I conclude my short exploration of the recent set of articles in the Harvard Business Review (HBR) White Collar crime special section. Today, I want to look at an article by Mary Jo white, entitled “What I’ve Learned About White Collar Crime”. White is about as well known a figure in the white-collar bar, both prosecution and defense. She is currently the senior chair of the law firm Debevoise & Plimpton LLP, is the former chair of the US Securities and Exchange Commission (SEC) and the former US Attorney for the Southern District of New York. All of these positions have given her keen insight into not only white-collar criminals but also the response companies have engaged in and the actions they should take when they find themselves under government scrutiny.

These are not the run of the mill fraudsters but senior executives who engaged in accounting frauds and fostered corrupt cultures that lead to bribery and corruption, illegal by the Foreign Corrupt Practices Act (FCPA) or participated directly in the bribery schemes.

Ego 

Interestingly, and channeling her inner Jonathan Marks, White first addresses the question of why senior executives would engage in financial fraud or engage in or facilitate bribery and corruption. She said, “Part of the motivation is greed, of course, but there’s more to it. The piece that the public underestimates is ego. Many of the people who commit these crimes have been successful, and they don’t want to fail. Very often the market has turned on them, but they need other people to still see them as successful. There’s often a financial motive, but in a highly charged business where there are temptations, you have to account for human nature and the need for status and continued success, too.”

How is that channeling her inner Jonathan Marks? Quite simply, it is one of the five points on Marks fraud pentagon.Marks calls it “arrogance” and defined it as “Arrogance or lack of conscience is an attitude of superiority and entitlement or greed on the part of a person who believes that corporate policies and procedures simply do not personally apply. This person, perhaps fueled by today’s obscene compensation structures, has complete disregard for the consequences bestowed upon his or her victims. Competence and arrogance play a major role in determining whether an employee today has what it takes to perpetrate a fraud.”

Mistakes in Remediation

Obviously, remediation of any compliance violation is critical from a prosecutorial perspective, as it is mandated for consideration under the US Sentencing Guidelines. Moreover, it is now enshrined in the FCPA Corporate Enforcement Policy as a key indicium for assessing potential liability. Yet, White believes that many companies miss the mark as, “The biggest mistake companies make in trying to prevent crime or misconduct is to ratchet up compliance simply by throwing more resources at it. They believe every extra dollar has the same incremental effect. That’s incorrect. Particularly when you’re dealing with potential violations of the Foreign Corrupt Practices Act (which targets bribery) or the Bank Secrecy Act (which focuses on money laundering), you need to be surgical and intelligent about where the biggest risks are. This is especially true in global organizations—very often problems are popping up far from headquarters, in overseas subsidiaries or with joint venture partners.”

Culture

Here White brings real weight to the debate. While noting that compliance programs are important, she feels it really comes down to culture. She wrote, “Compliance programs are important, but what really matters is the culture and the tone that a leader sets for the organization—that’s often a more effective way to increase the odds that lapses won’t happen again.”

She provided the example of the ostrich-ridden chief executive, when she wrote, “In the aftermath of a scandal, some leaders will claim they didn’t know what was going on. Sometimes that’s true. But when it is, you have to ask if the leader built a communication system that’s designed to bring bad news up to his or her level, or whether the system is designed to insulate leadership.”

Every public company is mandated to have hotlines for whistle-blowers. The problem is that very rarely do the allegations reach up to the Board of Director’s, the Audit or Compliance Committee or the Chief Executive Officer’s (CEO) office. As Kyle Welch demonstrated in his seminal work, “Evidence on the Use and Efficacy of Internal Whistleblowing Systems”, companies with robust reporting systems, where senior executives are actively seeking out complaints and allegations have a much stronger compliance and ethics culture. Unfortunately, as White observed, “In contrast, some hotlines seem designed to give leaders plausible deniability: We have a system for reporting complaints, and there haven’t been many. Leaders have to ask, Why is that? Are employees reluctant to come forward for fear of retaliation?”

It is interesting to note that Wells Fargo suffered from both problems at the same time. First the company had a large number of employees who came forward to warn about the fraudulent accounts creation in the bank. However, that information was never sent up the line to the then CEO, Board of Directors or Audit Committee. Even worse, the whistleblowers were actively retaliated against by the company through terminations and then fighting these wrongful acts.

It Starts at the Top

White concluded that without senior leaders actually leading in the area of compliance and ethics, there is little chance a company can make a comeback from a white-collar incident. She concluded by stating, “If you’re a new leader in an organization, my advice is to let people get to know you—and your values. Let them know how serious you are about doing the right thing. Make it clear that if they see someone do something wrong, they must report it—and that by doing so, they’re supporting all the people in the organization. When someone strays, it diminishes the entire company, and employees can’t let that happen. That’s the message leaders need to deliver—and it’s how they must act, too.”

One vital marker of an ethical culture is whether there really is a zero-tolerance policy for wrongdoing. Many companies claim to have one, but when high producers or senior people break the rules, leaders may go easy on them, either for business reasons or out of loyalty. That undermines everything. You can’t rely just on compliance and audits; you have to be willing to punish people who cross the line. To build an ethical culture, you have no choice but to follow through on your no-tolerance promise. Don’t just talk the talk; walk the talk.

Perhaps I should have started this blog post with the maxim that when Mary Jo White speaks, you should listen. The ideas that she puts forward in her article are not new, revolutionary or in the least bit controversial. Yet her long and distinguished career, on both sides of the bar, should give every business leader pause to consider about their organization. With the Business Roundtable’s Statement of Corporate Purposecompliance and ethics has been driven to the forefront in the rasion d’etre of a corporation. White explains why failing to do so can lead to significant corporate calamity.

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, 2019

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