Compliance officers scratch heads as U.S. trumps Brexit

Donald Trump’s election as the next president of the United States is likely to make compliance officers’ jobs both much harder and much easier according to commentators; fewer rules to comply with in many areas but a wholesale dismantling of free trade agreements means compliance with tariffs and major enforcement costs. The shift in the regulatory landscape that a Trump administration will bring will be most marked in the United States., but changes will affect compliance officers in the United Kingdom and Europe who will have to deal with them whether they work for a multi-national company, a U.S. company or simply a company that does business in the United States.

But there are already suggestions that some of Trump’s policies—those few that were disclosed during the campaign—may already be being dropped. “It’s not clear as yet what the change [to his policies] may be,” said David Robson, Head of Research & Development at Wilmington’s International Compliance Training. “But it seems to be seeping out already. From my own point of view (and politics aside) I knew little about what the actual policies of the delegates were, save from wanting to build a massive wall across the Mexican border and to ban Muslims entering the country. But, according to press reports, the latter has now been removed from his official website. Much of the rest resembled what we saw in the U.K. [during the Brexit debates]: rhetoric and insults.”

Bill Waite, CEO and founder of The Risk Advisory Group, felt that little, if anything, would change immediately on Trump’s accession to power. “I don’t think it’s going to have a huge immediate impact, frankly,” he said before enumerating what might happen in the future. “There is discussion of the repeal of Dodd-Frank and the Clean Air Act, and in 2012, Trump described FCPA as a horrible piece of legislation, but whatever happens will take some time. And Trump will very rapidly become aware that these are not silo issues and that they are interconnected. The Iran [nuclear] deal, for example, he may be able to scrap Obama’s executive order, but that will not make the deal go away.”

Robson agreed that little would change quickly, though qualified that the election would cause immediate concern among compliance professionals. “I think this will be an immediate concern for compliance professionals on both sides of the Atlantic and beyond,” he said. “Why? Because it ‘feels’ like it will represent change. Don’t misunderstand me that compliance people think change is automatically scary. It also represents an opportunity, and compliance professionals recognise this. Big external changes like this can present opportunities for the organisations within which compliance professionals operate. It may make their job more complicated, but if understanding and implementing that change is worth it for all the stakeholders in the organisation, then it’s a good thing. Compliance is an enabling function.”

While Waite felt that some changes would be inevitable, he made the point that many of the regulations now in place are not in the hands of politicians anymore. “Governments have passed the policing function for policy objectives, anti-money laundering, environmental, anti-bribery, technology transfer to companies, and if they are found not to have been enforcing them, governments will sanction the company. But companies have invested a huge amount of time and money putting in place controls and control mechanisms, and it would be naïve to imagine that just removing legislation will immediately affect organisations’ culture. Also, many businesses are multinational and have signed on to a whole array of regulations. Just because the U.S. changes its mind does not mean that anyone else will. The FCPA, for example, is embodied in the OECD Convention with forty-odd signatories, and there is individual country-based legislation in place. Just the other day France introduced anti-bribery legislation [that had been put forward originally in April this year]. This is all extra-territorial legislation that most companies simply cannot ignore. If the US retreats from enforcement of the FCPA, the SFO and other national agencies will fill the gap. And it is very unlikely that the current U.K. government will change its stance on bribery and corruption.”

"There is discussion of the repeal of Dodd-Frank and the Clean Air Act, and in 2012, Trump described FCPA as a horrible piece of legislation, but whatever happens will take some time."
Bill Waite, CEO and founder of The Risk Advisory Group

Robson also pointed to the FCPA as a potential Trump target for repeal. “Another area, it seems is corruption. It’s also been reported that Trump wants to review the FCPA—seemingly in terms of its basis and application. Let’s not forget that a lot of regulatory action is driven by public will/political ends. What do people want to see and why? There have been suggestions Trump wants to ease the restrictions on business. What this means and how far it goes remains to be seen.” Waite added: “The FCPA is enforced because it is recognised that corruption creates instability in developing countries. If you stop enforcement it is likely that that instability will increase and that does not just harm businesses, but national interests and, potentially, the U.S. itself.”

Waite also noted that government and regulation is just one lever for action and change in the world; other stakeholders have significant and influential stakes. “Pension funds require companies to make these commitments [to social responsibility and stamping out bribery, for example] and enforce them, investment banks require the same if they are to back an IPO, employees want to work for such companies. There is a wide array of interest groups driving corporate behaviour, and regulation is just one other driver—albeit an important one. Just removing regulation will not change behaviour. There is a whole host of stakeholder groups who support these issues—financial regulation, human trafficking, environmental protection, money laundering—” he continued, “and companies have contracts with counterparties that would take time and material effort to renegotiate. Companies are very slow to change. But in addition to any regulatory pressure, or its removal, there are issues around CSR [corporate social responsibility] commitments—employees who want to work for well-run, ethical organisations that do not tolerate bribery. It’s not as simple as ‘Trump says it’s a bad thing so it will go.’ ”

But at least some of the regulations put in place both by the Bush and Obama administrations will go. “Since the election,” commented Robson, “it seems that one area firmly in Trump’s sights is regulation; which, of course, slaps compliance professionals around the chops. The Dodd-Frank [shareholder protection act] appears to be first on the list—the implication being that there will be less oversight, less management and less constraints around capital and liquidity ratios. But [repealing] that won’t likely be that simple and won’t simply change overnight.”

Companies’ commitments to avoid the behaviours policed by FCPA, and to promote social responsibility and environmental protection, come with a guarantee, however, warns Waite. “If a corporation has raised funds on the back of a prospectus which is redolent with statements about environmental policies and procedures, corporate social responsibility, anti-bribery and their governance, risk management and control mechanisms they will not change them.  That’s because if they’ve raised funds on the back of having made them then all kinds of civil actions will rain down on them.”

Trump’s opposition to the several trade deals signed by many of his predecessors has also been a major feature of the campaign, and if any of these are dropped these will have marked international implications. Nicole Kar, a partner at law firm Linklaters commented: “Obviously it is hard to predict what will happen. The big question is whether President [elect] Trump will follow through on his campaign talk. If he does, it could be major. Trade wars with China, such as introducing 45 percent tariffs, are serious but also have ramifications for the European Union/United Kingdom. It means more pressure for Chinese exports into other markets, so demands for protection would rise here as a result. The same with tariffs on Mexico but much less significantly. As for the detail of FTA negotiations, we'd say TTIP is on life support as it is, so probably little effect there. It is hard to know what would happen with TPP.”

EU LEADERS REACT TO TRUMP ELECTION

European Commission President Jean-Claude Juncker 
“Trump's election could imperil relations between the two entities in their foundation and in their structure. Trump’s statements on security policy could lead to pernicious consequences. E.U. eurocrats would waste at least two years before Trump tours a world he does not know. I question Trump’s views about global trade, climate policy and Western security.”
Mark Rutte Dutch Prime Minister
“As allies and partners, the Netherlands and the US work closely together to create a safer and more prosperous world. The Netherlands and the US have a long history together. I assume the new American government will continue to work with the Netherlands and the rest of the world on the basis of shared values and principles, in line with the strong American tradition.”
Angela Merkel German Chancellor
“Germany and America are connected by values of democracy, freedom and respect for the law and the dignity of man, independent of origin, skin color, religion, gender, sexual orientation or political views. I offer the next President of the United States close cooperation on the basis of these values.”
Theresa May British Prime Minister
“I would like to congratulate Donald Trump on being elected the next President of the United States, following a hard-fought campaign. Britain and the United States have an enduring and special relationship based on the values of freedom, democracy and enterprise. We are, and will remain, strong and close partners on trade, security and defence. I look forward to working with President-elect Donald Trump, building on these ties to ensure the security and prosperity of our nations in the years ahead.”
François Hollande French President
“The election opens a period of uncertainty. It must be faced with lucidity and clarity. I congratulate him as is natural between two heads of state [but] certain positions taken by Donald Trump during the American campaign must be confronted with the values and interests we share with the United States. What is at stake is peace, the fight against terrorism, the situation in the Middle East. It is economic relations and the preservation of the planet.”

Waite warned that simply dropping trade deals would not automatically lead to less regulation and less need for compliance and enforcement. “There’s also another big problem with Trump’s aim to drop NAFTA, TPP and TTIP,” he said. “The whole point about free trade is that it allows deregulation. But protectionism will require regulation and an array of tools to enforce protectionist policies. Tariffs require measurement—quantitative and qualitative. That means compliance, and that requires enforcement and it requires funds to pay for the resources. That’s one of the reasons that there was a huge push for trade deals, to deregulate trade and reduce barriers and compliance burdens. Trump should think about that before he scraps any of the trade deals he’s been talking about.”

Kar suspects that campaign rhetoric will not be made into reality. “I suspect what we will end up with is ‘watered down pre-election Trump’. There may be more protection but not enough as to crash the system. He also didn't say trade deals were ‘bad’ per se, just that they could be better for the US. What he meant by that is hard to gauge—countries are not companies, as trade economics 101 teaches—but it gives him a political opening to continue them if he wants. In general we would assume trade policy will be driven on a PR front rather than by economic reasoning, but that is not an entirely novel phenomenon.”

Lukas Daalder, chief investment officer at Robeco Investment Solutions also issued warnings in a release this week. Speaking on breaking trade deals, he said: “China is an obvious target (‘bringing back jobs’), but with the big current account surplus of Germany, it is clear that Europe is certainly not outside the risk zone. This may sound unimportant, but the main reason why the Great Depression in the 1930s was as long-lasting and painful as it was, was because of the trade wars that took place. Of course, we do not forecast such an outcome, but it should be clear that there is a big downside risk involved with this.”

Waite predicted again that change would be slow and by no means inevitable. “Changing corporations’ policies and procedures and contractual obligations is a long, drawn-out process. Trump has just been elected for four years, so it’s highly likely that they [corporations] are going to wait and see what happens. Trump will be getting a lot of information from his advisors as to why certain pieces of regulation were adopted and the reasons for retaining them.” But Waite also predicted that many of Trump’s proposed changes would also be very difficult to implement. “As I said before, these are not silo issues and if you have no real understanding of how these things are interrelated then you are going to start having problems very quickly.” Much of what Trump proposes to drop, renegotiate or change cannot be changed at the stroke of a pen since it will have wide implications for other regulations and policies that he and the Republican party in the United States think are very good for U.S. businesses.

Robson summed up the situation for the compliance function: “Compliance officers worldwide will be looking at this. Well, all the good ones anyway. And they ought to be. Compliance frameworks tend to be global. Many organisations have overseas units, counterparties or transact in dollars. Many will have interests in the United States, or certainly be interested in developments, as this has implications for most and may be indicative of moves by other regulatory bodies/leaders. They certainly need to assess if any alteration such as this impacts on their ability to manage the compliance risk for which they are responsible.  And that finished where we started too—by understanding the operating environment and the changes within it, they can also identify any opportunities which present themselves.”