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The need for corporate compliance programs for small- and medium-size businesses. (Because it's the Bottom Line).

"Dangers lurk in the water for unwary corporations and their officers- the courts and the government are setting more and more standards for corporate compliance. Stiff sentencing guidelines and personal civil liability can result from in fractions." (1)

"My job is to get the business for the company in Asia, Africa and the Middle East. Nobody tells me to bribe but I know what I have to do to get the contract. It is implicit that I am to do what it takes and not make a mess of it. That means it is untraceable and everything looks legal." (2)

Small businesses may be so focused on economic survival that they may be woefully ignorant of the application to their companies of laws covering fraud, environmental concerns, zoning, export controls, bribery, antitrust and price fixing, discrimination and harassment. Or, as the person in the quote above signaled. he understood the law but chose to ignore it-calculating the chances of being caught were negligible. Some think that only larger corporations have to worry about such laws and regulations. Yet small companies can run afoul of the law as Denny Herzberg and the Vitusa Corporation (3) found out after an indictment for violating the Foreign Corrupt Practices Act and resulting plea agreement. Or as Metcalf & Eddy Inc. (4) in 1999 discovered in a Final Judgment of Permanent Injunction and Consent Order regarding another Foreign Corrupt Practices Act case (travel and lodging) that ignorance of the law is costly.

After the Organizational Sentencing Guidelines (5) went into effect in 1991, it was noted that a higher percentage of small- and medium-sized business became ensnared in prosecutions. (6) This may well be because the larger companies can afford attorneys and the initial costs of implementing a compliance program. Also, and as important, they understand the incredibly high costs of not having a compliance program. A compliance program as defined by the guidelines is a generic term that means an "effective program to prevent and detect violations of the law." (7) A compliance program that meets the federal criteria may possibly precipitate the government's elimination of the criminal charge or reduction of the fine under the Federal Sentencing Guideline formula. (8) Companies have begun to employ ethics officers who help monitor compliance programs. One clue to the dramatic interest of business in these programs is the growth from 12 ethics officers in 1992 to 540 in 1999 according to the Ethics Officer Associa tion. (9) But how has this interest by management trickled down to the employees, such as the employee in the opening quotation, who are responsible with others for securing the bottom line of the company every day? What guidance do they have?

What are employee attitudes?

An anecdotal illustration of employee attitudes is the quotation from the unidentified U.S. expatriate assigned overseas. However, anecdotes have real limitations. Is he an anomaly? How many others act as he does? Are employees like him found more often in small companies? We don't have the answers to these questions. However, in 1999, KPMG (10) sent out questionnaires to 3075 prequalified working adults. They received 2390 completed surveys for a response rate of 78 percent. " The following details some of the results: 76 percent of employees in all industries surveyed reported observing a high level of illegal or unethical conduct in the last year. The response of 81 percent was found in consumer markets. (12) The types of problems observed were: (13)
Employment discrimination 36%
Sexual harassment 34%
Falsification of financial data 18%
Violations of privacy rights (HR) 38%
Unsafe working conditions 56%
Shipping low quality or unsafe products 37%
Environmental breaches 31%
Misleading the public or media 25%
Mishandling confidential/ proprietary information 50%
Altering product quality or safety test results 32%
Unfair treatment of suppliers 21%
Insider trading 15%
Deceptive sales practices 56%
Unfair competitive practices/antitrust violations 32%
Conflicts of interest 20%
Thefts or embezzlement 17%

The survey polled employees about what they thought caused the misconduct: (14)
Does not know what goes on 57%
Are unapproachable if employee needs to deliver bad news 55%
Would authorize illegal or unethical conduct to meet 38%
business goals
Would respond inappropriately if they became aware of 36%

Furthermore, employees believe that management doesn't or can't deal with the problem: (15)
Cynicism, low morale/indifference 73%
Pressure to meet schedules 70%
Pressure to hit unrealistic earnings goals 65%
Desire to succeed or advance careers 56%
Inadequate training 50%
Desire to steal from or harm the company 22%

These survey results are troubling and underscore a corporate business doublespeak. It appears that corporations may be paying lip service to ethics and legal compliance but are perceived as not being serious or sending the message that the talk is just for the "paper trail."

Ask professors who have surveyed their business students about what the students have observed in their work experience and similar results will be revealed. Students report observing widespread theft of inventory off the loading docks, expense account padding, kickbacks and the omnipresent double sets of books in cash businesses and the accompanying payments "off the books" to employees. However, all it takes is a few dramatic headlines to begin to grab the attention of business people to rethink these illegal business practices. (16) Thus, given both the anecdotal and survey data, business managers need to pay attention to both compliance programs and training for employees.

What are Compliance Programs?

The main criteria of compliance programs can be found in The Guidelines sec. 8A 1.2 Note 3(k) requiring" reasonably designed, implemented and enforced" and with use of "due diligence to prevent and detect criminal conduct." (17) This is not a template that all businesses simply copy the language and fill in the blanks, There are seven "minimum" steps that must be in every compliance program: (18)

1. The organization must have established compliance standards and procedures to be followed by its employees and other agents that are reasonably capable of reducing the prospect of crime. Application Note 3(k)(1)

2. Specific individuals within the high-level personnel of the organization must have been assigned responsibility to oversee compliance with such standards and procedure. Application Note 3(k)(2)

3. Use due care not to delegate discretionary authority to individuals who the organization knew or should have know might engage in illegal activities. Application Note 3(k)(3)

4. Taken steps to communicate effectively its standard and procedures to all employees and other agents... [through] training programs or by disseminating publications that explain in a practical matter what is required. Application Note 3(k)(4)

5. Taken reasonable steps to achieve compliance with its standards e.g. by utilizing monitoring and auditing systems... and by having in place and publicizing a reporting system whereby employees and other agents could report criminal conduct by others in the organization without fear of retribution. Application Note 3(k)(5)

6. The standards must have been consistently enforced through appropriate disciplinary mechanisms. Application Note 3(k)(6)

7. After any offense has been detected, the organization must have taken all reasonable steps to respond appropriately to the offense to prevent similar offenses--including any necessary modifications to its program to prevent and detect violations of the law. Application Note 3(k)(7)

These seven points reflect the skeleton of a compliance program. The individual company needs to conduct a specific risk inventory. Obviously securities law will not affect some businesses. The company must then tailor the program to best manage those identified risks. A management structure needs to be established with a mechanism such as a hotline or ombudsperson to deal with complaints. As part of step one, many companies choose to articulate the corporate vision in a code of conduct that specifically fits the company. (19) A compliance officer is appointed who reports to both the CEO and the board audit committee. The more regulated the industry-such as healthcare, chemical, and securities-the more detailed the program need be.

What is to be done?

Small- and medium-sized companies need to think about how to systematically reduce their liability risk. Some argue that being ethical positively affects the bottom line. Others, more pragmatic, would argue that while being both ethical and legal may be more expensive in the short run, it would pay off in the long run. Of course there are yet others who argue that the legal minimum is all that is necessary and no good deed goes unpunished--but they may be unpersuaded by any logic. The fear of bad publicity about a firm is a powerful motivator to do the right thing in the first place because it can be difficult to undo. In the international arena, there is also a more noble reason for supporting compliance programs (with their accompanying codes of conduct and ethics training), because they deter corruption in civil society, which has a dramatic impact on economic growth and the stability of democracy. (20)

A compliance audit will identify the areas of risk to that particular company. For example, instituting an email policy and management of email communications is critical. Emails have come back to haunt even the wealthiest man in America, Bill Gates, and many less well-known figures, as well. Second, the audit is not a one-time occurrence but occurs regularly. Training is critical to overcome the problems KPMG identified earlier that workers don't believe the company is serious. The program must closely follow the listed seven requirements.

Last, the company should consider appointing an ethics officer/ ombudsperson who will function as the veritable "canary in the mines" for the company. Some will look at this and say "get real" -that is not how business is done-it ignores the reality of the vast cash economy that goes unreported to the IRS and the way wheels are greased in this country and all over the world. (21)

Yet, the world is changing with the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions outlawing bribery went in effect in February 1999. (22) This action signals that the international community is becoming united in seeing the pernicious effect of bribery of officials. The convention addresses the problem of bribing non-governmental officials too--a problem that received recent attention with the International Olympic Committee problem of bribery in Salt Lake City. (23) How many people are willing to face the reality of going to federal prison for several years for "crime in the suites?" (24) Each businessperson should ask employees if they are willing to break the law, risk trial and imprisonment for an extra couple of thousand dollars?

Some counsel might argue that the best program is simply to say our policy is to follow the law. Yet this advice is like the three monkeys who hear no evil, see no evil, and speak no evil--willful blindness to illegality will insulate neither an individual nor a company from liability. One need only turn to the recent language in U. S. Supreme Court sexual harassment decisions to discover the importance of having a complaint procedure in place. (25)

If you are heading a company-whether publicly or privately held-you have to be concerned about your liability exposure and your reputation in the community. Why have a compliance program? Because it's the bottom line!

(1.) Corporate Legal Times, Vol. 9. Nov. 1999, 1.

(2.) Quotation from man at a reception who did not want to be identified for obvious reasons. He said he would speak honestly with me as long as I wasn't a federal agent. He Joked about a "wire." Because I was a close friend of the host and hostess and he was a relative of the hostess, he felt comfortable discussing how he works.

(3.) U.S. v. Vitusa, 3 FCPA Rptr. 699.155-175, 1994.

(4.) U.S. v. Metcalf & Eddy Inc.. D.MA.1999, reprinted in Corporate Compliance 2000, Practicing Law Institute. Vol. 1, 609 (hereinafter called PLI) (noting that over 2 years time $600,000 was spent on official's first class airline tickets and lodging for him and family members).

(5.) United States Sentencing Commission. Guidelines Manual (1997). see generally (Note that the "fine provisions of the Organizational Guidelines currently do not apply to environmental, food and drug or export offenses, although probation and restitution apply to all offenses." There are special calculations for antitrust violations. PLI at 48.)

(6.) See generally. John Coffee. "Guidelines Let Big Business Off The Hook," Connecticut Law Tribune, May13. 1991. 21; "1028 Defense Firms Disciplined in 1988. " St. Louis Dispatch, January 15, 1989. 3a.

(7.) PLI. see supra note 4 at 84.

(8.) Id.

(9.) Id. at 314.

(10.) 2000 Organizational Integrity Survey. KPMG, A Summary. See also

(11.) Id.

(12.) Id.

(13.) Id.

(14.) Id.

(15.) Id.

(16.) For examples of recent headlines, see generally. Jerri Longman. "Leaders of Salt Lake Olympic Bid are Indicted in Bribery Scandal. New York Times. July 21, 2000 at Al (describing indictment of two organizers at Utah's bid for the Olympics on conspiracy to commit bribery fraud and racketeering. Note that now U.S law (FCPA as amended) would cover this situation. It had not been amended at the time of these alleged incidents. One person has already pleaded guilty for tax offenses regarding a fake job for a son of a delegate to the IOC. Alfredo LaMont of the U.S.O.C. pleaded guilty to tax charged for payments he received as "consultant.") Other headlines "Wood Products firm to Pay $93 million to settle Environmental Lawsuit." Boston Globe. July 21. 2000 at A9. Compare with Opinion editorial on the KPMG Survey. Jeffrey Seglin. ""The Ethics policy: Mind Set over Matter." New York Times. July 16. 2000 at Bus. 4.

(17.) PLI. supra note 4 at 84.

(18.) Id. at 117.

(19.) For discussion of corporate codes of conduct see Thomas W. Dunfee & David Hess. "Fighting Curruption: A Principled Approach. The [C.sup.2] Principles, 33 Cornell Journal of International Law 593, 2000. Compare with recent United Nations' effort described in Joseph Kahn. 'Multinationals Sign U. N. Pact on Rights and Environment. New York Times, July 27. 2000 at Al (describing UN and company agreement or global compact to "support human rights, eliminate child labor, allow free trade unions and refrain from polluting the environment.")

(20.) For a general discussion of the impact of lawlessness on society, see "Crime without Punishment," Economist. Aug. 28, 1999. 17. See also articles contained in Cornell Journal of International Law's 2000 Symposium issue on Bribery and Corruption supra note 19, 21 Id.

(22.) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Dec. 17. 1997, 337 I.L.M. 8. see also

(23.) Loogman. supra note 16.

(24.) Reportedly said by Mayor Rudi Giuliani.

(25.) Faragher v. City of Boca Raton. 118S.Ct.2275.141 L.Ed. 2nd 622 (1998) (where court articulated standard for when an entity is liable for acts of its employees.)

BEVERLEY EARLE, J.D., is professor of law in the Law Department at Bentley College. She is a co-author of a text, International Business Law and Its Environment, going into its 5th edition, published by West. She is an active conference speaker and was a participant in a Symposium on Bribery and Corruption sponsored by Cornell International Law Journal. She won the first Indiana University CIBER (Center for International Business Education and Research) 1999 Case Writing Award. Her articles have appeared in many journals including The Berkeley Journal of Labor and Employment Law, The Minnesota Journal of Law and Inequality and The Case Western Reserve Journal of International Law to mention a few. Her articles have also appeared in the Boston Globe.
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Author:Earle, Beverley
Publication:Business Forum
Geographic Code:1USA
Date:Jun 22, 2000
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