Increasing regulatory scrutiny and the threat of personal liability has compliance officers feeling especially vulnerable, fears that have grown only more intense with the newly established compliance counsel role within the Department of Justice’s Fraud Section.
Those observations come from the findings of a recent survey conducted by law firm DLA Piper, “CCOs under Scrutiny,” which captured the attitudes and perceptions of compliance officers immediately following the appointment of Hui Chen—former global head of anti-bribery and corruption at Standard Chartered Bank—to the newly established role of compliance counsel within the Fraud Section of the Justice Department’s Criminal Division.
“Chief compliance officers certainly have a heightened sense of awareness, given what is happening in Washington,” says Brett Ingerman, co-chair of DLA Piper’s global governance and compliance practice and lead author of the survey. This anxiety stems from a convergence of factors, he says, including the Fraud Section’s newly explicit focus on individual accountability in combination with the Justice Department now having a much clearer understanding of the effectiveness of a company’s compliance program.
As the DLA Piper survey clearly indicates, Chen’s role has compliance officers feeling the heat. When asked to what extent they believe Chen’s role as compliance counsel will intensify the pursuit of cases against compliance officers, 40 percent of 78 in-house counsel and compliance professionals polled said Chen’s appointment will intensify personal liability “to some extent,” while 27 percent said “to a small extent.” Another 20 percent said “to a great extent.”
Not everybody in the ethics and compliance space shares this perspective. “Does the appointment of Hui Chen increase a chief compliance offer’s liability? Not really,” says Pat Harned, CEO of the Ethics and Compliance Initiative, a non-profit group that empowers companies to foster ethical practices. “It’s the extent to which the organization is investing in a high-quality ethics and compliance program that is either increasing or decreasing that personal liability.”
When a company has in place a high-quality ethics and compliance program, the role of the chief ethics and compliance officer is central to how the business operates, says Harned. By virtue of that, the risk that a compliance officer will be found personally liable in the eyes of the Justice Department are greatly reduced, she says.
When asked to what extent Chen’s position will intensify the scrutiny of compliance programs overall, nearly all said that it would. Forty-eight percent answered “to a great extent,” while another 43 percent answered “to some extent.” Eight percent said “to a small extent.”
Respondents from public companies expressed a greater level of concern than respondents from private companies, with 96 percent saying they believed Chen’s role would increase scrutiny to some or a great extent, compared with 83 percent for respondents from private companies.
“Chief compliance officers certainly have a heightened sense of awareness given what is happening in Washington.”
Brett Ingerman, Partner, DLA Piper
Leslie Caldwell, assistant attorney general for the Justice Department’s Criminal Division, indicated that Chen’s appointment most certainly will intensify the scrutiny of compliance programs. “We look forward to her insights on issues such as whether the compliance program truly is thoughtfully designed and sufficiently resourced to address the company’s compliance risks and whether proposed remedial measures are realistic and sufficient,” Caldwell said at a conference in New York last year.
Despite the intensified regulatory scrutiny on compliance programs, 79 percent of in-house counsel and compliance officers to the DLA Piper survey said they have not made any changes to their compliance programs, while just 21 percent said they have. “As a practical matter, I think that CCOs are thinking about their program on a daily basis,” explained one compliance officer. “In terms of program elements, I think about mine all the time.”
Where Chen exerts the most influence is during the remediation stage of investigations, because now the Justice Department can really understand “what is window dressing and what is real, meaningful change at the organization,” says Ingerman.
Respondents to DLA Piper’s survey also were asked what affect, if any, statements from regulators about increased scrutiny on compliance departments and enforcement actions against other compliance officers would have on their decision to remain or accept a position as a chief compliance officer. In response to this question, 65 percent answered it will “make me consider more carefully any role I might consider.”
“If it’s a higher risk company or one with a prosecutorial history, you’re going to weigh the risk of whether it could destroy your career and your personal life,” one chief compliance officer said in the survey.
A compliance officer’s decision about whether to work at a particular company should be based “more on the extent to which the organization is focused on establishing a high-quality ethics and compliance program” and less on enforcement decisions made by the Department of Justice, says Harned.
On the flip side, 16 percent of respondents said increased scrutiny on compliance departments and enforcement actions against other compliance officers will have no impact, while 11 percent said it’s going to make it more difficult for companies to find good candidates.
Once again, compliance officers from private companies reacted more strongly than their public-company counterparts. Seventy-three percent of respondents from private companies said they would think more carefully about roles they might consider, compared with 60 percent from public companies. In the same vein, 14 percent of respondents from public companies said intensified scrutiny will make it more difficult to find good candidates, compared with just seven percent from private companies.
To what extent do you believe the Justice Department's recent appointment of Hui Chen in the new position of compliance counsel will:
Source: DLA Piper
What the findings indicate is that companies may have to be more creative in attracting talent to compliance roles, Ingerman says. Until last year, the primary approach to attract talent was to offer competitive compensation and benefits, but now companies are “faced with having to sweeten the pot a little bit,” he says.
Offering D&O insurance coverage or amending bylaws to allow for indemnification rights are examples of innovative ways to attract and retain talent. “Those are some of the demands we’re hearing from compliance officers as they face an environment in which they have heightened potential personal liability,” Ingerman says.
Another mounting concern keeping compliance officers up at night is how to effectively audit and monitor the compliance program. “Strong compliance must be data driven,” Chen told the Ethics and Compliance Initiative in a recent interview. “When I look at compliance programs, the kind of data that they do and do not monitor tells me a lot about how sophisticated their program is.” According to the DLA Piper survey, compliance officers depend on a variety of means to evaluate the effectiveness of their compliance programs, but with no real consistent approach as to how to use the information to improve the compliance program. Commonly used tools, for example, include audits, training data, benchmarking, and hotline data. Less commonly means include exit interviews, surveys, and a dedicated governance, regulatory, and compliance committee.
As one compliance officer said in the DLA Piper survey, “You’ve got to break down the compliance function—risk assessment, training and education, hotline escalation, communication. Then you have to look for objective things you can measure and subjective things you can ask.”
A lack of sufficient resources—which, by the way, is a metric in itself—further exacerbates the increased regulatory and prosecutorial scrutiny on compliance programs. Although 41 percent of respondents to the DLA Piper survey said they have a “sufficient” budget to accomplish the goals necessary to have an adequate compliance program, 28 percent said they do not, and 27 percent said they were not sure. In the DLA Piper survey, one chief compliance officer noted that it’s incumbent on compliance officers to tell the board and management if they feel they don’t have what they need. “If I didn’t do that, shame on me for not raising the point.”
The good news is that the majority of respondents (53 percent) said they do not encounter resistance from the C-suite, the board, or the audit committee when requesting annual budget increases, while 47 percent said that they do. In comparison, only 37 percent of respondents from private companies said they encountered resistance on budget increases.
In many companies, a common motivation for increasing compliance budget is a major scandal, so showing the cost of violations, compared to the cost of preventative measures, may be more effective. As one compliance officer put it, companies tend to “close the barn door after the horse is racing down the sidewalk.”
The Department of Justice, however, has said it hopes to further bolster the clout that compliance officers have within their companies. “I hope that, in seeing how seriously the Department of Justice takes compliance, we will strengthen the voice of the compliance professionals and help them get a stronger seat at the table as a key stakeholder in how businesses are run,” Andrew Weissman, chief of the Criminal Division’s Fraud Section, said in a recent interview with ECI.
What really matters at the end of the day is that companies make ethics and compliance central to their business strategy and continuously aspire to improve their program and practices overall, says Harned. By doing so, it doesn’t matter what the Department of Justice does, she says, “because you’ve established a high-quality program and you’re reducing your risk of misconduct in the first place.”