Corporate Culture 2Yesterday, I began an exploration about some of the issues around communicating corporate culture to business units located outside the US and away from the corporate office. This series is based on a recent article in the MIT Sloan Management Review, entitled “Fighting the “Headquarters Knows Best” Syndrome” jointly written by Cyril Bouquet, Julian Birkinshaw and Jean-Louis Barsoux. In this piece the authors discuss how you can move from a top-down US centric approach to a more global mindset. Today I discuss how to move forward.

The authors began by listing some of the solutions that have been tried. Under the category of “The Anatomy of the Organization” the authors focused on structural solutions, which included setting up hubs with global mandates. This allows a wider group of employees from multiple countries to gather in a true third party location to leverage cross-sharing of know-how. Under what the authors called “The Physiology of the Organization” they gave examples of companies that facilitated both online and in person brainstorming sessions across multiple boundaries. One company holds an internal forum to showcase and exchange ideas. Finally, under the category of “The Psychology of the Organization” they pointed to “solutions are designed to reshape the outlook and behavior of individuals. Your company could set up a global advisory group or better yet send a senior team into a new geographic region for a longer term, such as four weeks.”

The article then focused on the specific solution of one company, the Irdeto B.V., a Netherlands-based developer of security software for digital media providers, who were eager to increase its market share in the Asian market. The company tried some specific techniques, which you could certainly use in your own program. Most interestingly, the company moved to make conference calls less US time centric, “splitting what had been previously a one-way burden.” The company also required senior management to travel to the regions more often. Regional meeting agendas were expanded to include discussions of what was going on in other regions across the globe. Finally, transfer of executives from the corporate headquarters to a region matched a transfer of executives from the regions back to the home office. All of these changes led to more attention from top management about what folks in the regions were saying, greater contributions from employees in the region and better bi-lateral exchanges throughout the company.

What are some of the lessons for the Foreign Corrupt Practices Act (FCPA) compliance practitioner on how they might translate this into your spreading your culture of compliance outside the corporate office? The authors list several approaches in addition to their case study of Irdeto. They suggest openness to a different structure of assigning people and activities. Consider sending a senior executive out of the US to be an ambassador for your company’s culture. The authors note, “Relocating headquarters’ activities forces people not only to think differently but to act differently.”

Moreover, if you move a senior executive out to a region and assign him or her a compliance ambassador role, they could help to drive the cultural message down to the fabric of that region through constant interactions and reinforcement. Putting your team out in the regions is not only a great learning experience but allows you to put your corporate culture into action. By acting globally “People tend to act their way into new attitudes more than they think their way into new behaviors.”

Near and dear to my heart is a commitment to fairness because, as the authors note, “The perception of fairness is critical to reducing resistance to painful change.” Yet this is beyond simply following the Fair Process Doctrine with uniformity in how you treat employees in the region as you would treat people in the corporate office. The authors believe “One reason many restructuring efforts flounder is that they demand sacrifice from everyone except those at the top.”

It is more than simply accepting sacrifice, as those sacrifices must be delivered in a fair manner. The authors conclude “Fair processes can help render these difficult outcomes more palatable by making the case for change and engaging reluctant participants in discussions about how to achieve it and mitigate the downsides.” A Chief Compliance Officer (CCO) should consider sending one of the team abroad or better yet rotate a regional compliance officer back to the corporate headquarters.

Interestingly, the authors believe that the ease of virtual communications has led to more complicated collaborations. They note, “executives must make a conscious effort to connect with others regularly, often by scheduling appointments that span multiple time zones. It’s all too easy for the top team to neglect interactions and get swamped by the operational side of managing the business. If meeting times aren’t set in advance and respected, the demands of the moment invariably win out.” This is no different for the CCO or compliance practitioner but I feel this extra commitment to communications is the most critical aspect to bring a richer and fuller understanding of corporate culture across the organization.

Dockery’s series in the Wall Street Journal’s (WSJ) Risk & Compliance Journal, clearly demonstrates that not only is the government looking more closely at culture but also companies are struggling with how to translate this requirement into action. This seems to be precisely the point of the article, with the authors concluding that it is not where you do business but how you do business that counts. Focusing on where you do business mistakes a global footprint for a global culture. If you truly want to help drive culture across your organization you must not only communicate that message but put people in your regions who will model that message in their behaviors. Just as importantly is to bring representatives from the regions back to the corporate headquarters so they might see what culture means in the home office.

 

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, 2016

Blood on the TracksOn this week in 1975, Bob Dylan’s 15th studio album, Blood on the Tracks, reached the Number 1 album slot on the Billboard charts. This was in spite of no song rising above the 31st slot on the single charts. It came out in the final semester of my senior year in high school so its personal nature was very poignant to me. Two interesting facts were that Phil Ramone was an engineer on the recording sessions and Buddy Cage played steel guitar (shout out to Chris Bauer). While I probably enjoyed it because I found it to be the most accessible Dylan album to that point, the critics most generally praised it as well, finding it to be his most reflective. Indeed his son Jakob has been quoted as saying, “When I’m listening to Blood On The Tracks, that’s about my parents.”

Last week we had a second Foreign Corrupt Practices Enforcement Action (FCPA) from the Securities and Exchange Commission (SEC). This one involved the California based entity SciClone Pharmaceuticals, Inc. (SCLN) which was assessed a penalty of $2.5MM, profit disgorgement of $9.42MM and prejudgment interest of $900K for a total penalty of $12.8MM to settle SEC charges that it violated the FCPA when employees in China pumped up sales for five years by making improper payments to professionals employed at state health institutions. The penalty was for the conduct of its Chinese subsidiary, SciClone Pharmaceuticals International Ltd.

Many of the allegations reached back over 10 years, to 2005, when the Chinese subsidiary created a special VIP program for high volume customers called health care professionals (HCPs). According to the SEC Cease and Desist Order, this special program provided “weekend trips, vacations, gifts, expensive meals, foreign language classes and entertainment” to selected VIPs. It was described internally as “luring them with the promise of profit.” Clearly not the tone a Chief Compliance Officer (CCO) would want to see from his or her top salespersons. Oops, SCLN did not have a Chinese compliance officer at the time of the incidents in question because it did not have a compliance function at the company, so I guess that tone issue never came up.

Clearly the VIP program went beyond the pale as it provided for vacations for both the VIPs and their family members. But this program also had less egregious activities such as golf tournaments followed by beer drinking. However, the subsidiary’s conduct became more nefarious in 2007 when it hired “well-connected regulatory affairs specialist (Specialist) to facilitate” the application of certain licenses the company needed to distribute a new product in China.

This Specialist originally intended to send two foreign officials who were responsible for approving this license to Greece for an academic conference related to this new medical product. However visas could not be obtained in time so “the Specialist instead provided them at least $8,600 in lavish gifts.” In addition to the foregoing, the company sent many other Chinese government officials to in the US, Japan and the Chinese resort island of Hainan where “significant sightseeing was involved” in addition to an educational component.

The company even managed to fall prey to the well known Chinese bribery conduit of travel agencies by failing to conduct any due diligence on a number of travel vendors who were used to funnel bribes and improper gifts and trips involving improper sightseeing and tourist expenditures. Then again this may have been intentional given the overall posture of the subsidiary and its parent. Nevertheless it was another compliance program failure.

Finally, as part of SCLN’s internal investigation, after the discovery of all of the above, an “internal review of promotion expenses of employees from 2011 to early 2013. This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings. A portion of the funds generated through the reimbursements were used as part of the sales practices described above that continued through at least 2012.”

Noting the foregoing conduct, the SEC Order held that SCLN did not have the appropriate internal controls in place for any type of FCPA compliance program. Both the subsidiary and parent engaged in false accounting entries by “recording the payments to health care providers as sales, marketing, and promotional expenses.” So SCLN violated both prongs of the Accounting Provisions of the FCPA , those being the accounting and internal controls provisions.

However, SCLN did make a come back which led to the relatively low fine and penalty. As noted in the Order, the company took steps, “to improve its internal accounting controls and to create a dedicated compliance function. These include the following: (1) hiring a compliance officer for its China operations; (2) undertaking an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements; (3) substantially reducing the number of suppliers providing third-party travel and event planning services; (4) improving its policies and procedures around third-party due diligence and payments; (5) incorporating anti-corruption provisions in its third-party contracts; (6) providing anti-corruption training to its third-party travel and event planning vendors; (7) disciplining employees (and their managers) who violate SciClone’s policies; and (8) creating an internal audit department and compliance department.”

Lessons Learned

Mike Volkov has called the SCLN enforcement action, “A Textbook Case of FCPA Violations for Gifts, Meals, Entertainment and Travel”. I would add that it is the textbook case for CCOs and compliance practitioners to study for lessons learned. The first thing is to review your own compliance program to see if any of these anomalies that SCLN engaged in appear in your Chinese operations or any other high risk areas. Beyond these general reviews, I would suggest a more detailed transaction monitoring and data analytics approach, which would involve:

  • Tracking not only the expenses paid for gifts, travel and entertainment by employees but tying this information back to the foreign government officials who received these benefits;
  • Look to any third parties who may have been involved in any of the foregoing, such as the ubiquitous Chinese travel agencies or the more iniquitous ‘Specialist’ who might be involved in facilitating license approvals;
  • Consider the positions which were lavished with such gifts, entertainment or travel. Did any of these persons make any approvals or decisions which allowed your company to obtain or retain business immediately before or after such treatment?

Finally, consider the thoughts of Scott Lane, Executive Chairman of the Red Flag Group, where he described the line of sight a compliance practitioner needed. Lane described the data points that a CCO or compliance practitioner should have visibility into going forward. By looking down a straight line at all of this information derived from the SCLN enforcement matter, the compliance function can identify measures to improve any high risk issues before they move to FCPA violations. While gifts, travel and entertainment expenses might be on your company’s radar for compliance department pre-approval, if they are spent on one or two government officials who may influence deal making authority regarding your company’s business it may well merit a more detailed analysis.

 

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, 2016

Spud WebbOn this day 30 years ago, history was made when Spud Webb won the 3rd NBA Slam Dunk contest. Webb joined future Hall-of-Famers Michael Jordan, who won the inaugural contest in 1984, and Dominic Wilkins, who won the second event in 1985, as the Slam Dunk champ. What made Webb’s win so noteworthy? It was his size. He was 5 feet, 9 inches tall and the shortest player in the league at that time. Webb played for 12 seasons in the NBA, mostly with the Atlanta Hawks, but for anyone who tuned in that day, we will never forget when Spud Webb stood the tallest of the all the players.

I thought about Webb, his biggest moment of personal glory and individual responsibility when I read Sunday’s Fair Game column in the New York Times (NYT) by Gretchen Morgenson, entitled “Fixing Banks by Fining the Bankers. Morgenson has written several pieces about the banking scandals coming out of the 2008 financial crisis and beyond, coupled with the lack of personal accountability in all of the settlements with US regulators.

She began her piece with the certain truism, “Ho-hum, another week, another multimillion-dollar settlement between regulators and a behemoth bank acting badly.” The settlement she referenced referred to two financial institutions, Barclay’s and Credit Suisse, who agreed to pay $154.3MM, regarding their misrepresentations to investors around high-frequency trading. But what concerned Morgenson was the following, “As has become all too common in these cases, not one individual was identified as being responsible for the activities. Once again, shareholders are shouldering the costs of unethical behavior they had nothing to do with.”

Morgenson identified the reason behind the continued failings of banks “could not be clearer: Years of tighter rules from legislators and bank regulators have done nothing to fix the toxic, me-first cultures that afflict big financial firms.” She believes it is a failure of banks to change their culture. In her piece she quoted the Chairman of FINRA, Richard Ketchum, who said firms that continue to have violations are because of “poor cultures of compliance”. He finds the opposite to be true stating, “Firms with a strong ethical culture and senior leaders who set the right tone, lead by example and impose consequences on anyone who violates the firm’s cultural norms are essential to restoring investor confidence and trust in the securities industry.”

The rules and regulations of compliance can set down the written standards for employees to follow. Yet for a compliance program to be effective, it is much more than the paper part of the program. Morgenson believes that banks must change their culture to help stop these systemic breakdowns. Yet she did not end her piece there as she explored what regulators can do, more than simply talk, to facilitate this change in culture.

She considered two separate approaches regulators might consider. The first was suggested by Andreas Dombret, a member of the executive board of Deutsche Bundesbank, who noted, “Most companies have codes of ethics, but they often exist only on paper.” To help make the message of doing business ethically and in compliance, he also suggested banking regulators could help encourage a more ethical approach by routinely monitoring how a bank cooperates with the regulatory authorities particularly in an oversight rule. Finally he asked, “How often is the bank the whistle-blower?” He felt this question was important because “Not only to get a lesser penalty but also to show that it won’t accept that kind of behavior. We are seeing more of that.”

These suggestions would seem to be more aligned with an industry with significant oversight, such as banking. So I found the second area she explored more directly applicable to the Foreign Corrupt Practices Act (FCPA. It met her criticisms that it was either the shareholders or perhaps the company D&O insurance carrier who foot the bill for any FCPA violation.

She explored an idea posited by Claire A. Hill and Richard W. Painter, professors at the University of Minnesota Law School, in a new book they published, entitled “Better Bankers, Better Banks”. In this book the law professors urged “making financial executives personally liable for a portion of any fines and fraud-based judgments a bank enters into, including legal settlements. The professors called this “covenant banking.”

This covenant banking plan had some very interesting elements that spoke to the issue of individual v. corporate liability, similar to the discussion compliance professionals have engaged in since the release of the Yates Memo. Morgenson said the covenant banking plan “contains a crucial element, requiring the best-paid bankers in the company to be liable for a fine whether or not they were directly involved in the activities that generated it. Such a no-fault program, the professors argued, would motivate bankers not only to curb their own problematic tendencies but to be on the alert for colleagues’ misbehavior as well.” She quoted the book’s authors stating that this plan would help to change corporate culture as it “discourages bad behavior and its underlying ethos, the competitive pursuit of narrow material gain.”

Moreover, the professors believe, “If bankers aren’t willing to institute a system involving personal liability, regulators and judges could require it as part of their settlements or rulings. Something like covenant banking could be included in nonprosecution agreements. Or a judge overseeing a case in which a company is paying $50 million could require individuals to pay $10 million of that personally.” Finally, “A regulator could give a company the choice of a far lower fine if it were to be paid by managers, not shareholders. A company choosing to pay the higher fine and billing it to the shareholders would have some explaining to do”.

While most banks or non-financial institutions subject to the FCPA might well be reluctant to put such corporate strictures in place, it certainly could be a part of a civil penalty which comes before a court for review and consideration, such as when the Securities and Exchange Commission (SEC) goes to court when filing a Cease and Desist order in a FCPA enforcement action.

The Yates Memo recognized that individual accountability will help to drive compliance with the FCPA. The problem in going after individuals is that it is often difficult to pinpoint any single or series of actions by a senior manager that may have lead to the violation. It can be as nefarious as the General Motors (GM) nod or simply the diffusion of liability was the basis for the original creation of the corporate structure long ago.

Yet, by focusing on corporate culture Morgenson, the banking industry and banking regulators are hitting on a key theme. Paper programs are only that if there is not the culture of compliance set by senior management that the company will follow the rules. I was also intrigued that both FINRA Chairman Ketchum and banker Dombret recognized the business problem which poor cultures of compliance led to, lack of faith in capital markets and the securities industry. If companies will work to enhance culture, they move to addressing this most serious and long-term business issue.

Spud Webb was the first ‘Little Big Man’ in the modern era of the NBA. His 12-year run of success led to players such as the five-foot, five-inch Earl Boykins and five-foot, three-inch Muggsy Bogues. In 2006, 5’9” Nate Robinson of the New York Knicks became the second-shortest player to emerge victorious in the NBA slam-dunk contest. Webb changed NBA culture just as corporate culture can be changed as well.

For a YouTube video clip of Spud Webb at the 1986 Slam Dunk contest, click here.

 

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, 2016

SECThe Foreign Corrupt Practices Act (FCPA) enforcement journey, which began last summer with the guilty plea of Vicente Garcia for the payment of bribes to obtain contracts in Panama for his employer, SAP International, ended this week with the release of the Securities and Exchange Commission (SEC) civil action against the parent of SAP International, SAP SE, a German company. The case was concluded via a Cease and Desist Order (the “Order”). The fine was a relatively small $3.7MM with prejudgment interest of another $188K.

The facts were straightforward, which Garcia had previously admitted to in his guilty plea and sentencing hearing last December. He circumvented SAP internal controls to create a slush fund from which to pay bribes. To do so, he had to actively evade an internal compliance system that had stopped him from hiring a corrupt agent to facilitate the bribe payments. Frustrated by the success of the SAP compliance function to stop his initial bribery scheme, he then turned to using a previously approved distributor to facilitate the payment. He did so through giving this distributor an extra ordinary discount. The corrupt distributor then sold the SAP products to the Panamanian government at full price and used the price difference to fund the bribes to the corrupt government officials. This led to a $14.5MM sale to the distributor with $3.7MM in profits to SAP. Hence, the amount of profit disgorgement.

The bribery scheme is a clear lesson for any company that utilizes a distribution model in the sale chain. Bill Athanas, a partner in Waller Lansden Dortch & Davis LLP, has articulated a risk management technique for this type of bribery scheme, which he has called Distributor Authorization Request (DAR) and it provides a framework to help provide a business justification for any such discount, assess/manage and document any discount offered to a distributor. 

It begins with a DAR template, which is designed to capture the particulars of a given request and allows for an informed decision about whether it should be granted. Because the specifics of a particular DAR are critical to evaluating its legitimacy, it is expected that the employee submitting the DAR will provide details about how the request originated as well as an explanation in the business justification for the elevated discount. In addition, the DAR template should be designed so as to identify gaps in compliance that may otherwise go undetected.

The next step is that channels should be created to evaluate DARs. The precise structure of that system will depend on several factors, but ideally the goal should be to allow for tiered levels of approval. Athanas believes that three levels of approval are sufficient, but can be expanded or contracted as necessary. The key is the greater the discount contemplated, the more scrutiny the DAR should receive. The goal is to ensure that all DARs are vetted in an appropriately thorough fashion without negatively impacting the company’s ability to function efficiently.

Once the information gathering, review and approval processes are formulated, there must be a system in place to track, record and evaluate information relating to DARs, both approved and denied. The documentation of the total number of DARs allows companies to more accurately determine where and why discounts are increasing, whether the standard discount range should be raised or lowered, and gauge the level of commitment to compliance within the company. This information, in turn, leaves these companies better equipped to respond to government inquiries down the road.

Yet in addition to the DAR risk management technique advocated by Athanas is more robust transaction monitoring in your compliance program going forward. As noted in the Order, one of the remedial measures engaged in by SAP after the bribery and corruption was detected was that the company “audited all recent public sector Latin American transactions, regardless of Garcia’s involvement, to analyze partner profit margin data especially in comparison to discounts so that any trends could be spotted and high profit margin transactions could be identified for further investigation and review.”

This is the type of transaction monitoring which a Chief Compliance Officer (CCO) or compliance practitioner traditionally does not engage in on a pro-active basis. However this is clearly the direction that US regulators want to see companies moving towards as compliance programs evolve.

Here a couple of questions would seem relevant. What happened? and How do you know? In answering these questions, it is clearly important that there should be an understanding of the business cause of significant sales and that there could be other issues involved in the situation that may require consideration by the compliance practitioner. While a company would usually only consider an analysis of variations at the level at which the sales increase was material, this was not the path taken by SAP in their post-incident investigation. Moreover, such a sales increase would most probably be material for the Panama region and certainly for the employee in question.

Once the appropriate level is determined, direct questions should be asked and answered at that level. Explanations of a sales increase as being the result of the appointment of a new head of business development or a more aggressive sales manager should not simply be taken at face value. Questions such as what techniques were used; what was the marketing spend; how much was spent on discounts to distributors; etc., might help to get at the true underlying reason for a spike in sales. Further, a company should review its findings over subsequent periods for confirmation. So, for example, if a sales increase legitimately appears to be due to the efforts of a new person in the territory or region, is that same increase sustained in later periods? The answer to such a question might identify red flags indicating the need for further review.

A final lesson to be considered is when you have an employee like Garcia. Is he a rogue employee? Does rogue mean his behavior is only sociopathic so that he appears to operating within the rules? Or were there clear signs that greater scrutiny needed to put in place? What about his clear attempt to bring in a corrupt agent, at the last minute of a deal to facilitate it? This is a clear red flag and was not approved by SAP compliance. Does this put the company on notice that an employee is not only willing to go beyond the rules but also engage in illegal conduct down the road? How many passes does such an employee get before they are shown the door?

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, 2016

Data Analysis 2I end my review of the types of data analysis that can be used to help detect or prevent bribery through the case studies from Joe Oringel, co-founder and Managing Director of Visual Risk IQ, a firm that helps audit and compliance people see and understand their data. Having previously discussed Visual Risk IQ case studies involving review of employee expenses and duplicate payments to vendors, today we reflect on an area not usually considered; that being rebates and other adjustments to customer revenues that can be a source to create a pot of money to pay bribes. Finally, I consider why data analysis has become a best practice going forward.

Adjustments to revenue (returns, rebates, and discounts) are quite different from the duplicate invoice situation we previously explored, where someone has provided services and then overbills or bills multiple times for those services. A similar mechanism was used by Hewlett-Packard’s (HP’s) German subsidiary to pay bribes where the business unit made fraudulent sales to corrupt distributors, booked the revenue then a couple of quarters later repurchased the equipment at a higher price and pooled those price differences to pay bribes. A similar scheme was used to fund to fund bribes paid to senior level Petrobras employees where corrupt companies would provide a discount to Petrobras yet the money was not rebated or credited to Petrobras but diverted to Swiss bank accounts.

Oringel introduced the techniques that one would use to identify what accountants call a contra-revenue account (CRA), which is generally recognized as the account in which you might record a discount or a rebate. He further explained these are ways through which gross revenue gets reduced and becomes net revenue. This is yet another way a pot of money can be developed from which bribes can paid.

Oringel and his team have tackled this issue when performing data analytics around rebates. Visual Risk IQ is located in North Carolina, which is a state where there continues to be a large domestic furniture manufacturing industry. This is an industry where rebates, particularly in the form of advertising allowances, are fairly common. He explained the fact pattern similar to the following, a “furniture manufacturer sells an independent dealer a mattress with a wholesale cost of $1,000; and if that mattress brand is advertised and promoted during the 4th quarter, and that mattress sells during the 4th quarter, then the dealer can claim an additional $100 discount to be used for that advertising, yielding them a net wholesale price of only $900 for the mattress.”

Visual Risk IQ was asked by a client to use data analysis to help determine whether there were improper or suspicious claims for advertising allowances by the channel partners of a furniture manufacturer. After comparing the relative discounts between dealers, based on both percentage and absolute dollar amount, the team also began to compare orders by month to advertising allowances claimed. These analyses were used to select dealers for additional scrutiny as part of their advertising allowance rebate program, but this approach was different from prior reviews, which were primarily accomplished using statistical sampling. Oringel built an analysis that compared order size by month with prior claims for advertising allowances for each of the various dealers that were buying the furniture from this manufacturer. By comparing order size to advertising allowance claims, the team identified dealers that were claiming disproportionate allowances relative to orders and expected on hand inventory. Indeed, certain dealers were claiming to have significantly negative on-hand inventory balances during the holiday selling season, based on their past orders and the timing of these large allowance claims.

Oringel further explained, “by identifying what was estimated to be an expected and minimum on-hand inventory, based on dealer size and prior order history, a forecasted allowance was computed. The additional scrutiny devoted to dealers whose claims yielded unusually low levels of inventory resulted in disallowed rebates and allowances after additional customer sales documentation was not provided as requested.” Visual Risk IQ and the client team “found, as you might expect, since this was the first time that advertising rebates were ever audited with such a data analytics approach, that there were many dealers and channel partners that appeared to be following the rules, but there were also several that really did appear to be problematic.”

I asked Oringel if he could provide any examples where he found issues involving the client’s channel partners. He stated an “example of one of those problematic channel partners was a dealer that had sold almost a year’s worth of furniture in a single quarter. To help put some numbers on this. They had purchased, in the preceding 12 months, about 400 units with order size varying between 25 and 50 units each month. Yet nearly all of these 400 units were claimed as Q4 sales, which was the quarter with the largest advertising allowance.”

The Visual Risk IQ team asked some thoughtful follow-up questions when they compared the pattern of purchases with the sales claimed to be related to the advertising allowances. “Do these orders make sense? Why did they keep ordering February, March, April, 40 pieces, 30 pieces, 40 pieces all year, if they were not selling any of them in Q1 and Q2?” Finally he added, “And how did they get from 400 to nearly zero in Q4?” Using these and other questions together with the data analytics, the company was able to successfully challenge some of the advertising allowance monies claimed by certain dealers.

These CRA’s are similar to customer rebates, which can be fraught for abuse. Improper accounting of customer rebates can be used to create a pot of money to pay a bribe. However, a Chief Compliance Officer (CCO) may not consider these for review. Oringel’s example shows the power of data analytics for a wide variety of transactions which could be used to pay bribes.

If there has been one consistent message the Department of Justice (DOJ) has communicated since at least the Lanny Breuer days, it is that a compliance program should evolve, both in terms of how your company’s business evolves but also as standards and technology evolves. Data analysis is moving towards the forefront in the realm of best practices. Moreover, use of data analysis can be the only way a CCO or compliance practitioner can have visibility into a large amount of data to determine trends and issues. Finally, it is through the use of data analytics that a CCO can move the compliance practice from detection to preventative to proscriptive so that your program can spot and then stop issues and trends from becoming Foreign Corrupt Practices Act (FCPA) violations.

Joe has more than twenty-five years of experience in internal auditing, fraud detection, and forensics, including ten years of Big Four assurance and risk advisory services. His corporate roles included information security, compliance and internal auditing responsibilities in highly-regulated industries such as energy, pharmaceuticals, and financial services. He has a BS in Accounting from Louisiana State University, and an MBA from the Wharton School at the University of Pennsylvania.

Joe Oringel can be reached at joe.oringel@visualriskiq.com.

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, 2016