We continue our Hunter S. Thompson themed week in honor of Michael Cohen and his Essential Consulting LLC entity and his work which he sardonically named “Project Sunlight”. There may not be a finer example of full Gonzo journalism than Cohen’s self-named consulting scam on the current American dream. No doubt tripping on successive re-readings of Fear and Loathing in Las Vegas, Cohen was beginning to see sheep out there he might shear for literally millions of dollars through his consulting gig. Today we consider it from the angle of the compliance practitioner perspective and what compliance brings to the table when it comes to the retention of and working with third parties in any best practicescompliance program.

The lifecycle of third-party management is well-known. The five steps are:

  1. Business Justification by the Business Sponsor;
  2. Questionnaire to Third Party;
  3. Due Diligence on Third Party;
  4. Compliance Terms and Conditions, including payment terms; and
  5. Management and Oversight of Third Parties After Contract Signing.

Now consider these five steps in the context of the hiring of Cohen for consulting. Cohen claimed to bring insight into the mind of Donald Trump and how the administration would think through issues of concern. What would be the business justification? We know AT&T was interested in the Federal Communications Commission’s upcoming ruling on net neutrality and of course its proposed acquisition of Time Warner. The Korean entity Korea Aerospace Industries (KAI) had a joint bid with Lockheed Martin to build the T-50A trainer jet in hopes of securing a US Air Force contract worth roughly $16 billion. KIA wanted specific advice on the accounting practices for this type of bid. Novartis apparently wanted some assistance in navigating the intricacies of the Affordable Care Act, as apparently it had not been able to do so in the first five years the law had been in effect.

Next would come the questionnaire to Essential Consulting LLC. It might well contain some basic questions like: How long has the company been in business? (one month) How many employees did the company have? (zero) The physical location of the business? (Trump Tower) How about financial statements demonstrating the ongoing viability of the business, audited or otherwise? (none) How about knowledge of the laws around lobbying/consulting? (hard to say) How about the compliance program? (are you kidding???)

Due diligence would obviously flow from the questionnaire. If any third-party provided you any of the above information you might consider it high-risk or at the very least raising a red flag; thereby mandating a higher level of scrutiny, maybe even a Level Three due diligence i.e., boots on the ground interview. Since the office is in Trump Tower, that part should not be too hard. However, some basic questions about the company, its length of time in business, its purpose and its references (legal/financial/compliance) should be considered. As a part of this due diligence process you might even inquire into the subject matter expertise of Essential Consulting into net neutrality, anti-trust law, the Affordable Care Act and of course aircraft manufacturing accounting standards.

Assuming your due diligence investigation found what Bess Levin, writing in an aptly named Vanity Fair piece entitled “Michael Cohen Must Be The Most Gifted Consultant in America,said, “it appears that Cohen is indeed a multi-talented renaissance man with “insights” into all sorts of industries” you are now ready to move the contract. One might assume a baseline of compliance terms and conditions for any consulting contract such as a certification that there will be no legal violations by the consultant, they accept your company’s third-party suppliers Code of Conduct and, most importantly, will make no illegal payments going forward. But more than the compliance terms and conditions, there should be standard commercial terms and conditions such as material breach of contract, failure to perform or termination for cause after a period of notice and opportunity to cure.

There is also the pricing of the contract. Apparently, Cohen had asked for an annual commitment of $1.5 million for his services. At least the three companies which hired him did not pay that exorbitant amount but Novartis did pay $100,000 per month or $1.2 million in 12 months to Cohen. This was approximately 10 times what the company usually paid lobbyists/consultants. In a tweetlast week, Jason Meyer raised the issue of the fair market value of the payments for the services Cohen delivered. Although AT&T did get a dinner with the FCC Chair, it is difficult to believe that AT&T could not get one of its other lobbyists to set up such an event.

How about managing the relationship after the contract was signed? Novartis showed the way forward once again. Levin reported that Novartis, “After their first and only meeting, however, in March 2017, the company realized Cohen “would be unable to provide the services that Novartis had anticipated” and “the decision was taken not to engage further.”” (Due diligence might have turned up this fact.) Yet Novartis continued to pay on the contract for the life of the contract because “Novartis worried that cancelling the contract might anger the president, so they continued to pay Cohen $100,000 a month until early 2018. You know, standard protocol for an in-demand “consultant” who couldn’t actually follow through on any of his promises.” So that was the management of the contract, just to walk away and keep making the payments so you do not piss off someone completely unrelated to the contract.

For every compliance practitioner, the Cohen affair presents the exact reason why compliance must be operationalized for it to succeed. This means not a paper program but one where a company actually does compliance in how it does business. In Fear and Loathing, Hunter S. Thompson captured the zeitgeist of the post–’60s era. If your company does not actually operationalize its compliance programs, it could well be stuck in paying out millions to someone as useless as Cohen, simply to not upset a sitting president and cause him to attack you in a tweet.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

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