Guest Blog Post: The PR Problem in SME Compliance Reply

Today’s guest blog post is written by Ms. Thuy Tran.  Ms. Tran, a Texas lawyer, has worked as a legal consultant in a variety of industries for companies around the globe.  In her own words, she says that she “came to know the FCPA the hard way.  I lost weekends and holidays as  a member of a legal department of a company undergoing FCPA investigations.”  Now, she is doing her best to prevent people from losing their weekends and holidays to the FCPA. 


sme2The biggest barrier to a small or medium-sized enterprise (“SME”) compliance program is the lack of political will.  Many SME compliance practitioners came to their responsibilities after one or two executives became concerned about reports of investigations or settlements under the FCPA.  They have the support of one or two members of upper management, but the rest believe that the SME is too small to be noticed by authorities, or that they are private and are therefore immune to these laws. The purpose of a compliance program, of course, is not to avoid scrutiny.  It’s just common sense to know and abide by the law.  Period.  However, common sense is not so common, and getting buy-in from the top tier of management is no easy task.  Every Best Practice list will say that tone from the top is essential.  Before SME’s can get to Best Practices, they must first talk some common sense to the executives and the employees and get consensus that compliance is necessary. Many advisory firms, consultancies, and other service providers overlook this essential first step. SME compliance practitioners need help with how to shape the compliance message so that everyone is on board. Only then can they tackle Best Practices.

SME compliance practitioners are often frustrated with the cavalier attitude of employees with respect to ethics and integrity.  The practitioners then ask their outside advisors to “teach them a lesson” during presentations and training sessions. Inevitably, words such as “bribe”, “corrupt” or “kickbacks” appear in presentations. The initial reaction from audience members is usually, “I don’t bribe.  I don’t give/receive kickbacks.  I am certainly not corrupt.  This presentation does not apply to me or my company.”  The challenge is to inform the audience without annoying them.  Admittedly, the above words are all essential to understanding anti-corruption.  Perhaps, however, instead of using them in a presentation, they can appear in a policy or appendix to the presentation, with non-legal definitions. Whether or not this is effective is unknown.  What is known is that a different approach is certainly needed because feedback from the audience is that these presentations are “scare tactics” and they don’t appreciate that.

In addition to strong language that conjures images of crime and imprisonment, the anti-corruption message is often too legal.  Presenters should always avoid quoting the FCPA statute.  It means nothing to a non-legal audience.  It even irritates some lawyers for its lack of clarity on facilitating payments.  There’s another word to avoid – “facilitating payments.”  It is impossible to ignore this word, but like the criminal words, it may be best to include it only in the policy or as an appendix to a presentation.  Perhaps “acceptable payments and unacceptable payments” may be more effective when explaining what is and is not allowed under the company policy and the laws.

These are only a few examples of the communications challenges that an SME faces.  Once a solution is found, then the SME practitioner will hopefully have an easier time getting budget approval for more outside advice and some Best Practices can be implemented.  Getting all Best Practices implemented is indeed a victory and that SME practitioner who achieves it is truly ahead of the pack.


As U.S. looks to increase trade with Africa, compliance becomes increasingly important Reply

President Obama’s current trip to Africa has garnered much attention.  But lost amidst the discussions of the cost of his trip and reasons for why he isn’t visiting his “homeland” of Kenya is this fact: the US government appears interested in pushing back against China’s growing commercial influence on the African continent.  For anti-corruption professionals, this could get interesting.

Many of the world’s fastest growing economies are located in Sub-Saharan Africa.  But in the past, U.S. presidents who have visited the area have generally focused on foreign aid, health, and security issues, not on trade and investment.  Judging by the fact that over 500 U.S. business leaders will join President Obama at various points in his African travels, this trip is clearly aimed at encouraging US-African economic and private-sector engagement.

In Tanzania, Obama is planning on having a closed-door meeting with about 25 carefully selected American and African CEOs to discuss increased trade opportunities.  There are also reports that the U.S. President is going to announce a power initiative along with other economic incentives to encourage American investors to build turbines or other energy and infrastructure projects.  In mid-August, the US Government will hold the U.S.-Sub-Saharan Africa Trade and Economic Cooperation Forum in Ethiopia.

South African President Jacob Zuma and his wife Tobeka Madiba welcome US President Barack Obama and his wife Michelle Obama to the Union Buildings in Pretoria, South Africa this week. (Photo: GCIS)

South African President Jacob Zuma and wife Tobeka Madiba welcome US President Barack Obama and wife Michelle Obama to the Union Buildings in Pretoria, South Africa this week. (Photo: GCIS)

But America still has some catching up to do with China, which has been making a strong imprint on the continent over the past 10 years.  From 2000 to 2011, China’s trade with Africa reportedly went from about $10 billion to $166 billion, making it Africa’s largest single trading partner to date.  It has also been investing in infrastructure as well, building highways, factories and ports, setting up construction companies, and mining copper, coal, and precious gems.

As the U.S. tries to play catch-up, anti-bribery professionals understand that future investment in Africa will necessarily have to involve coordinated efforts at compliance.  The unfortunate reality is that despite improvements, Africa has its fair share of poorly governed countries.  This, combined with the fact that many of these countries are rich in natural resources, can be a recipe for corruption.  Roughly 15% of the approximately 740 anti-bribery enforcement cases tracked in the TRACE Compendium (where the location of the misconduct is known) involve government officials from an African country.  However, the entire continent of Africa makes up just 2.5% of world GDP.  In the past, many U.S. companies have simply chosen to stay out of Africa because of the compliance risks.  Their Chinese counterparts, on the other hand, are often less scrutinized by their country’s enforcement agencies for engaging in unsavory business practices with government officials. More…

3 Steps Towards Building a Better Compliance Culture Reply

A corporation’s compliance culture: that intangible force that permeates a company’s entire way of doing business.  Like an invisible hand of ethical expectations, it guides employees to do the right thing in difficult situations.  But how well are companies cultivating their compliance culture?

In a recent 2012 survey conducted by Ernst & Young, a stunning 15% of respondents said that they were prepared to make cash bribes to win or retain business.  That means that 15% of respondents were willing to break the law – putting themselves and their companies at risk of criminal penalties – in order to win a business opportunity.  The survey was comprised of 1,700 interviews of chief financial officers and heads of legal, compliance and internal audit in 43 different countries.  The survey is a cold reminder that for a sizable minority of companies the message remains plain: win at any cost.

A healthy compliance culture, on the other hand, not only helps a company stay out of trouble, but it also builds a company’s reputation as trustworthy and can often lead to gaining new business opportunities.  How, then, to change the message?  Below are three steps that compliance officers are taking in the uphill battle towards building a better compliance culture at their companies:

1)  Change The Incentive Structure – Studies have found that people act dishonestly less out of a desire for personal gain and more out of anxiety for what will happen to them if they don’t cheat.  In a recent article in Scientific America Mind entitled “Why We Cheat”, it was revealed that “many instances of dishonesty in the real world result when people find themselves in a situation in which they face losing money, reputation or their career.”  That goes double in a bad economy.  “There is little question that the current economic situation has exerted negative pressure on employees,” writes Ernst & Young in their report.  “One of the most troubling findings of the survey is the widespread acceptance of unethical business practices.”

Companies need to be aware of these pressures and create incentive structures and reward systems that counteract the impulses to act unethically.  This entails giving employees a sense of security that they will be rewarded, not punished, by doing the right thing.

Walmart associates from around globe gather during the 2011 Walmart Shareholders' Meeting. (photo by Wesley Hitt, Hitt Photography)

Walmart associates from around the globe gather during the 2011 Walmart Shareholders’ Meeting. (photo by Wesley Hitt, Hitt Photography)

That’s what Walmart’s trying to do right now.  Last year, Walmart made front-page headlines when it was alleged that their employees had been paying bribes in various countries around the world.  Since then, the company has spent millions of dollars to reform its compliance program, and, more importantly, change its compliance culture.  Part of that shift has been changing its executive compensation plan so that pay is not only based on financial measures, like sales, operating income, and return on investment, but also based on whether they’ve successfully overhauled their compliance operations.  By changing the incentive structure, such as Walmart is trying to do, companies send a message to their employees that compliance is more than just some hollow promise.

2)  Nip Bad Behavior in the Bud – Strict enforcement against infractions – even minor ones – can help prevent bigger problems down the road.  It’s what Dan Ariely, a behavioral economist at Duke University, describes as the “what the hell effect” – an attitude that develops after a person has already broken a rule once, leading them to cheat more frequently.  “Just as an untreated minor infection may progress to a more serious condition, minor acts of dishonesty that pass without consequences may be followed by more egregious misconduct,” writes Scientific MindMore…

Why We Ask For References: TRACE Vignettes Reply

TRACE LogoTRACE Vignettes, a recurring segment on our blog, is an opportunity to share with our readers interesting, real-life due diligence tales that come direct from our team of analysts.

A few weeks ago, while conducting a review of a small, seven-person South Korean distribution company, we were again reminded that checking out business and financial references is more than just checking a box.  Depending on the type of due diligence being conducted, TRACE will sometimes ask for business and financial references when vetting a third party to screen not only for effectiveness and reputation, but also for government relations and business ethics. In some cases, such as this one, the exercise can prove truly enlightening.

When the South Korean company provided TRACE with a reference, our due diligence analyst noticed that the name listed on the reference’s business card was the same name as a director of the company itself.  The analyst emailed the distributor back and asked if there had been an error or if the company had listed one of its own directors as a business reference.

The company’s response was to ignore the question and simply to provide a new financial reference.  But by then, alarm bells had begun to sound.  Again, TRACE pressed the issue and asked if the director was also an employee of the business reference.  The reply was a curt “no.”  Something seemed definitely amiss.  TRACE once again followed the trail: “Was that you that filled out the financial reference form?  How are you associated with [the financial reference]?”

After a few more back-and-forth communications, the mystery finally came to an end.  The distributor admitted that it had completely fabricated the reference’s business card and e-mail address and listed one of its own directors as a point of contact.  The director had even signed a questionnaire vouching that the candidate company had “excellent” business ethics and practices.  And yet what was perhaps most surprising of all is that the company still didn’t seem to think it had done anything wrong: couldn’t TRACE simply just ignore the whole matter and use the second business contact as a reference instead?

Suffice to say that TRACE denied the company certification. Forging documents and creating fake business cards and e-mail addresses does not, as one might imagine, instill the greatest confidence in business ethics. A good eye for detail combined with a bit of perseverance, on the other hand, can often uncover what lies just beneath the surface.