Government enforcement efforts are on the rise. In December 2021, the Secret Service announced an initiative to more aggressively counter pandemic-related fraud. Empowered by new personnel, new funding, and new legislation, the DOJ has bolstered its antitrust enforcement efforts. Gurbir Grewal, the SEC’s new director of enforcement, shared his aggressive SOX enforcement plans in a recent PLI speech. Speaking at the ABA 36th White Collar Crime Institute, Deputy AG Lisa Monaco announced the DOJ would be re-energizing its enforcement of “white collar” wrongdoing. “Although we understand the costs that enforcement actions can place on shareholders and others,” she told the audience, “our responsibility is to incentivize responsible corporate citizenship, a culture of compliance and a sense of accountability.”
DAG Monaco’s reference to “culture” was not accidental. DOJ long has believed culture plays an important role in compliance. The Department’s guidelines for evaluating corporate ethics and compliance programs expressly direct prosecutors to “assess whether the company has established policies and procedures that incorporate the culture of compliance into its day-to-day operations.” Similarly, the U.S. Sentencing Guidelines focus on whether a business promotes “an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”
We wholeheartedly agree with the importance of culture when it comes to promoting corporate responsibility and accountability. The problem is that every organization believes it has a strong culture of integrity and compliance. Mission Statements and Codes of Conduct are filled to the brim with all manner of cultural commitments. Experience (and research), however, tells us that it’s not enough to demand a positive culture; complex organizations must take meaningful steps to drive that culture.
Like many of you, we have toiled in the trenches of cultural change for decades. We have counseled corporations and government agencies as they have been confronted with the realities of ever-changing public demands and expectations. Since 2013, as the court-appointed federal monitors over the New Orleans Police Department, we have worked hand-in-hand with the U.S. Department of Justice, the U.S. District Court, and law enforcement leaders to change the culture of the NOPD and ensure the success of one of the country’s most far-reaching federal Consent Decrees. We have counseled numerous other law enforcement agencies as they respond to new public expectations of transparency and accountability. And as the co-founders of the Sheppard Mullin Organizational Integrity Group, we help companies, universities, and other organizations defend threats to their organizational integrity by developing and implementing compliance programs that stick, responding to and defending against government investigations and litigation, and driving sustainable cultural change.
Through these experiences, we have learned a thing or two about building a positive organizational culture as a means of reducing legal (and business) risk. Here are a few of the lessons that have held us in good stead whether we are working with corporations, professional service firms, universities, or government entities:
- Ensure leadership understands what it means to have “tone at the top.” We’ve all heard the phrase “tone at the top,” and we all think we have it. But we should challenge ourselves to take a hard look at our actions and ensure they are consistent with the view we have of ourselves. The Association of Certified Fraud Examiners explains the connection between tone at the top and employee behavior well: “If upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud because they feel that ethical conduct is not a focus or priority within the organization. Employees pay close attention to the behavior and actions of their bosses, and they follow their lead. In short, employees will do what they witness their bosses doing.” For example, if your employees see two tiers of accountability — one for big sales producers and another for everyone else, the tone you are trying to create quickly will fall on deaf ears. Similarly, it’s not enough that key members of the C-Suite are outspoken proponents of ethics and integrity. “The top” encompasses a group far larger than the CEO. On a day-to-day basis, employees take their cues from their supervisors and managers more than from corporate leaders who they may never have met. Those supervisors/managers must reinforce the culture of the corporation through their words and actions. And, as importantly, they must be measured, evaluated, and rewarded accordingly.
- Be transparent in your efforts to shape your culture. As corporations have paid more attention to the importance of ethics/compliance programs over the years, the faith their employees have in those programs has increased. That faith, however, has not been shared by all employees equally. According to a 2020 study by the Ethics & Compliance Initiative, non-management employees continue to have significant misgivings about their employer’s ethics and compliance programs. Such misgivings, we submit, drive negative behavior. One way to build employee faith in a corporate ethics/compliance program is by being transparent with regard to the functioning of that program. Let employees see compliance successes rewarded and compliance failures punished. Promoting such transparency (within the reasonable strictures of attorney/client privilege and trade secret protections) has a significant advantage for sustainability as well. What future leader wants to tell his or her customers and investors, “We have decided to become less transparent”?
- Treat integrity as more than legal compliance. While legal standards are one way to think about what it means to do the “right” thing, it is important to remember that what is “right” often reflects a combination of moral, ethical, legal, cultural, and other normative values. Building and maintaining a culture of integrity entails, in the first instance, focusing on doing the right thing. This, in turn, conditions your personnel to do the legal thing. Conversely, focusing on doing what is right increases the likelihood of doing what is legal. There is further benefit to be had by encouraging your employees not only to do the right thing, but to openly debate what that means in a given situation. In the event of disagreement, encourage them to elevate that debate because ultimately the company is entitled to make that decision. Once made, explain the reasoning to your employees so that even if they do not agree, they will understand and appreciate that their views were considered.
- Live Your Culture. Meyling Ly Ortiz, a friend and thoughtful commentator when it comes to corporate culture, recently offered in-house counsel the following observation in a wonderful Above The Law article: “Doing only our legal work and acting as an advice ‘drive-thru’ seems like such a waste, a missed opportunity to do good, even in the smallest of ways.” As we said in our response to Mey’s post, we think she has it exactly right. But how does “doing good” promote corporate compliance? Engaging in, encouraging, and promoting civic and charitable works manifests an organization’s commitment to doing the right thing for those beyond its direct constituents. It also strengthens and reinforces the shared values between the organization and those who work together on these efforts. Establishing a shared values framework decreases the risk that employees will violate corporate policies or engage in workplace misconduct, while simultaneously increasing the likelihood that they will speak up when they notice activity that could harm the organization. Multiple studies have suggested that a positive work enforcement reduces employee misconduct, which probably doesn’t come as a big surprise to anyone.
- Train your employees HOW to be active bystanders. Most every organization encourages their employees to report misconduct (with varying degrees of success), but very few train their employees how to intervene in the conduct before whistleblowing becomes necessary. We submit this is because intervening in a colleague’s conduct — let alone a superior’s conduct — is hard. But compelling research and writing by Ervin Staub, Dr. Joel Dvoskin, Dr. Catherine Sanderson, and others shows that individuals can be taught to become more effective active bystanders. In 2020, Sheppard Mullin and Georgetown University Law Center teamed up to develop just such a program for law enforcement, and it quickly has become a best practice in promoting cultural change. The national ABLE Project teaches law enforcement officers practical tactics and skills of intervening in other individual’s conduct to prevent harm. Corporations and other organizations would be wise to adopt the lessons of ABLE. You can read more about the ABLE Project HERE.
- Conduct a Legal Pre-Mortem. Research shows that one of the most effective ways to identify risks, compliance gaps, and problems that have not occurred yet is by conducting what we call a legal pre-mortem. Sheppard Mullin’s Organizational Integrity Group employs legal pre-mortems — under the protection of the Attorney Client Privilege — as a means of identifying risks early in a project’s life-cycle. The same tool can be used to help businesses shed the blinders they often inadvertently don in the midst of an emergency to see the risks that may be lurking around even the best-intentioned corners. You can read more about Legal Pre-Mortems HERE.
- Measure What you Want To Manage. Peter Drucker, the famed business management consultant, said, “if you can’t measure it, you can’t manage it.” The concept is a critical one for driving cultural change and sustaining it over time. An ethics and compliance program, for example, is far more likely to have legs if the organization’s internal audit function regularly measures its effectiveness. We use this strategy continuously in our work with the New Orleans Police Department. We measure, track, and report virtually every aspect of the Department’s performance from uses of force to pedestrian stops to citizen complaints. Experience well beyond the NOPD teaches us it is far too easy for leaders to lose interest in an initiative, program, or policy if they are not held accountable for their action or inaction. Being shown the data that reveals successes or failures makes it harder to ignore the failures. To put a slight spin on Professor Drucker’s management adage, if you want to manage something, measure it.
- Don’t shy away from measuring culture. While not always easy or obvious, culture is measurable and, with effort, manageable. Culture is the sum of how an organization thinks, performs, and behaves — all of which can be influenced by thoughtful decision-making. Your mission, vision, and values can be promoted and reinforced. Your policies can thoughtfully crafted to drive culture and compliance. Performance evaluations can include evaluations of the extent to which an employee’s performance reflects the standards that comprise the corporation’s values. Bonuses for contributing to a positive culture can be given, as can penalties for conduct inconsistent with the organization’s culture. Our experience tells us that organizations often shy away from measuring things they view as “subjective.” We submit sometimes the most subjective matters are the most telling.
These lessons obviously are not exhaustive. And they are meant to be implemented in conjunction with the more basic building blocks of an effective ethics and compliance program — e.g., policies and procedures, training, supervision, and accountability.
If you have similar (or additional) lessons you have learned in the course of your work, we’d love to hear them. As the federal enforcement community gears up to bear down, businesses need as many tools as possible to protect themselves.
Contrary to some expectations, the Trump Administration Department of Justice imposed record penalties under the U.S. Foreign Corrupt Practices Act from 2017 through 2020. But in each of those years, fewer and fewer new FCPA investigations were initiated. We expect the Biden Administration to continue the trend of increasing FCPA enforcement settlement values, while also increasing the pace of initiating new FCPA investigations. Anticorruption matters present some of the most severe threats to a company’s organizational integrity. Understanding the changing enforcement culture is an important component to addressing those threats.
Record FCPA penalties 2017-2020, despite a personal anti-FCPA view at the top. Analysis of historical enforcement data shows that FCPA settlements did not slow down under the Trump Administration, when looking at dollar value. By our count, six of the top 10 FCPA settlements in history were completed on President Trump’s watch, accounting for over $7 billion in fines, penalties, and disgorgements. And 2020 just became the biggest year in FCPA history, measured by penalties.
This record stands somewhat in contrast to the personal views voiced by President Trump regarding the law. The President reportedly criticized the FCPA in 2017, speculating about the negative effect the law has on U.S. companies. And White House Economic Advisor Larry Kudlow reportedly said in January 2020 that the administration was “looking at” making changes to the law because of complaints from the U.S. business community about antibribery enforcement.
The Trump DOJ and SEC initiated fewer cases than previous administrations. We do not expect the Trump Administration to engineer any substantive change to the FCPA before January 20, 2021. But by one very important measure, the Trump Administration’s DOJ and Securities and Exchange Commission did slow down FCPA enforcement: each year since 2016, fewer FCPA investigations were initiated than in the year before. We have no information on whether the slowdown was an actual reflection of the President’s personal skepticism of the law, or mere coincidence.
5 reasons the Biden Administration will step up FCPA enforcemen
- The new playbook is the old playbook
The most famous page of that playbook is the 2015 Yates Memorandum which, in 2015, essentially required that corporations identify all individuals involved in any aspect of alleged misconduct, regardless of their status or seniority, in order for the corporation to receive any credit for its cooperation with the government. At one time, President Trump’s then-Deputy Attorney General Rod Rosenstein suggested that the DOJ might change the approach outlined in the Yates memo. But the principles and procedures favoring individual prosecutions remain materially unchanged in the current Justice Manual. This means that the focus on individual prosecution is still DOJ policy, and we expect it to remain so in the Biden Administration.
- Re-populating the rank and file
The Trump Administration was many things, but a magnet for lawyers it was not. According to one study, DOJ ranked 15th out of 16 cabinet departments in filling critical personnel positions, with only 45% of “key positions” filled as of November 2020, roughly 9/10 of the way through the term.
The Biden Administration is likely to act aggressively to reverse that trend. The President-Elect’s transition teams are bristling with DC legal talent. We expect strong moves to re-populate key DOJ offices such as the Criminal Division’s Fraud Section, which has exclusive authority over FCPA cases.
- Young prosecutors see the FCPA as good hunting
The Fraud Section has always attracted smart, professional, ambitious prosecutors. The culture of the Section, in our experience, has always tended that way. And a major FCPA settlement is a very good way to make a mark. With a new crop of FCPA prosecutors occupying the Bond Building, we expect a new round of mark-making.
- Economic downturn
The COVID-19 recession is a perfect storm of misfortune. Any economic downturn creates multiple incentives for fraud. FCPA cases spiked in 2001 and 2007-2009, correlating with the two most recent recessions. And we expect the trend to be magnified in the current one. International trade flows are disrupted, profit targets are under pressure, industries are consolidating, and corrupt officials always have a hand outstretched for a bribe.
- Sector sweeps
Back in the Obama days, DOJ and SEC were known for the concept of “industry sweeps,” in which an FCPA investigation of one company would lead to series of cases in the same industry sector and then to adjacent sectors. Some former Fraud Section attorneys have downplayed the concept of industry sweeps as a strategy. But there are good reasons for pursuing corruption sector-by-sector, even if it is unintentional. As prosecutors learn about a new industry they tend to learn the common patterns of bribery and other wrongdoing. And settlements have clustered by industry year after year as a result. We are arguably in the middle of sector sweeps of healthcare, aerospace and defense, and financial services now. We expect those trends to continue.
Get ready for the enforcement surge. For all these reasons, we consider 2021 to be likely to be another record year for FCPA enforcement, and we expect the trends toward greater enforcement to accelerate. Steps organizations can take now to address the threat of corruption include the following:
- Assess the changing culture of enforcement in the DOJ and the Securities and Exchange Commission
- Pressure test your compliance procedures by performing a legal pre-mortem
- Consider upgrades to your risk-based compliance program
- Update your training
- Make sure your internal investigations teams are ready