We previously considered the Prong in the Evaluation that was not present in the Ten Hallmarks of an Effective Compliance Program; that being root cause analysis. The requirement was first raised in the 2017 Evaluation. It was then carried forward as a requirement in the FCPA Corporate Enforcement Policy, later in 2017. It was discussed again in the 2019 Guidance. The evolution has been instructive.
Under Prong 1 Analysis and Remediation of Underlying Misconduct, the 2017 Evaluation stated: What specific changes has the company made to reduce the risk that the same or similar issues will not occur in the future? What specific remediation has addressed the issues identified in the root cause and missed opportunity analysis? The FCPA Corporate Enforcement Policy brought forward this requirement for a root cause analysis with the following language: Demonstration of thorough analysis of causes of underlying conduct (i.e., a root cause analysis) and, where appropriate, remediation to address the root causes.
In the 2019 Guidance it stated, “a hallmark of a compliance program that is working effectively in practice is the extent to which a company is able to conduct a thoughtful root cause analysis of misconduct and timely and appropriately remediate to address the root causes.” It is therefore the use of the root cause analysis that the DOJ is concerned with going forward.
You should begin with the question of who should perform the remediation; should it be an investigator or an investigative team which were a part of the root cause analysis? Jonathan Marks, believes the key is both “independence and objectivity.” It may be that an investigator or investigative team is a subject matter expert and “therefore more qualified to get that particular recourse”. Yet to perform the remediation, the key is to integrate the information developed from the root cause analysis into the solution.
Marks further noted that the company may also have deficiencies in internal controls. More importantly, the failure to remediate gaps in internal controls “provides the opportunity for additional errors or misconduct to occur, and thus could damage the company’s credibility with regulators” by allowing the same or similar conduct to reoccur. Finally, with both the 2019 Guidance and FCPA Corporate Enforcement Policy, the DOJ has added its voice to prior SEC statements that regulators “will focus on what steps the company took upon learning of the misconduct, whether the company immediately stopped the misconduct, and what new and more effective internal controls or procedures the company has adopted or plans to adopt to prevent a recurrence.”
As required under the 2019 Guidance, from the regulatory perspective, the critical element is how did you use the information you developed in the root cause analysis? Every time you see a problem as a CCO, you should perform a root cause analysis. Was something approved or not approved before the untoward event happened? Was any harm was done? Why or why not? Why did that system fail? Was it because the person who is doing the approval was too busy? Was it because people didn’t understand? It is in answering these and other questions which have been developed through a root cause analysis that you can bring real value and real solutions to your compliance programs.
The key is that after you have identified the causes of problems, consider the solutions that can be implemented by developing a logical approach, using data that already exists in the organization. Identify current and future needs for organizational improvement. Your solution should be a repeatable, step-by-step processes, in which one process can confirm the results of another. Focusing on the corrective measures of root causes is more effective than simply treating the symptoms of a problem or event and you will have a much more robust solution in place. This is because the solution(s) are more effective when accomplished through a systematic process with conclusions backed up by evidence.
When you step back and consider what the DOJ was trying to accomplish with its 2019 Guidance, it becomes clear what the DOJ expects from the compliance professional. Consider the structure of your compliance program and how it inter-relates to your company’s risk profile. When you have a compliance failure, use the root cause analysis to think about how each of the structural elements of your compliance program could impact how you manage and deal with that risk.
Three key takeaways:
- The key is objectivity and independence.
- The critical element is how did you use the information you developed in the root cause analysis?
- The key is that after you have identified the causes of problems, consider the solutions that can be implemented by developing a logical approach, using data that already exists in the organization.