Beyond Balance V: The Ethical Business Criterion

By Andy Spalding

“A problem well stated is a problem half solved.” So said the American inventor Charles Kettering. In FCPA circles, we’re debating whether and how to fix assorted problems in our anti-bribery regime. But the first step in designing solutions is to state the problem well.  

As is so often the case, the two sides have defined the problem differently: to the business community, the FCPA’s severity deters investment in otherwise promising economies; to the anti-bribery advocates, the continued pervasiveness of global corruption shows that our laws must become more effective, not less.  

But perhaps, upon closer examination, these are not different problems. Maybe they're two ways of looking at exactly the same problem.And if they are, then maybe they call for exactly the same solution.

Like Kettering’s electric automobile ignition, statutes prohibiting the bribing of overseas government officials were invented to solve a well-stated problem. In our case, the problem was unethical business; the solution was a criminal legal regime that incentivized ethical business.

But notice that this solution has two components: 1) ethical; and 2) business. Our aim was to promote both, and to deter neither. We did not want business without ethics; nor did we want ethics without business.  Either one, without the other, fails to achieve the FCPA’s fundamental goal of encouraging political and commercial transparency overseas.  

Today, some complain of a lack of ethics, while others, a lack of business. But this dichotomy proves false -- not because both sides are wrong, but because both are right.  

Reforms, then, should lead to an increase in ethical business. To the extent that a proposed reform would permit companies under FCPA jurisdiction to engage in bribery, it fails this test. At the same time, to the extent that any feature of a current or proposed legal regime induces companies to withdraw from particular projects, or sectors, or countries, it decreases the amount of ethical business and thus also fails this test. And as explained in my prior post, when FCPA-bound companies withdraw, reckless bribe-payers from foreign jurisdictions fill the void. In other words, we cannot promote norms in places we aren’t.  

So I want to suggest that this is the principle criterion by which all reform proposals should be evaluated.  We’ll call it the ethical business criterion. If a proposed reform would increase ethical business, it is good; to the extent that it would deter such conduct, it is not.

Ultimately, we can all agree: the current problem with our anti-bribery regime is a deficiency of ethical overseas business. Kettering teaches that the problem is now half-solved. The remainder may be found -- invented? -- by evaluating various reform proposals by the ethical business criterion. That’s where we’re headed.

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Andy Spalding teaches international business law at the Chicago-Kent College of Law; effective June 1, he’ll be an Assistant Professor at the University of Richmond School of Law. A former Fulbright Senior Research Scholar and lawyer at a major international firm, he has lectured and conducted research on anti-corruption law throughout the developing world. He can be contacted here.

We're grateful to Professor Spalding for allowing us to serialize 'Beyond Balance.'

Beyond Balance I can be viewed here, Beyond Balance II here, Beyond Balance III here, and Beyond Balance IV here.

'Not Every Mistake Is A Criminal Act'

Lawrence Goldman's posts on the White Collar Crime Prof Blog are uniformly smart and engaging.

What Goldman said last week about the over criminalization of business behavior brought to mind some recent FCPA prosecutions that ended with acquittals, mistrials, or dismissals:

Both Attorney General Eric Holder and SEC Enforcement Director Robert Khuzami defended their record, stating that not every mistake is a violation of law. Holder said, "We also have learned that behavior that is reckless or unethical is not necessarily criminal," a statement which (aside from leading me to ask why it had taken him so long to realize it) should be painted on the walls of every prosecutorial office.

Read Lawrence Goldman's full post here.

'Do I need to quit my job?'

By Jeffrey M. Kaplan

This is a question that many compliance and ethics (C&E) officers have asked themselves when faced with management’s refusal to implement compliance program recommendations. And over the years, quite a few have answered the question in the affirmative (although, for obvious reasons, they are rarely eager to advertise the fact).

It is also a question for which there is little legal guidance. However, in a recent case described in this story in Investment News, the issue of when a compliance officer should quit was placed squarely before the Securities and Exchange Commission:

After numerous instances of misconduct by broker Stephen Glantz came to light, [Theodore] Urban [General Counsel at Ferris Baker Watts Inc., and direct supervisor of its compliance department], wrote a memo in December 2004 to Louis Akers, vice chairman of the board and head of retail sales, and Patrick Vaughn, assistant head of retail sales, recommending that [Mr. Glantz] be fired. Mr. Akers did not dismiss Mr. Glantz, a top revenue producer, but rather put him under special supervision. In 2007, Mr. Glantz, who admitted to a drug problem, pleaded guilty to securities fraud… Mr. Urban maintained that he was not Mr. Glantz's supervisor and could not terminate him without Mr. Akers' concurrence. In its case against Mr. Urban, the SEC staff argued that Mr. Urban was required to take the situation to the company board — and if they did not act, Mr. Urban should resign. Brenda Murray, the SEC's chief administrative law judge, ruled in September 2010 that Mr. Glantz violated securities laws but dismissed proceedings against Mr. Urban, finding that he had done all that could reasonably be expected to prevent Mr. Glantz' behavior.

The SEC staff appealed this ruling and last Thursday, the Commission split one-to-one (three Commissioners had recused themselves), which had the effect of affirming the administrative law judge’s dismissal. (Download the Commission's decision in pdf here.) As noted in the article, while the result may help some compliance officers breathe easier, the split decision leaves unresolved the SEC’s position regarding compliance officer duties in situations of this kind.

I should emphasize that the SEC does not have jurisdiction to regulate all companies the way that it does investment-related ones, and the case is clearly most relevant to compliance officers at the latter. Still, given how little guidance other C&E officers have on what could be highly consequential – indeed, potentially existential, at least from a career perspective - decisions of this kind, it may be worth their consideration, too.

Also, it should be noted that the administrative law judge’s decision (download in pdf here) was based in part upon the fact that it would have been futile for the General Counsel to have tried to escalate the matter. That circumstance presumably is not present in all cases of this sort.

Finally, in considering the question “Do I need to quit my job?” C&E officers should be careful not to take part in “half-measure” compliance programs that could be seen by the government as covering up for ongoing wrongdoing – as described in an earlier post in the FCPA Blog. In other words, there may be situations were a C&E program is actually doing more harm than good – and no C&E officer should be part of that.

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Jeffrey M. Kaplan writes the widely read Conflict of Interest Blog. He's a partner in the Princeton, New Jersey office of Kaplan & Walker LLP and has practiced in the compliance law field since the early 1990’s. He serves as Adjunct Professor of Business Ethics at NYU’s Stern School of Business. He can be contacted here.

For Sustainability, 'Rethink, Rebuild, Report'

By Benjamin Kessler

As Chief Executive of Global Reporting Initiative (GRI), Ernst Ligteringen, left, encourages and enables businesses to shine light on their sustainability efforts.

GRI’s mission is to make sustainability reporting just as common in the corporate world as financial reporting. To make it happen, GRI developed guidelines that organizations can use to measure and report their impact within the social, economic, and environmental spheres. Introduced in 2000, the GRI Guidelines are currently on their fourth revision (G3.1), with a new release expected in 2013.

In May 2010, GRI held the third Amsterdam Global Conference on Sustainability and Transparency, whose theme was “Rethink, Rebuild, Report.” Ligteringen presented to the Conference’s more than 1,200 attendees two new far-reaching propositions:

By 2015, all large and medium-size companies in OECD countries and large emerging economies should be required to report on their Environmental, Social and Governance (ESG) performance and, if they do not do so, to explain why; and by 2020, there should be a generally accepted and applied international standard which would effectively integrate financial and ESG reporting by all organizations.

Ligteringen’s talk offered compelling justifications for these bold ultimatums:

If a company chooses not to measure and disclose – to fly blind, as it were – it does not only take a risk with its own business. It deprives the market and society of important information. It potentially undermines solid and responsible decision-making. It creates an uneven playing field for companies. And it withdraws from an essential public debate on sustainability.

Ligteringen has led GRI since it was established as an independent organization in 2002. Before joining GRI, he served for six years as the Executive Director of Oxfam International. His past roles also include Director of Programme Coordination of the International Federation of the Red Cross and Red Crescent Societies, and Consultant to the World Commission on the Social Dimension of Globalization at the ILO.

Last month, GRI launched the Sustainability Disclosure Database, a free resource that gives the general public access to sustainability performance data for more than 3,000 companies.

The fourth Amsterdam Global Conference on Sustainability and Transparency will take place in May 2013.

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Benjamin Kessler is an editor and writer for Ethics 360. He can be contacted here.

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[Editor's note: This post is part of our series profiling global compliance leaders. Most appear on our sponsor Ethisphere’s annual list of the 100 Most Influential People in Business Ethics. Readers are also welcome to suggest others they'd like to see profiled in this series.]

Compliance Lessons From Citigroup Case

By Michael Scher

In the recent, highly-publicized securities fraud case, SEC v Citigroup Global Markets, the Court rejected the settlement proposed by the parties because the public interest would not be served.

Although it is not an FCPA case, it is noteworthy for two reasons.

First, the Court's opinion did not mention Citigroup's compliance and ethics program ( “CEP”), although as a distinguished observer remarked, in FCPA practice prosecutions and settlements typically review the CPE. (See the November 29, 2011 letter from Win Swenson, former deputy general counsel of the United States Sentencing Commission (1991-1996) in the New York Times here.)

Second, the opinion has several indications that the company violated its CEP responsibilities by allowing an unethical business culture to go unchecked. According to the complaint, a billion dollar fund of defective mortgage-backed securities was dumped on intentionally misinformed investors with damaging consequences for the national economy.

The Court described Citigroup as a “recidivist” offender willing to incur a fine equivalent to “pocket change” as a cost of doing business and as a way to smooth future dealings with its regulatory agency. Sending the case for trial, the Court stated that when a case “touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth.”

It is unethical conduct, prohibited by a CEP, for a company to create a defective product that is as close as possible to the legal line and whose illegality would be difficult to prove and prosecute. A company may have complied with the law, but violated its CEP obligations to deter and prevent unethical conduct.

The operation of Citigroup's CEP could be considered post-conviction during sentencing under the federal guidelines. If applicable, the Court could set a useful precedent by applying sanctions specifically for unethical conduct prohibited by a CEP.

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Michael Scher has over thirty years experience as senior in-house counsel for anti-fraud and money laundering, regulatory compliance, international transactions and litigation management for financial or aerospace companies based in New York and the Middle East. He consults and provides training on the FCPA and related laws. He can be contacted here.