DoubleCheck May ’12 Monthly Newsletter: Mitigating Risk in the Era of the Corporate Bounty Hunter
By Michael Rasmussen, Corporate Integrity
Business is global, distributed and dynamic. Organizations of all sizes and industries have global client, partner, vendor and supply-chain relationships. Adding to this complexity is the dynamic nature of business — it is ever changing, with a revolving door of employees, partners, technology, processes, and strategies in an environment where risk, economics and regulations are in a constant state of change. The complexity of today’s global, distributed and dynamic business makes regulatory compliance a challenge.
How does an organization validate that it is current with legal, regulatory and other obligations in the face of an ever-changing business environment?
The era of the corporate bounty hunter
Government is increasingly turning to insiders (e.g., employees), incenting them to report wrongdoing and noncompliance. In the U.S., the SEC and DOJ have extended their compliance monitoring into a firm’s activities by enlisting the eyes, ears, and voice of the organization’s employees. The framework for this is established in the Dodd-Frank Act whistleblower provisions, which entice employees to report violations, such as bribery, corruption, fraud, insider trading, and more to the government. Corporate whistleblowers that provide information which leads to a successful SEC enforcement receive 10 to 30 percent of the monetary sanctions over $1 million. In an era of increased scrutiny and judgments for non-compliance, this is a significant concern that keeps executives, the board, legal, and compliance professionals up at night.
The organization cannot afford ad hoc approaches to compliance. In the era of the corporate bounty hunter, established processes must be in place to prevent non-compliance from happening. And when it does happen, the ability to demonstrate established compliance and monitoring processes can significantly reduce the penalties imposed upon the organization. The best defense to the era of compliance with the corporate bounty hunter is an active offense. Organizations must be prepared to show they have a strong compliance program in place to mitigate or avoid compliance issues. In today’s complex business environment, incidents do happen — the organization defends itself by demonstrating it has implemented appropriate compliance measures. Preventive measures must work alongside detective measures to monitor compliance, and the organization must respond quickly and efficiently.
To mitigate risk in the era of the corporate bounty hunter, organizations needs to:
- Strengthen ethical and compliance culture: This starts with increasing employee comfort to speak up and report issues and incidents. It is better to have an employee to report internally than have them go to the government bypassing the organization. HOWEVER, be prepared to respond – officials will throw the book at an organization if evidence is brought forward that an employee did report internally and the organization did nothing about it. To enable a strong ethical and compliance culture requires that the organization has mechanisms in place for employees to report issues, that they are recorded, and responded to.
- Understand risk: An organization needs to understand the risk and exposure to non-compliance. This includes periodic assessment (e.g., annual) of exposure to unethical and non-compliant conduct. The risk-assessment process should also be dynamic — conducted when there is significant business change that could lead to exposure (e.g., mergers and acquisitions, new strategies and new markets).
- Know who it does business with: It is critical to establish a risk-monitoring framework that catalogs third-party relationships. Due-diligence efforts in establishing relationships must make sure the organization contracts with ethical entities. If there is a high degree of risk in a relationship, preventive and detective controls must be established. This means knowing your vendors, partners, suppliers and even your own employees to understand if they are susceptible to corruption and unethical conduct. Due diligence and risk assessment efforts must be kept current. These are not point-in-time efforts that happen once; they need to be done on a regular basis or when the business becomes aware of conditions that point to increased risk of non-compliance.
- Established and communicate policies and procedures: Organizations must have documented and up-to-date policies and procedures that address compliance. The code of conduct must filter down to address regulatory requirements and obligations. Requirements and processes must be clearly documented and adhered to.
- Effective training: Written policies are not enough — individuals need to know what is expected of them. Organizations must implement compliance-training programs to educate employees and business partners. This includes getting acknowledgements from employees and business partners to affirm their understanding, and attestation of their commitment to behave according to established policies and procedures.
- Manage business change: The organization must monitor the business environment for changes that introduce risk of non-compliance. The organization must document changes to business practices as a result of observations and investigations, and address deficiencies through a careful program of change management. This requires that change in business, regulations, and the risk environment be monitored by compliance processes to actively address risk of exposures resulting from change.
Compliance must be an active part of culture and processes to prevent and detect issues before they are reported to government. Compliance processes must be monitored, maintained and nurtured. The challenge is establishing compliance activities that move the organization from an ad hoc reactive mode to one that actively manages, monitors, detects and prevents corruption risk. This requires the organization to implement technology to manage compliance.
Learn more about the role of technology in compliance management at http://www.doublechecksoftware.com/the-role-of-technology-in-managing-compliance-risk/