Billie Sol Estes died yesterday and when it comes to scam artists from the great state of Texas, before there was Allen Stanford and his magical Certificates of Deposits located in his private bank in Antigua, there was Billie Sol Estes. Before Sir Allen came along, Billie Sol had a 50 year run as the King of Texas Swindlers. He was most well-known for his scam involving phony financial statements and non-existent fertilizer tanks to loot a federal crop subsidy program. He went to jail for mail fraud over this scheme, although his conviction was later over-turned. But his lasting legacy may be the following quote by former Associated Press (AP) correspondent Mike Cochran, who recalled writing how Estes made millions of dollars in phone fertilizer tanks scam and noted “how many city slickers from New York or Chicago can make a fortune selling phantom cow manure?”
Billie Sol’s risk tolerance was quite high and his implementation of a risk management plan may have seemed, well, rather 1950ish. Hopefully your company is a tad more mature in this process. But after you have identified a compliance risk, what should the next steps be for a company’s Chief Compliance Officer (CCO)? This question was explored in an article by C. J. Rathbun, in the May/June issue of Compliance and Ethics Professional Magazine, in an article entitled “You’ve identified a corporate risk—what next?”. Rathbun believes that any consideration of such an identified risk will be in the context of three key questions:
- The severity of the risk weighed against the company’s appetite for risk.
- How the company has performed in the past on managing similar risks and if so, what the impact might be on the company if the risk actually occurred.
- The probability or likelihood of the risk event occurring.
I. The Compliance Report
Rathbun explained that a CCO needs to consider several questions when shaping the report which will go to the management group or Chief Executive Officer (CEO) to make any decision on whether a new risk should be accepted. These questions include:
- Who is the audience for the report? Will it be the CEO, Board of Directors or some other senior management group or council? Further, what is the level of trust between the CCO and those constituent groups? Has the CCO been elevated to a C-Suite level position within the company? Could the audience be a regulatory body or perhaps even a Judge?
- What is your company’s organizational structure? In this question you need to consider how decisions of this dimension are usually made in your company.
- What reputational risk for the company should be anticipated? This is the Wall Street Journal (or New York Times) questions. How would your CEO feel if he woke up to read about your company and its decision being on the front page of the Wall Street Journal?
- What should be incorporated into the report? Should other business concerns be incorporated into the report, such as financial or other legal issues?
- How should the report be presented? In what format or with what technology should the report be presented? Will the group or person tasked with making the decision accept a written report or will it simply be a high-level PowerPoint presented to a Board of Directors?
II. Weighing the Options
Once the report is considered and the options weighed, what are some of the possible outcomes that a company may utilize? Rathbun breaks the options down to four. The first is risk avoidance, where a company decides that the risk is simply too great. The second option is risk management, where the company implements procedures to manage the risk and then monitors the risk closely. The third is risk shifting where some portion of the risk is transferred through insurance or other mechanism. Fourth, and finally, is that the company can simply accept the risk, so risk acceptance.
Rathbun believes that the risk management choice is the one which may well take the most work, particularly for a CCO. You may be required to create new policies and procedures to assist in the risk management process. Any new policies and procedures will need to be implemented with attendant training for the affected employees. There will need to be follow-up monitoring to ensure engagement and accountability.
IV. Confirming Changes in Behavior
Rathbun articulates that are two mechanisms by which a “checkback” can be performed on policies, procedures, actions and employee accountability. These two mechanisms are monitoring and auditing. Monitoring is a commitment to reviewing and detecting compliance programs in real time and then reacting quickly to remediate them. A primary goal of monitoring is to identify and address gaps in your program on a regular and consistent basis. Auditing is a more limited review that targets a specific business component, region or market sector during a particular timeframe in order to uncover and/or evaluate certain risks, particularly as seen in financial records. However, more aggressive approaches may be required such as the addition of follow-up assessments to confirm effective management of the new risk.
Rathbun cautions that the use of more standard tools to “checkback” should also be utilized. These include compliance by third parties, testing or otherwise gauging employee knowledge regarding the risk management program and even hotline complaints. Rathbun also suggests that relatively new tools such as transaction monitoring, relationship monitoring and real-time party monitoring of third parties should be considered.
V. End Goal
Rathbun believes that the end goal should be “to allow the company to identify a growing concern before it becomes an issue—before consumers are harmed or regulators become concerned.” While a well-structured program does require vigilance it also allows the opportunity for continuous improvement for your company. Rathbun concludes by stating that your goal should be to “help ensure that you and your company ‘will get the first crack’ at addressing a problem, if one occurs.”
I found the Rathbun article to provide a good method for the compliance practitioner to think through, then design and implement a risk management plan, within the context of your overall compliance program. Although she never states it, a key component that she outlined is the Document, Document, Document component of any compliance program. The Department of Justice and Securities and Exchange Commission said in their FCPA Guidance “In the end, if designed carefully, implemented earnestly, and enforced fairly, a company’s compliance program—no matter how large or small the organization—will allow the company generally to prevent violations, detect those that do occur, and remediate them promptly and appropriately.” I believe that you can achieve such a carefully designed and earnestly implemented risk management program by using Rathbun’s suggestions.
Finally, if a long, tall Texan comes to you wanting to borrow money against some fertilizer tanker; do not just turn and walk, run in the other direction.
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© Thomas R. Fox, 2013