In the new DOJ-SEC Guidance there is a hole big enough for a Wal-Mart truck to drive through.
The Guidance (pp. 17, 26, 52-65) has many hypotheticals to illustrate “Guiding Principles of Enforcements,” “Hallmarks of Effective Compliance Programs” and what violates the FCPA or securities laws.
It also discusses (p. 57) the need for “tone at the top” and warns against senior management that is indifferent, uninvolved or negligent about compliance.
However, it is silent on a critical point: corruption directed by senior executives that is intentionally hidden from compliance staff and the Board. This is alleged to have happened already at Wal-Mart. The silence in the Guidance implies there is nothing like this to watch for, or to worry about, because it does not happen.
To stimulate analysis and discussion of this compliance problem and the Guidance, here is a mini-hypothetical formatted in Guidance style drawn from the alleged conduct of Wal-Mart and some of its senior executives during 2003-2011.
Guidance Hypothetical: Board Oversight – Executive Misconduct
The CEO and senior executives of the Company direct its Mexican subsidiary to re-investigate red flags of bribery that have been partially documented by the Company’s Compliance, Audit and Legal Departments, with support from outside forensic experts and a major law firm.
The original investigation began after a whistleblower, an internal lawyer at the subsidiary, sent details to the General Counsel of the Company’s international compliance department indicating a campaign, run by the former CEO of subsidiary, to bribe local officials throughout Mexico to obtain real estate licenses. The CEO has since been promoted and is now a top officer of the Company and a member of its Executive Committee.
The Mexican subsidiary quickly completes the re-investigation. Its conclusion: the whistleblower stole the bribery funds and therefore no bribes had been paid.
The Company’s top executives accept this answer and close the case. The Company’s Board of Directors is not consulted during the investigation and does not participate in the decision to close the case. The Company’s General Counsel, who led the original investigation, resigns. The Company’s compliance professionals object that a subsidiary may not investigate its own officers and that the extensive red flags from the original investigation remain unresolved.
The Company decides that since no bribes were paid, the Company has no reporting obligations and no adjustments are required to its financials. For the next five years, the Company’s executives affirm the accuracy of the Company’s financial statements and sign an annual certification of compliance with the Company’s Code of Ethics and FCPA laws.
Using the Guidance for reference:
According to the guidelines for an effective compliance program, should the Company’s senior officers accept the subsidiary’s reason for closing the investigation? Is Board approval required? (pp. 56-61)
How would DOJ and SEC evaluate the potential liability of the Company and its executives under the FCPA, conspiracy or aiding and abetting laws and securities laws and regulations? (p.65 and pp. 34, 38-46, 52-55)
Wal-Mart and involved executives are entitled to due process, including the presumption of innocence, during the now-pending DOJ, SEC and Congressional investigations. The mini-hypothetical, a fiction, is only illustrative of a future Guidance hypothetical.
Great deference to top executives of powerful companies is culturally encouraged but can foster blind followers. It is hard to acknowledge that senior executives sometimes initiate corruption and conspire in its cover-up, and harder still for compliance officers and boards of directors to know what to do about it.
A frank, public discussion of this complex compliance problem, including the gap in the Guidance, is overdue.
Michael Scher is a contributing editor of the FCPA Blog.