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

Rubik's CubeIt is generally believed that the world’s single best selling toy is the Rubik’s Cube, invented in 1974 by the Hungarian Ernő Rubik. Although it was initially believed that Rubik’s Cube was built as a teaching tool to help his students understand 3D objects, the inventor has said his purpose was solving the structural problem of moving the parts independently without the entire mechanism falling apart. Further, even he did not realize he had created a puzzle until the first time he scrambled his new Cube and then tried to restore it. The cube made its international debut in 1980 and the rest, as they say, is history.

I thought about Rubik and his famous (and for me – very frustrating) Cube when I read a recent article in Adam Bryant’s New York Times (NYT) Corner Office column where he interviewed Liz Pearce, Chief Executive Officer (CEO) of LiquidPlanner, a project management software firm. Pearce said that leadership is like a Rubik’s Cube in that you have to put all the pieces together. I thought that was a very apt analogy for a Chief Compliance Officer (CCO) or compliance practitioner because there are so many moving parts in the job of any compliance professional.

Pearce said, “When you’re running a start-up, you have this finite set of resources, and you have this huge goal. So you look at all the angles, and twist things this way and that as you’re thinking, “What if we did it this way?”” But more than simply the technical side of a Rubik’s Cube analysis, Pearce also talked about the people part of the equation. She said, “And every new employee who comes in is like Christmas morning. What are they going to bring to the table? What do they know that can help us? How can we help them?”

This certainly comes into play when working with other corporate functions to assist in the doing of compliance in an organization. For instance, Human Resources (HR) can be a key asset in your compliance program. HR has several key areas of expertise, such as in discrimination and harassment. But beyond this expertise, HR also has direct accountability for these areas. It does not take a very long or large step to expand this expertise into assistance for compliance. HR often is on the front line for hotline intake and responses. These initial responses may include triage of the compliant and investigations. With some additional training, you can create a supplemental investigation team for the compliance department.

Clearly HR puts on training. By ‘training the trainers’ on compliance you may well create an additional training force for your compliance department. HR can also give compliance advice on the style and tone of training. This is where the things that might work and even be legally mandated in Texas may not work in other areas of the globe; advice can be of great assistance. But more than just putting on the training, HR often maintains employee records of training certifications, certifications to your company’s Code of Conduct and compliance requirements. This can be the document repository for the ‘Document, Document, and Document’ portion of your compliance program.

Internal Audit is another function that you may want to look at for assistance. Obviously, Internal Audit should have access to your company’s accounting systems. This can enable them to pull data for ongoing monitoring. This may allow you to move towards continuous controls monitoring, on an internal basis. Similarly, one of the areas of core competency of Internal Audit should also be internal controls. You can have Internal Audit assist in a gap analysis to understand what internal controls your company might be missing.

Just as this corporate function’s name implies, Internal Audit routinely performs internal audits of a company. You can use this routine job duty to assist compliance. There will be an existing audit schedule and you can provide some standard compliance issues to be included in each audit. Further, compliance risks can also be evaluated during this process. Similar to the audit function are investigations. With some additional training, Internal Audit should be able to assist the compliance function to carry out or participate in internal compliance investigations. Lastly, Internal Audit should be able to assist the compliance function to improve controls following investigations.

A corporate IT department has several functions that can assist compliance. First and foremost, IT controls IT equipment and access to data. This can help you to facilitate investigations by giving you (1) access to email and (2) access to databases within the company. Similar to the above functions, IT will be a policy owner as the subject matter expert (SME) so you can turn to them for any of your compliance program requirements, which may need a policy that touches on these areas. The final consideration for IT assistance is in the area of internal corporate communication. IT enables communications within a company. You can use IT to aid in your internal company intranet, online training, newsletters or the often mentioned ‘compliance reminders’ discussed in the Morgan Stanley Declination.

Finally, do not forget your business teams. You can embed a compliance champion in all divisions and functions around the company. You can take this a step further by placing a Facility Compliance Officer at every site or location where you might have a large facility or corporate presence. Such local assets can provide feedback for new policies to let you know if they do not they make sense. In some new environments, a policy may not work. If your company uses SAP and you make an acquisition of an entity that does not use this ERP system, your internal policy may need to be modified or amended. A business unit asset can also help to provide a push for training and communications to others similarly situated. One thing that local compliance champions can assist with is helping to set up and coordinate personnel for interviews of employees. This is an often over-looked function but it facilitates local coordination, which is always easier than from the corporate office.

Pearce also had another insight that is not often discussed. It is that as a CCO or even compliance professional, if not held to a higher standard, you are certainly watched more closely. As Pearce put it, “I’ve had light-bulb moments when I realized I have to be really thoughtful about what I ask for and how I ask for it, because people are watching and listening closely, and caring in a way that they didn’t when I didn’t have this title. That’s always been a little bit uncomfortable for me. I don’t have this grand image of myself. I’m just like everybody else.” Roy Snell and Donna Boehme are probably two of the leading advocates about how the CCO or compliance practitioner should carry himself or herself, not simply to do the right thing, but to stand as an advocate for telling the whole story. This is far different from the role of a corporate legal department or any other corporate department. Just as Pearce realized as a leader she had to be more thoughtful, I think as a compliance professional, you should be mindful of this as well.

When I initially went to an in-house legal position, I was amazed at the depth and quality of the challenge. You had to factor in state law, US federal law, usually a foreign law (or two) and then, of course, internal company policies. I described it as a three-dimensional chessboard with any one move affecting the rest of the board. The same is true for the compliance function, but only more so. I find the Rubik’s Cube of leadership to be an apt metaphor for the compliance function as well.

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 4I continue my exploration of the use of data analytics in a best practices compliance program. Today we look at how data analytics can be used to help detect or prevent bribery and corruption where the primary sales force used by a company is third parties. A vast majority of Foreign Corrupt Practices Act (FCPA) violations and related enforcement actions have come from the use of third parties. While sham contracting (i.e. using a third party to conduit the payment of a bribe) has lessened in recent years, there are related data analysis that can be performed to ascertain whether a third party is likely performing legitimate services for your company and is not a sham.

I asked Joe Oringel, co-founder and Managing Director of Visual Risk IQ, how data analysis might help a Chief Compliance Officer (CCO) or compliance practitioner detect such conduct and also move toward preventing such conduct in the future. Oringel described different case studies from his organization’s clients where they used data analysis on accounts payable invoices and how that experience can be used to formulate similar data analysis for a CCO or compliance practitioner. There are a number of more complex analytics that can be run in combination to identify suspicious third parties, and some of the simplest can be to look for duplicate or erroneous payments.

Oringel said that a key to moving from detection to prevention is the frequency of review. It is common for organizations to periodically review a year or more of accounts payable invoices at a time for errors or overpayment. Changing this from a one-time annual or biannual event to something that is done daily or weekly dramatically changes the value of such internal controls. This more frequent, preventative analysis is integral to the foundation of how Visual Risk IQ works with many of its clients. While the company does perform periodic look-back audits, it also works with technology to accomplish the same queries on a daily or weekly basis. This allows organizations to find duplicate payments or overpayments after the invoice has been approved but prior to its disbursement. So instead of detecting a payment error three or six months after it is made, you prevent the money from leaving the company altogether.

Oringel provided several client examples where duplicate invoices had been submitted but were not immediately caught. In one instance, Invoice No. 0000878-IN, was paid for $1,617.95. Thirty days later the same vendor re-submitted the same invoice due to non-payment, but it was recorded without the hyphen and was not detected by the system of controls. The problem was that it was the same invoice with slightly different writing on the face of it, and both were scanned into the company’s imaging system and queued for payment. The Visual Risk IQ’s team used data analysis to locate such overpayments, and to identify that the second payment should not be made because it is a match of one that had been previously approved.

In another example, Oringel detailed a query which a compliance practitioner could compare using vendor name and other identifying information, for example address, country, data from a watch list such as Politically Exposed Persons (PEP) or Specially Designated National (SDN), to names and other identifying information on your vendor file. He gave an example where a duplicate payment of more than $75,000 was made. One payment in that amount was made to a law firm named ‘Kilpatrick Stockton’ and the second was made to a different vendor, the law firm ‘Kilpatrick Townsend’. Oringel and his team recognizing that these were related entities, even though they had been established as different vendors in the vendor master. Because of the amount and the date were similar enough as detected by data analysis, the invoices warranted a human inspection.

Oringel said such an inquiry could also be used to test in other ways. He posed the example if a “vendor has the same surname as a vendor on the specially designated national terrorist list, or a politically exposed person. They share the same name as an elected official down in Brazil. How do we make sure that our vendor or broker is a different John Doe than the John Doe that is a politically exposed person in that country? It is only upon closer inspection where you can determine that the middle names are different and the ages are different, one of has an address is Brasilia and the other is in Sao Paolo.” He noted that until you inspect the other demographic information about your vendors, consultants or third parties and compare them to watch list individuals, you just do not know. That is what data analytics is designed to do, is to help you go from tens of thousands of “maybes” to a very small number of potential issues which need to researched individually.

One of the important functions of any best practices compliance program is to not only follow the money but try to spot where pots of money could be created to pay bribes. Through comparison of invoices for similar items among similar vendors, he has seen data analytics uncover overcharges and fraudulent billings. Oringel said that continual transaction monitoring and data analysis can prove its value through more frequent review, including the Hawthorne effect which states that individuals tend to perform better when they know they are being monitored.

Oringel emphasized that the techniques used in transaction monitoring for suspicious invoices can be easily translated into data analysis for anti-corruption. Software allows a very large aggregation of suspicious payments “not only by day or by month, but also by vendor or even by employee who may have keyed the invoices” into your system. As these suspicious invoices begin to cluster by market, business unit or person a pattern forms which can be the basis of additional inquiry. Oringel stated, “That’s the value of analytics. Analytics allows us to sort and resort, combine and aggregate, so that patterns can be investigated more fully.”

This final concept, of finding patterns that can be discerned through the aggregation of huge amounts of transactions, is the next step for compliance functions. Yet data analysis does far more than simply allow you to follow the money. It can be a part of your third party ongoing monitoring as well by allowing you to partner the information on third parties who might come into your company where there was no proper compliance vetting. Such capabilities are clearly where you need to be heading.

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