Textbook Lessons Learned from the Société Générale and Legg Mason FCPA Enforcement Action (Part III of III)
Sometimes it takes a large enforcement action to underscore basic and important anti-corruption compliance principles. The Société Générale enforcement action demonstrated two important principles – the dangers of a weak corporate culture and the need to apply basic third-party risk management practices to respond to and resolve red flags when they occur.
Absence of Culture of Ethics: Société Générale’s culture, as described in the Statement of Facts accompanying the FCPA enforcement action, reveals a culture lacking in any recognition of ethics and compliance. Société Générale is another example of a global French company lacking in ethical principles (e.g. Alstom, BNP Paribas).
Société Générale’s lack of ethical culture is repeatedly demonstrated by its adherence to money over any recognition of the importance of compliance with the law. A culture of bribery was embraced by numerous senior actors at Société Générale without any apparent consideration of compliance with the law, much less any code of conduct governing corporate behavior.
Equally troubling was the fact that this culture extended beyond foreign investment markets but to Société Générale’s separate LIBOR operations involving US Dollar and Japanese Yen trading. While a significant part of Société Générale’s operations was dedicated to promoting a complex bribery scheme in Libya, a separate Société Générale operation was engaging in false LIBOR submissions during the same time period. Such pervasive conduct reveals the rotten nature of Société Générale’s culture and its ignorance of all important values of ethics and compliance with the law.
Third-Party Risk Management: The Société Générale bribery scheme underscores basic but important third-party risk management practices. The Libyan intermediary, from the outset, presented a high-risk business opportunity. Libya, by definition, was a corrupt country and the Libyan intermediary presented several red flags based on his relationship with the Libyan officials, and the structure of his business operations.
By itself, there is nothing wrong with a third-party that offers the ability to access high-ranking foreign officials. But this risk has to be closely managed by legal and compliance officials. While on its face, the commission rate of one and one half to three percent may not appear to be very high, such a factor has to take into account the overall size of the transactions where the Libyan intermediary was earning as much as a $20 million commission for “introductory” services. The general rule is that the larger the transaction, the lower the commission rate. In this context, a commission rate of one and one half to three was excessive.
Such a compensation arrangement has to include a close and skeptical review of services provided by the third-party. In this case, there is no rational justification for a payment of $20 million for a single transaction for “introductory” services. The risk of bribery was beyond the pale and, on its face, indicative of corrupt intent to pay Libyan officials. Even assuming the Société Générale officials did not know that the Libyan intermediary intended to share some of the commission with Libyan officials, the transaction itself sets up red flags that, unless resolved, provide sufficient evidence of bribery.
The factual statement also noted in several paragraphs that Société Générale compliance personnel, who appear to play only a minimal role in the corporate culture, raised concerns about the payments to the Libyan intermediary and questioned the absence of a justification for such large payments. It is not known precisely how these concerns were resolved but it appears that Société Générale officials altered the relationship with the Libyan intermediary to set up another offshore account for paying the Libyan intermediary and even when so far as to establish a false joint venture arrangement.
The blatant lawlessness of the bribery scheme is further demonstrated by the unusual payment arrangement involving the Libyan intermediary, who was a dual citizen of Italy and Libya, and resided in London and Dubai. Notwithstanding this set of facts, the Libyan intermediary insisted on being paid for his services through a Panamanian company. On its face again, payment to an unrelated and uninvolved company in a high-risk jurisdiction such as Panama, created another significant red flag for the Libyan intermediary.
The rampant bribery scheme at Société Générale calls into question the absence of any meaningful oversight at the board, senior executive and compliance levels of the company. I always ask myself – where was the board? The CEO? and where was the compliance department?
In these situations, where systemic and pervasive bribery operates, the company’s three lines of defense are turned into mush and even non-existent, except perhaps on paper. Société Générale’s leadership bears significant responsibility because they either failed to intervene, knowing that illegal conduct was occurring, or they ignored the risks by turning a blind eye to rampant illegal conduct. In either case, the board and senior management bear responsibility for this multi-year commitment to illegal bribery and LIBOR conduct.