The Danger to a Compliance Program of Ineffective In-House Lawyers

The United Technologies FCPA settlement underscored, once again, the harm to a company when lawyers fail to do their job.

As outlined in the SEC settlement, an in-house attorney at Otis Elevator was required to review and approve a contract with a third-party, where a cursory due diligence review would have uncovered major red flags.  The in-house attorney reviewed the contract without inquiring about the third-party or whether due diligence had been conducted.

In another incident, an Otis Elevator attorney was asked to review and approve a contract engaging the local government customer to assist in selling products in other areas in Kazakhstan.  The attorney correctly asked the business why the company needed to retain the new intermediary.  In the face of resistance, the attorney eventually backed down and approved the arrangement.

The Otis Elevator attorney is not the first occasion of an attorney failing to do his or her job.  Last year, an in-house attorney at Keppel Marine plead guilty to an FCPA violation for drafting a contract for a third-party with specific knowledge that the third-party was facilitating bribery payments.  Of course, the Keppel Marine case is an outlier but an important warning flag.

Another example of  in-house attorney miscues is the VimpelCom case in which an in-house attorney approved a transaction involving a shell company which was owned by the Uzbekistan President’s daughter.  VimpelCom’s in-house attorney signed off on the transaction, notwithstanding the obvious red flags.

An in-house attorney serves an important gatekeeper role in protecting a company’s culture and its compliance program.  When an in-house attorney fails to do so, or succumbs to business pressure, the company suffers.  An in-house attorney subjected to this kind of pressure reflects poorly on the company’s culture.  Those companies that ignore their lawyers are doomed to suffer real and significant consequences.

An in-house attorney needs the support of his/her supervisors, and the company’s leadership.  When an in-house attorney folds in the face of business pressure, such a dynamic reflects the absence of a culture that values ethics and compliance.  A company with a singular focus on the next business deal without any consideration of legal risks is asking for trouble.  The company may not get caught in the immediate circumstance, but the company’s culture will suffer and overall performance may deteriorate.

Corporate gatekeepers are routinely subject to business pressure.  These gatekeepers have to withstand the pressure and explain to the business why compliance is important.  If necessary, the gatekeeper has to enlist his/her supervisor to support the gatekeeper’s position.

When gatekeepers buckle and give in to the business, the company is likely suffering from a deeper culture problem.  Companies that do not respect the importance of ethics and compliance while focused on the next business deal do not have basic ethical values embedded in the company’s culture.

A company with this culture and compliance problem will suffer.  The company may or may not be investigated by the government.  There are many companies engaging in misconduct without being caught by the government.  However, a company suffering from a poor culture will experience higher rates of misconduct, lower reporting rates, higher turnover and eventually lower performance.  If the company connects these trends and links them to its poor culture, a business-dominated corporation is unlikely to address the problem without a major shake-up or intervening event.

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