RC & IS TUNNEL VISION UNDERMINING YOUR COMPLIANCE PROGRAM? risk compliance RISK & COMPLIANCE MAGAZINE. risk & compliance REPRINTED FROM:

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1 R E P R I N T RC & risk compliance & IS TUNNEL VISION UNDERMINING YOUR COMPLIANCE PROGRAM? REPRINTED FROM: RISK & COMPLIANCE MAGAZINE APR-JUN 2015 ISSUE RC & risk & compliance Visit the website to request a free copy of the full e-magazine Published by Financier Worldwide Ltd riskandcompliance@financierworldwide.com 2015 Financier Worldwide Ltd. All rights reserved.

2 Barbara D. Linney Member Miller & Chevalier Chartered T: +1 (202) E: 2 RISK & COMPLIANCE Apr-Jun 2015

3 IS TUNNEL VISION UNDERMINING YOUR COMPLIANCE PROGRAM? BY BARBARA D. LINNEY > MILLER & CHEVALIER CHARTERED In today s complex regulatory environment, the importance of a holistic approach to risk analysis and compliance cannot be overly emphasised. Failure to consider the complete regulatory picture can result in compliance oversights and inefficiencies as well as unanticipated consequences of guilty pleas or settlement agreements. Companies with global footprints must navigate a minefield of laws and regulations governing international trade and business economic sanctions and asset freezes, export controls and customs and anti-corruption laws, to name just a few. Laws of multiple jurisdictions may apply to a single transaction, and even within the same country, businesses must contend with various separate regulatory regimes and government agencies. The compliance challenges are even greater for government contractors, whose operations are subject to additional regulations and restrictions. In the face of such complexity, many global enterprises have succumbed to the temptation to stovepipe compliance programs by assigning separate compliance personnel with specialised expertise to oversee each area of regulation within each country in which operations are based. This approach results in higher costs of developing and RISK & COMPLIANCE Apr-Jun

4 implementing compliance plans, a proliferation of policies and procedures applicable to a particular transaction, and lack of coordination and communication during internal investigations and plea negotiations. Staggering fines and the threat of criminal prosecution have caused most companies to identify anti-corruption compliance as a top priority. However, in many cases a targeted focus on anticorruption risk has resulted in the development and implementation of compliance strategies without regard for other applicable risks. For example, background check procedures for third party due diligence may require name-screening of potential agents and representatives without ensuring that sufficient information is collected to assess whether the ownership structure of the third party might attract asset freezing or other economic sanctions. Forms of agency agreements may be developed that do not contain appropriate clauses regarding compliance with export controls and economic sanctions. Training programs for employees and agents may focus on anti-corruption compliance to the exclusion of sanctions and export restrictions. This narrow approach to compliance not only leads to unintended violations of other applicable laws and regulations but also results in higher costs of developing compliance procedures. On the other hand, a comprehensive approach to ensuring compliance with all regulatory regimes applicable to a particular aspect of the business (such as 4 RISK & COMPLIANCE Apr-Jun 2015

5 management of third party agents) is more costeffective in the long run, both in terms of the cost of developing compliance procedures and in terms of avoiding the costs associated with unintended violations (internal investigations, fines and penalties, etc.). The historical tendency to view sanctions and export control compliance as discrete risk areas is also problematic, as illustrated most recently by the international approach to Russian and Ukrainerelated sanctions, which has featured a blend of traditional asset-freezing measures and targeted export controls. In the United States in particular, compliance risks are exacerbated by implementation of the sanctions by two separate government agencies (the Office of Foreign Assets Control and the Bureau of Industry and Security). In order to avoid violations, companies must develop integrated compliance procedures that take both regimes into account, and this compliance challenge is multiplied for those companies affected by European Union, Canadian and other sanctions programs in addition to the US programs. Failure to consider the big picture can also have significant implications for the approach to resolving anti-corruption and other criminal matters. A conviction for anti-corruption or criminal violations can snowball into a whole host of additional problems, including ineligibility for government contracts and export licences, False Claims Act liability, and so on. RISK & COMPLIANCE Apr-Jun

6 Investigations that result in criminal convictions expose US government contractors to debarment that is, they run the risk of losing their eligibility to compete for US government contracts. Many other countries and international organisations have similar debarment policies. This means that when negotiating settlements of alleged criminal violations, government contractors must ensure that the corrective actions and remedial measures required by the settlement agreement related to the anti-corruption or other criminal charges will serve the dual purpose of demonstrating present responsibility and persuading debarment officials that debarment is not necessary. Failure to focus on the debarment issues during the settlement negotiations can lead to nasty surprises and unnecessarily prolong the process of getting the company back on track. Likewise, many companies fail to appreciate that a consequence of ineligibility to contract with the US government (as well as criminal violations of sanctions, export control and other laws) is general ineligibility to participate in transactions involving defence articles and services regulated under the US Arms Export Control Act and the International Traffic in Arms Regulations (ITAR). This means that an ineligible company may neither export such items nor be a party in any other way to the export transaction (i.e., manufacturer, consignee, freight forwarder, end user, etc.). Persons convicted of violations of the Export Administration Regulations Attention to detail must always be a cornerstone of regulatory compliance, whether in the context of anti-corruption, sanctions, export controls, customs or other regimes. (EAR) likewise may be denied participation in transactions subject to the EAR. The consequences of being cut off from key export markets or suppliers can be dramatic, so it is imperative, in order to avoid unintended consequences of a settlement agreement with the Department of Justice, that the potential ineligibility for export privileges should be considered and discussed with the appropriate government agencies before finalising the agreement. Beyond fines, disgorgement and the spectre of debarment and exclusion from export privileges, anti-corruption violations can have additional implications for government contractors, particularly where external consultants have been engaged. Most prominent is the potential for False Claims 6 RISK & COMPLIANCE Apr-Jun 2015

7 Act liability. Many foreign military sales programs are funded under US government contracts, which expose a contractor who falsifies records of payments to subcontractors or consultants in order to disguise bribes to civil actions for false claims by the government and, potentially, whistleblowers. Sanctions, export control and other violations may also violate contract clauses mandated by defence and federal acquisition regulations, which, in some cases, require disclosure. If the potential for false claims or other government contract liability is implicated during the course of an internal investigation of other violations, care must be taken to simultaneously evaluate and coordinate all necessary disclosures. Likewise, resolution of alleged violations of the laws of one jurisdiction should not be finalised before considering whether the circumstances involved might also attract enforcement action in another jurisdiction. Attention to detail must always be a cornerstone of regulatory compliance, whether in the context of anti-corruption, sanctions, export controls, customs or other regimes. Companies will continue to need compliance personnel with expertise in each regulatory scheme to which their business is subject. Equally important, however, is the big picture. Care must be taken to ensure appropriate coordination and collaboration at all levels within the organisation s compliance structure, as well as coordination and collaboration with other key departments, such as contract administration. This must be done both day-to-day and when planning and executing internal investigations of possible violations. RC & RISK & COMPLIANCE Apr-Jun