In this episode, I visit with Doreen Edelman, a partner at Baker Donelson on the top FCPA enforcement action of 2017, the Telia Company matter. We discuss the background facts of the case; we explore the amount of the fines and penalties, were they too high or were they too low; we consider the involvement of senior management right up to the CEO and the Board’s role; we explore the multiple lessons for the compliance professional, the CCO, senior management and the Board of Directors. We conclude with what the enforcement action means going forward and the increase in international enforcement, cooperation and investigation in anti-corruption.

Doreen Edelman can be reached at dedelman@bakerdonelson.com.

Doreen blogs on export control and trade issue concerns at Export Control Matters.

I continue my look at the Beatles classic album, Sgt. Pepper’s Lonely Hearts Club Band. Today I want to consider the song For the Benefit of Mr. Kite. Jordan Runtagh, writing in a Rolling Stone article entitled “Beatles’ ‘Sgt. Pepper’ at 50: How an Old Circus Poster Led to ‘… Mr. Kite!‘”, noted that John Lennon found all his material for this song on an old circus poster in an antique shop. While filming a promotional video for Strawberry Fields Forever near Kent, England, in early 1967, Lennon saw a “framed Victorian circus advertisement, breathlessly hawking the “Grandest Night of the Season” – February 14th, 1843, a Tuesday – more than a century after the applause had died away. “Pablo Fanque’s Circus Royal, Town Meadows, Rochdale, and Positively the Last Night but Three!” the verbose headline trumpeted. “Being for the Benefit of Mr. Kite, (Late of Wells’s Circus) and Mr. J. Henderson, the Celebrated Somerset Thrower! Wire Dancer, Vaulter, Rider, Etc.””

Lennon bought the poster for about one-half shilling, or $0.50. Later during the Sgt. Pepper’s recording sessions the “poster provided a welcomed dose of inspiration. “I had all the words staring me in the face one day when I was looking for a song,” he told biographer Hunter Davies. Keeping the archaic syntax intact, he borrowed a title: “Being for the Benefit of Mr. Kite!”” The song became one of his most personal songs and one of his favorite works. He said in a 1980 Rolling Stone interview “The song is pure, like a painting, a pure watercolor.”

I thought about how Lennon was able to use this simple poster to create an enduring, if whimsical, song as I read about the burgeoning scandal involving Kobe Steel, Ltd (Kobe). The basics were laid out by Peter Wells and Emiko Terazono in a Financial Times (FT) article entitled “Kobe Steel scandal hits Boeing, Toyota and Nissan”. The Japanese company admitted it had falsified “inspection data on an estimated 20,000 tons of metals shipped to about 200 customers in the year to August 2017. The steelmaker had sold metal with strength that did not match the quality standard it had promised its clients for use in products ranging from cars to aircraft.” Unfortunately, it may get much worse and Kobe announced over the weekend that the fraud may extend back 10 years.

This has the distinct possibility of being a truly international scandal involving companies as disparate as Boeing, Nissan, Toyota, Mitsubishi Heavy, the rail group that operates the bullet train JR Tokai and Mitsubishi Regional Jet. All of these companies must “check the safety of their products after it emerged they had been supplied with falsely certified metal.”

This is yet one more dent in the quality component of the Made in Japan brand as the scandal follows on the heels of the “string of scandals highlighting wider concerns about inspection and quality control in Japan from wobbly building pilings at the construction arm of Asahi Kasei to overstated fuel economy at Mitsubishi Motors.” The FT article noted Yasuji Komiyama, the Director of Metal Industries at Japan’s Ministry of Economy, Trade and Industry, “said the scandal was “threatening fair and proper trading” by other companies. He called on the firm to do extra safety checks, investigate the root cause of the certification failure and put forward proposals to prevent problems.”

Unfortunately, the Kobe scandal is not an isolated example of a company fudging the books, not on its financial statements but in the area of quality control. Francine McKenna, writing in the online Wall Street Journal (WSJ) site MarketWatch, in a piece entitled “Kobe Steel joins rogues gallery of companies that have falsified data”, noted this was one example in a line drawn from Lumber Liquidators to Volkswagen (VW) to Tata Steel. McKenna noted the 20% drop in stock value for Kobe. She also reported that the company admitted the fraud was ““systematic.” The practices go back up to 10 years for some items, according to executive vice president Naoto Umehara who apologized for the fabrications at a news conference on Sunday. He said workers were “feeling pressure” to meet delivery goals the products, but that senior management had ordered or was aware of the conduct.”

Yoshifumi Uesaka, writing in the Nikkei Asian Review article entitled “Kobe Steel’s falsified data undermines trust in ‘Made in Japan‘”, also noted that “Dozens of employees, including senior managers, were involved in the misconduct. Furthermore, a review of the past 10 years revealed other incidents of falsification, suggesting a widespread organizational effort to mold the data to align with customer specifications.” This appears to have been a case of fraud up and down the organization.

The Kobe scandal points to another way to think about the fraud triangle. The fraud triangle is well-known to most compliance practitioners. It is pressure, opportunity and rationalization. When these three factors converge, there is danger of an ethical lapse which could lead to violation of law. Here you add on the role of senior management identified by Kobe Executive Vice President (EVP) Umehara and you can see an entire systemic failure in both compliance and ethical values.

When your stock in trade is quality, a company must not only do everything it can to protect it; it must not actively seek to damage it. The cost to Kobe may well end up far greater than the loss of market cap. It could take years to repair its reputation, which going forward may be the company that actively misled its customers. For companies which purchased Kobe products, the potential cost is equally high if there are structural failures.

While John Lennon created an entire story around one 19th century circus poster. The Japanese steel industry may learn the lesson the German auto industry learned from the VW scandal the entire national Made in Japan brand for quality may be at risk. That is certainly a high price to pay for creating a fiction.

 

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, 2017

Richard H. Thaler won the Nobel Prize in Economics yesterday. Binyamin Appelbaum, reporting in a New York Times (NYT) a piece entitled, “Nobel in Economics Is Awarded to Richard Thaler”, wrote that “Thaler, whose work has persuaded many economists to pay more attention to human behavior, and many governments to pay more attention to economics, was awarded the Nobel Memorial Prize in Economic Sciences on Monday. Professor Thaler is the rare economist to win a measure of fame before winning the prize. He is an author of a best-selling book, “Nudge”,  about helping people to make better decisions. He also appeared in the 2015 film “The Big Short”, delivering what is surely one of the most widely viewed tutorials in the history of economics, on the causes of the 2008 financial crisis.”

Thaler’s true insight was to remind us all that economics has a human component. Thaler was quoted at a news conference after the announcement, that “In order to do good economics, you have to keep in mind that people are human.” This simple insight has significant implications for the compliance profession and anti-corruption compliance programs. Thaler also recognized “the importance of fairness. He showed that people will penalize unfair behavior even if they do not benefit from doing so.” Yet this is also a theoretical basis for the Fair Process Doctrine, which is so critical in compliance.

One thesis of Nudge, written with Harvard Law School Professor Cass R. Sunstein, is choice architecture, which is the manner through which decisions are influenced by how the choices are presented. People can be “nudged” by arranging the choice architecture in a certain way without taking away the individual’s freedom of choice that how choices are presented can impact the final selection by a person. This concept has application to the compliance profession in the following but simple example. By moving the signature on an employee expense reimbursement form to the top, at the start of the process, can actually improve compliance. When employees certify the information they will be reporting is true and correct, they tend to provide more truthful information in the information they record. This straight-forward example demonstrates how a prevent control can be modified to become more effective at little or no cost.

Appelbaum wrote Thaler’s “career was shaped by his discovery of the work of Professor Kahneman and his longtime collaborator, Amos Tversky, who were advancing the idea that economics needed to grapple with actual human behavior. Professor Thaler became their collaborator and played a central role in bringing the work into the economic mainstream.” Kahneman won the Nobel Prize for Economics in 2002, Tversky having passed away in 1996. These two men were instrumental in the field of behavioral economics.

They were profiled in Michael Lewis’ The Undoing Project, A Friendship that Changed Our Minds. It was the story of two Israeli academicians who authored a series of papers on humans’ decision making process. Lewis, a well-known author of such works as Liar’s Poker and The Big Short first heard of the two psychologists after publishing his book Moneyball. Indeed, it was another paper in response to Moneyball which directly led to The Undoing Project.

The main thesis for Moneyball was that baseball was inefficient because judgers and raters of baseball talent misjudge that talent due to their mind’s biases. However, this thesis was developed by the two Israeli psychologists, Kahneman and Tversky almost 30 years ago. They were so well known in the academic community that the one still living, Kahneman, won a Noble Prize in Economics. The book was a great read and should be studied by every compliance professional for its insights into how the human mind works, or in some cases fails to work, when forming judgments and making decisions. In short, people do not always make rational decisions.

The implications for anti-corruption compliance programs under the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act are numerous. Often one hears legal types advocating simple rules and regulations as a compliance program. They opine a compliance professional only has to understand the law and then communicate that understanding to employees in a corporation to create an effective compliance program. In short, the rational mind will always make the rational and rules based decision.

Lewis’ book explains the research and publications of Kahneman and Tversky that destroy and debunk this myth. There are wide variety of other factors which go into an employee’s decision making process, least of which could be summarized as ‘What’s in it for me?’ The work of Kahneman and Tversky also explain not only why you must have a compliance program but why a company must actually do compliance for the rules and regulations to gain and hold effectiveness.

Thaler reintroduces the human element into compliance programs. His theories go a long way to helping the compliance practitioner understand how important non-financial incentives can be towards influencing behavior. Every compliance practitioner is well-aware of the role of financial incentives in compliance. I write about this topic on a regular basis. Todd Haugh, an assistant professor of business law and ethics at Indiana University’s Kelley School of Business, takes the incentives discussion in a different direction, suggesting there are non-monetary incentives which could positively impact compliance. As posited in a MIT Sloan Management Review article, entitled “The Trouble With Corporate Compliance Programs, he noted that companies should “use incentives to influence behavior in the right direction” by understanding how rationalizations come into play. Most interestingly Haugh believes that employee “praise and expressions of gratitude motivate more than money”. Think of the cost of a good word now and then or a pat on the back. But more than a pat on the back, such an approach emphasizes that good compliance is seen as the “governing ethos” of the company where the goal is “to build a corporate culture that incentivizes the rejection of rationalizations through the creation of shared values.”

No compliance program will always eliminate bad employee behavior. However, the research pioneered by Thaler gives the compliance practitioner new insights into how to motivate employees and make compliance more effective in an organization. Further, many of the ideas in Nudge and in the works of Kahneman and Tversky will help the compliance practitioner to more fully operationalize your compliance program as specified by the Department of Justice (DOJ) in the Evaluation of Corporate Compliance Programs (Evaluation). Finally, the use of behavioral economic techniques can add a powerful tool to the compliance practitioner in more fully integrating compliance into the fabric of an organization.

 

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, 2017

In this episode, I have back James Koukios, a partner in the law firm of Morrison and Foerster. We review some of the top FCPA and international anti-corruption cases and issues which have occurred over the summer of 2017. The topics are based on the firm’s most excellent monthly newsletter Top Ten International Developments for Anti-Corruption, which is available at no charge on the firm’s website. In this podcast, we discuss topics from the following newsletters:

From the June newsletter 

  1. The Supreme Court decision in Kokesh-what does it mean for prosecutors, what does it mean for compliance practitioners and does it change the calculus around self-disclosure?
  2. DOJ Continues to Pursue “Declinations with Disgorgement.” What does this mean for companies going forward? Should it encourage or discourage self-disclosure?
  3. DOJ Files Forfeiture Complaint in connection with Alleged Malaysia Bribery Scheme. How does this tool relate to anti-corruption enforcement? Why is it such a powerful tool for prosecutors?

From the July newsletter

  1. The Halliburton FCPA enforcement action. What does it mean for the compliance practitioner?
  2. Three Long-Standing Corporate FCPA Investigations End without Charges. What can be learned from these cases about enforcement going forward?
  3. Dimitri Harder was sentenced to Five Years’ Imprisonment for FCPA Violations. What was the basis of the sentence? Do you see anything in this sentencing unusual?
  4. Was the Second Circuit decision in the FOREX trading case a setback for International Law Enforcement Cooperation? What is compelled testimony? What are the implications for international cooperation going forward?

From the August newsletter

  1. Following Undercover Investigation, DOJ Charges Retired U.S. Army Colonel with Conspiring to Bribe Haitian Officials. How do undercover operations work in the FCPA and what they might mean going forward?
  2. UK Financial Reporting Council Announces Plans to Require Increased Anti-Corruption and Bribery Disclosures. What does this mean for US companies doing business in the UK?

Check out the firm’s newsletter or better yet subscribe to it.

It is the first Friday in October and I am back with my celebration of classic monster movie month. This year I am returning to the roots, with one of Universal’s original greats The Mummy. Over the next three weeks I will be going through the five Universal movies featuring the creature returned to life through the desecration of his tomb of eternal damnation.

The first appearance was appropriately entitled, The Mummy, and was released in 1932, starring Boris Karloff. In many ways I found this to be the most hauntingly filmed of the classic monster movies. Perhaps this was due to the director Karl Freund, who was in his directorial debut for this film. He is probably best known as Universal’s top cameraman and the person who set up some of the great shots for the gamut of Universal pictures in the 1930s. His use of shadings in the black and white era added an aura of mystery that is not present in today’s films. This original movie in the Mummy series, is probably the best visual feast of all the classic Universal Picture horror films.

One cannot see the movie, or indeed write about it, without talking about the makeup artist, Jack Pierce, one of the truly greatest makeup artists of any era. He headed Universal’s Makeup Department until 1948 and personally created the makeup for all of the classic Universal Pictures monsters. While most people think of Frankenstein’s monster as Pierce’s greatest creation, I agree with his self-assessment that The Mummy was his true masterwork. The application of the makeup was arduous, taking up to eight hours of work on Karloff to complete the 3,000 year old look for the Mummy.

For me, most haunting scene is one which occurs quite early in the movie. After a spell is read aloud, bringing Karloff as the Mummy to life, the casket which houses the Mummy is left open allowing the Mummy to escape into the present-day world. One of the young archeologists sees the Mummy walk out of the room and immediately goes insane. I can hear his haunting scream in my head to this day. But here is the key to making this scene so powerful, we never see the Mummy; the only thing we see is some of the rags trailing from his body as he walks out of the room. Too bad today’s gore-fest directors have forgotten what real terror can be.

The basic story line is that Imhotep, the High Priest of Egypt, was mummified after the Pharaoh found out he had fallen in love with the Pharaoh’s wife Princess Anck-es-en-Amonand. As a Mummy, Imhotep was condemned to eternal damnation and his soul would never to go the afterlife. After he is released from this curse in the 20th Century with the reading of the spell, Imhotep searches for the reincarnation of the Princess. He finds her in modern day London, as Helen Grosvenor, played by the alluring Zita Johann; the Mummy tries to convince her she is the reincarnated Princess Anck-es-en-Amonand and to join him in an eternal love affair. Grosvenor prays to the goddess Isis who sends a ray into Imhotep which turns him into dust.

So, the compliance angle here? It is the dust in end that Equifax created from its statements over the past week and actions which led to the massive data breach in the first place. The former head of the company, Richard Smith, testified before Congress that the entire breach was the fault of one lone employee. Yes, you read that right, the rogue employee myth lives. Admitting that the company had received the security warning that part of its security software, Apache Struts, had a deficiency and needed an upgrade to install a patch. A Memo was sent to the IT Department and Smith literally testified before Congress that one Equifax employee ‘didn’t read the memo’ and did not install the patch. Of course, all this happened in March some three months before the breach occurred. Equifax either did not verify the update was installed or could not do so. Further none of the company’s internal controls or other redundant back-ups picked up this mis-adventure.

Another interesting compliance angle and one which may be even more instructive than former Chief Executive Officer (CEO) Smith’s inane defense were the actions of the company’s General Counsel (GC), John J. Kelley. While most reports have focused on Kelley’s role in allowing senior executives to dump their stock before the public announcement of the security breach, thereby saving them millions; I was more interested in Kelley’s multiple roles in the organization. In addition to be GC, he was also Chief Compliance Officer (CCO) and a host of other roles. According to the Equifax website, Kelley was responsible for “legal services, global sourcing, security and compliance, government and legislative relations and more.” The head of security reported to him. As I have previously noted, law schools simply do not prepare lawyers for the compliance role and certainly not all the roles that Kelley took on.

Another clear sign that Equifax was headed for a massive crash in the dust is also found in the company’s Board committee charters and the make-up of its Board of Directors. It should not surprise many reader that Equifax did not have a Compliance Committee on the Board. More troubling, for a company which is in the specific business of buying and selling data, it did not even have a data governance or other similar committee.

While the Board did have two members who are retired CEOs of technology companies; the Board did not have any compliance expertise on the Board. Just as Wells Fargo and Uber demonstrated, when you do not have a commitment to compliance, extending up to the Board; a company cannot adequately prevent, detect and remediate a significant issue; let alone respond in an adequate manner.

Just as Imhotep literally turns to dust to end the movie, Equifax’s claims are dust in the wind. One thing I forgot to mention is that as it is a 1932 production, it is pre-Code. So be on the lookout for some interesting ladies garments. As I said, a visual feast for all.

 

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.