting hotline • Develop employee training • Revamp written codes of conduct • Designate a chief compliance officer who would report directly to the Chairman, CEO, and President of the company. – The chief compliance officer “shall not be or be subordinate to the general counsel or chief financial officer.”
  • 46. 10/9/2014 DeStefano 46 2004 – Fraudulent Revenue Projection $250 Million
  • 47. Settlement Agreement • Develop employee training • Revamp written codes of conduct • Designate a chief compliance officer who would report directly to the Chairman, CEO, and President of the company. – The chief compliance officer “shall not be or be subordinate to the general counsel or chief financial officer.” • Corporate Monitor
  • 48. 10/9/2014 DeStefano 48 2009 – Illegal Promotion of Drug Uses $2.3 Billion
  • 49. 5 Year Corporate Integrity Agreement • Develop employee training • Revamp written codes of conduct • Designate a chief compliance officer who would report directly to the Chairman, CEO, and President of the company. – The chief compliance officer “shall not be or be subordinate to the general counsel or chief financial officer.” • Corporate Monitor
  • 50. 10/9/2014 DeStefano 50 2010 – Insider Trading Investigation
  • 51. SEC Saga Continues • Recommendation – one department with primary compliance responsibility – Remained under Office of GC • But in 2011 . . . – The SEC GC was named as a defendant in Madoff bankruptcy suit – SEC was criticized for organization structure of compliance – In response, SEC separates compliance function to reports to the SEC Chairman
  • 52. The reaction by the DDHS and SEC DEPARTMENTALIZATION 10/9/2014 DeStefano 52
  • 53. 10/9/2014 DeStefano 53 • Changes in corporate liability rules • Some of the Federal Sentencing Guidelines • Best Practices developed by governmental entities • OIG Compliance Program Guidance • Institute of Internal Audit • In-House Counsel Conferences This Reaction is Consistent with Recent Guidelines and Recommendations
  • 54. Inconsistent with other corporate practices and mandates that put compliance in the hands of lawyers . . . 10/9/2014 DeStefano 54
  • 55. Examples ABA Task Force on Corporate Responsibility recommended that general counsels oversee compliance (with direct oversight by the Board) And MR 1.6 (may)and 1.13 (must) 10/9/2014 DeStefano 55 Recent Federal Sentencing Guidelines enable GC to oversee Compliance SEC §307 of Sarbanes- Oxley puts the GC in role of whistle blower/gatekeeper 2004 Investment Company Act 'Compliance Rule' enables GC to oversee compliance
  • 56. Despite the debate over who should play gatekeeper, more and more corporations are departmentalizing 10/9/2014 DeStefano 56
  • 57. Review: Government Mandates • Corporate Reporting – Sunshine Act – Dodd Frank – Sarbanes Oxley • Internal Policies and Programs – Revised Written Codes of Conduct and Enhanced Training • Corporate Monitorships • Departmentalization – CCO separate from GC – Direct access to the Board
  • 58. Potential Objectives of Government Mandates? • Increase actual compliance with the law (and prevention of noncompliance) • Increase transparency externally & internally – So that company AND government has increased access to information in order to monitor and catch noncompliance • Increase visibility & entrenchment – To enhance importance of and commitment to compliance internally – To demonstrate government has acted
  • 60. Hypothesis Efforts to Increase Compliance Transparency & Visibility lead to a result that is cloudy at best
  • 61. In Other Words: Preemptive Departmentalization
  • 62. Hypothesis Departmentalization may not increase: – Objective #1: Actual compliance – Objective #2: Transparency – Objective #3: Visibility/Entrenchment
  • 64. May Not Increase Compliance Separation
  • 65. May Not Increase Compliance Tension
  • 66. May Not Increase Compliance Turf Wars
  • 67. May Not Increase Compliance Viewed As Outsider
  • 68. May Not Increase Compliance Watch Dog AND Cost Center “I think compliance is the world’s longest four letter word XXXX and it initiates a response in people that is negative.” - CCO Interviewee
  • 69. May Not Increase Compliance Lack of Power & Influence
  • 70. ‘C’ for ‘Chief’ ≠ Unlock the Door to the “C-Suite” “[E]ven if the chief compliance officer reports to the [board] or CEO, they are going to have the same problem, because chances are the CEO is going to want to listen to the general counsel . . . because they are their trusted legal advisor. Very rarely is the compliance officer reporting to a CEO, because that’s what the CEO wants.” – CCO/Assoc. GC
  • 71. May Not Increase Compliance No Guarantee Right Professional with Right Skills
  • 72. May Not Increase Compliance False Complacency
  • 73. May Not Increase Compliance Lack of Responsibility
  • 74. May Not Increase Compliance Lawyers Subrogated . . . Decrease in Gatekeeping Role
  • 75. May Not Increase Compliance Revival of the Legal Technician
  • 76. May Not Increase Compliance Lawyer Cast of Mind 10/9/2014 DeStefano 76
  • 77. 10/9/2014 DeStefano 77 May Not Increase Compliance Double Trouble
  • 79. 10/9/2014 DeStefano 79 May Not Increase Transparency Strengthens Support for Attorney-Client Privilege
  • 80. 10/9/2014 DeStefano 80 May Not Increase Transparency May Increase Info Shielded by Attorney-Client Privilege
  • 81. 10/9/2014 DeStefano 81 May Not Increase Transparency Organizational Structure Doesn’t Tell The Real Story MORAL MAZES STOP GAPS
  • 82. 10/9/2014 DeStefano 82 May Not Increase Transparency Internal Social Networks Are More Telling MORAL MAZES STOP GAPS
  • 84. May Not Increase Visibility & Entrenchment No Lightening Rod Salesmen
  • 85. 10/9/2014 DeStefano 85 May Not Increase Visibility & Entrenchment Talismans - Form Over Function Org Charts Codes Of Conduct and Training Manuals
  • 86. Formal Systems = Weakest Link 10/9/2014 DeStefano 86
  • 87. 10/9/2014 DeStefano 87 May Not Increase Visibility & Entrenchment Emphasis ≠ Culture Easy to Control: Routine Check the Box Harder to Control: Complex, multifaceted, About ethics and morals
  • 88. 10/9/2014 DeStefano 88 Genuine Motivation is a Combo
  • 89. Motivation: Carrots? Or Sticks? 10/9/2014 DeStefano 89
  • 90. Money Can Take the Good Out of Doing Good 10/9/2014 DeStefano 90
  • 91. And Penalties Can Justify Non-Compliance 10/9/2014 DeStefano 91
  • 92. 10/9/2014 DeStefano 92 Compliance initiatives do not account for the reality that employees do not necessarily recognize a dilemma as an ethical one
  • 93. Many Ethical Dilemmas Result from Blind Spots 10/9/2014 DeStefano 93
  • 94. 10/9/2014 DeStefano 94 . . . Think Pinto . . . Think The Challenger
  • 95. Or Desensitization and Ethical Fading 10/9/2014 DeStefano 95
  • 97. 10/9/2014 DeStefano 97 Conclusions Look Through the Looking Glass
  • 98. 10/9/2014 DeStefano 98 Conclusions Look Through the Looking Glass
  • 99. Recommendations • Look inward at actual decision making processes of individuals and at the informal values, culture, and networks – Conduct a network analysis to determine communication flow and critical stopgaps • Liability mitigation to corporations that make changes based on internal findings on the networks and ethical culture that exists beneath the org chart
  • 100. 10/9/2014 DeStefano 100 "Everything's got a moral, if only you can find it.” Lewis Caroll, Alice’s Adventures in Wonderland and Through the Looking Glass
  • 101. 10/9/2014 DeStefano 101 Sometimes the hardest task is not solving but instead, finding the problem
  • 102. Compliance, Transparency, & Visibility A Perspective of the US Market: Cloudy At Best Michele DeStefano Professor of Law, University of Miami Meeting of LAAW e.V. Munich Germany October 2014

Hinweis der Redaktion

  1. Potential objectives of these govt mandates – departentalization specifcially but also sunshine act, whistle blower act etc.
  2. ----- Meeting Notes (10/9/14 06:45) ----- use research along with secondary to inform my analysis
  3. Bacgkround US Regulatory History from 1960 to Today; Overview The compliance function Role of and challenges faced by the CCO Organizational structure Trends - Government MandatesvFour ExamplesvObjectives
  4. ***Tin 1960s governmnet prosecuted a group of heavy electric equipment companies for antitrust violations. GE argued that the strength of its compliance program should be part of its criminal defense – and in response other companies beefed up their compliance programs And the Foreign Corrupt Practices Act of 1977 incented corps to develop more robust compliance programs
  5. ***Whistleblower uncovered fruad by govt defense contractors – lead to DOD issueing reqs ***OSGs Organizational Sentencing Guidelines wereimplemented – partnered with In re caremark (interpreted by Delaware Stone v Ritter) busin judgment rule protection only appplies to directors who exercise a good faith judgment that the corps info and reporting system is in concept and deisgen adequate to assure the board that appropriate info will come to its attention in a timely manner as a matter of ordinary operations
  6. ***change in focus to directing corporate stucture – SOX, sentencing guidelines – include mitigation in sentencing for good programs, and deferred pros and nonprose agreeements (consent decrees) mandating structural changes – which we will delve into a bit more
  7. ***Corpor Crimilnial Liability Rules -- designed to incent people to give specific timiely info – if result in successful action over 1million then can get 10-30% monies collected – OWB – within SEC commission There is even a Chief of the Office of the Whistleblower. In 2013 th e office paid whistleblowers over 14 million in contributions to succeess of actions against frauds
  8. In past 15 years in the wake of corporate scandals tha thave spanned industries pharma, insurance, financial services, health care, consumer p;roducts – the compliance funtionc is getting a lot of attention
  9. Huge roup of lawyers and nonlawyers that now consider themsevels a part of this professsion – with professional associatisons and conferences like this one dedicated – and separate compliance departments and chief compliance officers and writtend codes of ethics and programs, and montiory and audit sytems and reporting procedures.
  10. One of the reasons I set out to do these interviews was that compliance seemed to mean different things to different people
  11. What are all these compliacne professionals doing? Not as clear as you may think
  12. Difficult to tell where legal ends and compliance begins
  13. Hard to sleep at night!
  14. One GC of large trucking company said – I know someone is breaking the law someowhere at any moment – the key is what law and have I done everythign I can to help prevent it
  15. Help prevent investigations – and mitigate penalties if noncompliance found
  16. In terms of structure and organization at large publicly traded corporations, historically there has been a trend for compliance directors to report directly to the general counsel—or even to be the general counsel.
  17. PwC’s third annual survey of 800 corporate compliance officers,117 reported that there has been a “steady reduction in formal reporting of compliance into the legal function over the past three years” (from thirty-seven percent of respondents in 2011 to thirty-three percent in 2012 to twenty-eight percent in 2013).118
  18. Separating out the compliance function from the
  19. In the wake of corporate scandals from JP Morgan to Walmart
  20. And in response to all of these new regs and increased penalties Dodd Frank, Sunshine Act etc
  21. Corporations are adopting – as a preemptive move – enhanced compliance programs so that Like GE in the 1960s they can defend that they “tried”
  22. Of course also comes involuntary initiatives adopted bc they are mandates by the government – time and time again
  23. PUT IN YOUR CHOICE
  24. HANDCUFFS here
  25. 4 examples of recent misconduct and the govt reactions
  26. In 2004, the Schering-Plough Corporation, one of the largest pharmaceutical manufacturers in the world, agreed to plead guilty to fraud in relation to pricing information it provided (or failed to provide) to Medicaid for its drug Claritin.136 Evidently, believing that Claritin was too expensive, two health maintenance organizations (“HMOs”) threatened to replace Claritin with Allegra on their list of covered drugs.137 To discourage the HMOs from doing so, Schering- Plough allegedly paid the HMOs millions of dollars in discounts via data fees, interest free loans, and rebates.138 Reputedly, Schering pled guilty to one count of offering and paying a kickback in violation of the Anti-Kickback Statute.140 Further, it paid more than $290 million in settlement141 and assented to a five-year corporate integrity agreement (“CIA”) with the DHHS’s OIG.142 In addition to mandating that the company establish a reporting hotline, develop employee training, and revamp the written codes of conduct,143 the CIA required the company to designate a chief compliance officer who would report directly to the Chairman, CEO, and President of the company. 144
  27. In October 2004, the SEC147 charged Quest Diagnostics with fraudulently projecting over $3.8 billion in revenue earnings in a
  28. illegally promoting several of its drugs, including Bextra, for uses that were not specifically approved by the Federal Drug Administration (“FDA”) led guilty to a felony criminal violation of the Federal Food, Drug, & Cosmetic Act and signed a five year CIA.15
  29. FBI Investiaged 2 SEC attorneys for insider trading - at the time of the alleged insider trading, the compliance function at the SEC was disjointed and housed in two different departments.164 Disconcertingly, the OIG report concluded that the SEC “lack[ed] any true compliance system to monitor SEC employees’ securities transactions,”165 understand reporting requirements or who was in charge of overseeing ethics and compliance,166 and that there was “lax enforcement of the reporting requirements.”167
  30. The report recommended that the SEC ensure that one department be vested with primary responsibility over compliance. And in response, the SEC consolidated the compliance department under the Office of Ethics Counsel and hired its first ever, chief compliance officer.168 This department, however, remained a part of the Office of General Counsel until late 2011.169 After the SEC’s general counsel was named as one of the defendants in a Madoff bankruptcy suit, the OIG criticized the SEC for having the ethics counsel report to the general counsel.170 In response, the SEC “formally proclaimed thndependence of its Office of Ethics Counsel as a stand-alone unit within the agency.”171 Resultantly, the head of this office no longer reports to the General Counsel but instead to the SEC Chairman.
  31. Increase training policies – CCO does not report to the GC
  32. Like the ABA Task force on Corp Resp that recommends that GC oversee compliance (with direct oversight by board) MR 1.6 (may and 1.13 must SEC Section 307 of Sarbanes Oxly puts GC in role of whistle blower/gatekeeper 2004 investment Company Act Compliane Rule enables GC to oversee compliance & Recent Fed Setencing guidelines
  33. Departmentalizing and creating similar programs and policies
  34. Potential objectives of these govt mandates – corporate monitorships, new laws, etc, departentalization specifcially but also sunshine act, whistle blower act etc. **These last group differ slightly – ** For example, Some commentators claim that the government’s focus on ethics and on other aspects of compliance like corporate monitorships “demonstrate a broader regulatory trend that recognizes the limits of regulating corporations through external prescriptions and inspections, and therefore directs its energies towards encouraging corporations to engage in meaningful self-regulation through the adoption of effective internal compliance programs.” Ford & Hess, supra note 25, at 2; see supra note 5
  35. Potential objectives of these govt mandates – corporate monitorships, new laws, etc, departentalization specifcially but also sunshine act, whistle blower act etc. *Specifci to Departmentalization By separating the two departments, a chief compliance officer will have the autonomy she needs to uncover and report misconduct thereby increasing the level of transparency into corporate conduct (by the board of directors and, in the case of investigations, also by the government).31
  36. Potential objectives of these govt mandates – departentalization specifcially but also sunshine act, whistle blower act etc.
  37. Potential objectives of these govt mandates – departentalization specifcially but also sunshine act, whistle blower act etc.
  38. Well vven if its not wrong –it doesn’t appear to be right
  39. Potential objectives of these govt mandates – corporate monitorships, new laws, etc, departentalization specifcially but also sunshine act, whistle blower act etc.
  40. Departmentalization is purposeful – to sep compliance so that this professional has autonomy and independence to act – but result is that they are Seen as separate – legal and compliance
  41. Create tension – refuse to collaborate – which goes against problem solving literature – entrenches competition and impedes open communication
  42. And creates turf wars – which do not lend themselves to collaboration – which is key to problem solving
  43. Further separation risks viewing compliance as an outsider -- How can you uncover anything if you aren’t invited to the table? ----- Meeting Notes (10/9/14 06:45) ----- true of GCs years ago - but now have a seat at C-suite
  44. Worse separation exacerbates the idea that complinace is seen as a watch dog – purposefully kept out – not just outsider ----- Meeting Notes (10/9/14 06:45) ----- seen as "NO" people
  45. Even if that isn’t the case, separation by itself – although it may signal that the corp is commiteed to compliance - doesn’t provide the CCO with the power influence and support they need to be able to do their job Jack of all trades – master to NONE
  46. There is no reason to believe that an independent chief compliance officer will have a better set of compliance skills or expertise than a chief compliance officer who reports to the general counsel. Thus, it is not clear that the unofficial governmental mandate will change the current status quo. Indeed its often Assoc GC that takes the job
  47. Enhancing compliance – by departmentazlizing may not increase compliance bc people will view it as “taken care of”
  48. Lack of responsibility
  49. Lawyers not watching – not playing gatekeeping role
  50. eparating the compliance and legal functions could entrench the fallacy that the general counsel’s role is to define what the corporation “can” do from a technically legal point of view versus what it “should do” based on the spirit of the law and other considerations
  51. It exacerbates what Rosen calls this the Lawyer Cast of Mind – lawyers may be followers – and “may even aid their clients to resist and subvert regulation.”282 Thus, they find that lawyers can behave as “gamesters” treating the law as “a game of loopholes” and litigation as unavoidable.283 Similarly, others contend that lawyers take an “excessively legalistic approach” to compliance that obscures the “cultural influences that impact employee behaviors or nuances.”284
  52. We have double trouble with separation - . It could lead to expectations that the legal team is a group of super talented, super educated set of strategic individuals—completely off the hook for compliance, ethics, reputation, and business risk counseling—and completely on the hook for helping the corporation find loopholes in the law—and there to serve the client above all else
  53. Counterintuitive –one of the reasons for sep is to prevent the a/c priv from applying. However departmentalization may strengthen the argument that the attorney-client privilege should apply to communications with lawyers around compliance issues and, therefore, lead to less transparency into corporate behavior and In the states the a/c priv only applies between lawyers and clients when primary purpose of the communication is legal advice. If the compliance function is sep – it makes clear that compl is not LEGAL and not considered part of legal then no ac priv right? Wrong
  54. . Actually, this may increase application. Bc every time there is a lawyer in the room with compliance – arg can be made they were there for the primary purpose of legal advice – NOT true if the lawyer is also the CCO – thsu more information might actually be protectable – or better args for it
  55. Thus, the way that employees interact and the groups they interact with do not match static organization or traditional communication flow diagrams.381 Instead, “social networks” (defined by Rob Cross and Andrew Parker are the more relevant indicator of organization and communication flow within institutions.382 And they have a dynamic influence on an organizations’ performance and its ability to execute strategy, react to issues, and to change.383 The internal dynamics of a corporation can create stopgaps and “moral mazes.”384 SO much depends on this inner web and communication among the teams . . .
  56. Thus, the way that employees interact and the groups they interact with do not match static organization or traditional communication flow diagrams.381 Instead, “social networks” (defined by Rob Cross and Andrew Parker are the more relevant indicator of organization and communication flow within institutions.382 And they have a dynamic influence on an organizations’ performance and its ability to execute strategy, react to issues, and to change.383 The internal dynamics of a corporation can create stopgaps and “moral mazes.”384 SO much depends on this inner web and communication among the teams . . .
  57. **Researchers have shown that First, having compliance report to legal may increase the corporation’s attention on risks, and, therefore, compliance. Bc Lawyers, they claim, are like Herman Melville’s “lightning-rod salesmen putting fear into people’s heads about the risks that “lightning” will strike. ** When a lawyer (as opposed to another type of professional) is in charge of compliance “the company is more frightened of conflict with regulators and third parties.”
  58. While it is true that govt has said that it wants to insitll culture of compliance its not clear that xy do so. Some commentators claim that the government’s focus on ethics and on other aspects of compliance like corporate monitorships “demonstrate a broader regulatory trend towards encouraging corporations to engage in meaningful self-regulation - AND CULTURE ,BUT govt reg they place value on structural manifestations of compliance like adoption of codes of conduct, revisions to mission statements, and enactment of training programs.371
  59. Second, However, there is little empirical evidence that these trappings are effective at deterring prohibited conduct without more372 and experts claim they may actually be the “weakest link in an org ethical structure formal controls are completely unconnected to the way employees interact376 and are decoupled from norms and ethics.37
  60. When dealing with routine check-the-box processes, noncompliance with these requirements is easy to uncover, and compliance is easy to motivate. However, when the choice involves, nonroutine, complex, multifaceted choices about ethics, morals, or personal preferences, malfeasance is much harder to control.
  61. Combination of extrinsic and intrinsic
  62. Can motivate simple jobs and complinance steps with carrots and sticks but not necesssarily true for the more complicated -
  63. Money can motivate for routine tasks - explaining research study where offering money to people to give blood decreased by half the number of people willing to give blood). Also study with monkeys and puzzles Ultimately, the analysis indicates that departmentalization is the wrong answer because the right question is not about independence but instead about connectivity, informal norms, ethics, and motivation.54
  64. Speeding limits – there is a fine – you choose whether to break the law – like the day care situation
  65. ----- Meeting Notes (10/9/14 06:45) ----- billable hour
  66. ----- Meeting Notes (10/9/14 06:45) ----- look internal - look at ourselves
  67. What are employees really saying, what is the tone at the middle? Who is connecting with whom?
  68. ----- Meeting Notes (10/9/14 06:45) ----- leave you with this from Lewis Carrol