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Is it Ever "Rational" to Ignore Compliance?

The steady drumbeat of compliance continues – comply, comply and comply.  The refrain goes even deeper – document, document, document.

But can you imagine when the “rational” decision maker decides to continue engaging in bribery, or turning a blind eye to continuing bribery.  Let’s examine a possible scenario.  “Assume” (in the economists favorite refrain) that a company sells a product in a highly competitive market and the company and its competitors engage in bribery.  As the chief compliance officer, you know that if you train and educate your sales staff in that country about compliance with anti-corruption laws and inform the sales staff that they cannot continue to engage in bribery, they will quickly lose market share and eventually leave the company, and the company which is in a precarious financial condition will suffer dramatic losses.  Senior management is well aware of this situation and has decided to “take the risk” of continuing the behavior.  Nothing is in writing and the issue is never discussed but the message is clear.  There is no smoking gun of criminal conduct at the senior level.  For the company’s survival, they cannot comply nor can the company seriously consider a voluntary disclosure.  The risk to the company is the risk of detection and risk of reporting.  But even in that case, the company is looking at a fine, a low risk of debarment, and an unlikely criminal prosecution of any individual except maybe in the country of operation.

This is not a far out scenario.  In fact, I would argue that some companies engage in collusive antitrust violations with their eyes open to the violations and the risk, and companies in the off-label marketing arena may be doing just the same.  The benefits from illegal conduct outweigh the downside of an enforcement action.  In this case, enforcement may truly be a “cost of doing business.”

What should the Chief Compliance Officer do?  What alternatives does the Chief Compliance Officer have?  If the CCO alerts senior management and the Board, the CCO may put each of the officers and Board members at risk, raising the stakes and the cost of any enforcement action.  In this case, the tone at the top may be communicated through neglect and avoidance.  The CCO is stuck and may even be the most at risk of possible prosecution – why?  Because the CCO is “aware” of the entire picture, has the duty to investigate (red flags are lying all over) and may be senior management’s sacrificial lamb.

The CCO needs to protect himself or herself.  First, the CCO needs to document what is occurring, create a record to protect himself or herself, and quietly depart.  The difficult issue he or she faces is the duty to disclose to the Board or to top management who may truly not be aware of the situation.  These are some of the most difficult issues a CCO can face, and they need to be represented and they need to make sure they are not the scapegoat when the stakes get raised.

In my experience, this situation is occurring more and more frequently.  It is not the norm but it certainly is not outside the possibility.  It requires careful deliberation and planning, and the examination of some difficult alternatives.  As the compliance message grows and as more companies face the need to design and implement compliance programs, the market context will play a bigger and bigger role.

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4 Responses

  1. Jon May says:

    My guess is that in most cases these companies will not have a chief compliance officer but will have a general counsel who may become aware of the company’s illegal activities. My guess also is that knowing that there is a very small chance that the illegal activity will ever be uncovered, counsel will make the “rational” (defined purely in utilitarian terms) decision not to do anything and take whatever measures are necessary to insulate himself or herself from any material that could show knowledge if in the unlikely event the government gets wind of the crime. The situation becomes more difficult if the GC or CCO learns of the crime through a report from a company employee. In that case the chances of disclosure increase dramatically as a result of Dodd-Frank. In that case the most rational choice may be for counsel to run as fast as he or she can to 10th and Constitution Ave.

    • Michael Volkov says:

      I agree — and I ahve seen that situation occur. It is a mess and everyone circles their own wagons to trya nd rpotect themselves

  2. John Weaver says:

    I have no doubt that GC and CCO’s find themselves in this position. It was ever thus. The stark reality however is that these individuals are charged with certain tasks and are generally well rewarded as a consequence. Those rewards are provided in recognition of the weight of responsibility which the role entails. In the event documenting and leaving cannot be the right answer. Similarly it cannot be a ‘commercial decision’ in the truest sense as to whether the costs of compliance outweight the risk of expeosure.

    If you hold yourself out as a compliance professional your role and duty is to comply with the law and stated company policy. Almost certainly the consequence is that there should be a notification to the board and all of the other steps which follow. Quite apart from the question of legal and professional obligations, plausible deniability is often a long and muddy defence to run. As Michael has said senior management will look after themselves. If they have created an environment where the CCO feels threatened in making a notification (which should properly be made) they should not be premitted to absolve themselves so readily of their own legal and professional responsibilities.

  1. January 29, 2012

    […] looks at the Transparency International Bribe Payers Index. Mike Volkov asks whether it’s ever rational to ignore compliance, what the Justice Department should do, a short profile on Russia and China, […]