In London, Compliance Officers in the Crosshairs

The corruption and conspiracy charges brought by Britain’s Serious Fraud Office against Alstom SA could have serious implications for compliance officers.

On May 12, the prosecutor—the SFO is keen to distinguish itself from mere regulator—charged Jean-Daniel Lainé, former senior vice president of ethics and compliance at Alstom, with corruption and conspiracy to corrupt, according to court documents. The charges involve numerous Alstom subsidiaries, but Lainé has been charged for his alleged role in bribes paid to the Budapesti Kozlekedesi Vallalat (BKV) to win a contract between BKV and Alstom Transport SA to supply trains for Budapest’s metro system. Lainé appeared at Westminster Magistrates Court on May 12, and the case is expected to go to trial early in 2017.

Former director Graham Hill, who once oversaw compliance at Alstom, faces similar charges regarding India’s Dehli Metro. Bruno Kaelin, another compliance officer, was named as a co-conspirator but has not been formally charged. Hill's case is due to go to trial next May. 

Compliance officers rarely find themselves in the dock in cases of fraud; indeed, the SFO has never prosecuted a compliance officer before. Lainé, whose compliance program was certified by independent agency ETHIC Intelligence in 2009 and was renewed for two more years in 2011, is the sixth individual charged in the hydra-headed story of Alstom corruption. Lainé retired from the company in 2013 after 40 years.

Alstom SA pleaded guilty in the United States in December, agreeing to pay a record $772 million to resolve investigations into a bribery scheme prosecutors said was “astounding in its breadth.” The settlement followed a five-year investigation into transport projects in India, Poland, and Tunisia. The interesting thing about Lainé’s alleged involvement, however, may not be so much what he may or may not have done, but rather what he did not do: operate a compliance program that prevented the fraud from happening in the first place, or blowing the whistle once it had occurred.

In a May 20 speech at the Global Anti-Corruption and Compliance in Mining Conference, Ben Morgan, joint head of bribery and corruption at the SFO, reminded the audience that despite their best efforts, “corruption-free mining is not a reality.” Still, he said, compliance officers would “have a chance, if you want to, to positively influence what happens if something goes wrong.”

No Cozy Deals

Morgan may have delivered his comments to the mining sector, but they are just as valid for other industries as well. The implication of his words is clear: contact the SFO with corruption concerns you have before it discovers those problems itself.

“If you don’t tell us, or you do and you don’t engage with us properly, prosecution is a likely outcome,” Morgan warned. The tone of his comments strongly suggested that confessing may put the individual in a better light, but that transparency will not be an absolute defense. “No cozy deals,” he said. “So don’t be under any illusion.”

The impression of cooperation would not be sufficient, Morgan said, emphasizing the adversarial nature of the SFO. The only hope is in “actually helping us, behind [being] fully frank and honest with us,” he said, remarking ruefully “as little by little some companies now are.”

“We are reliant on compliance officers and internal audit to act as an important line of defense to support effective regulation at firms and to show backbone even when challenged by their colleagues.”
Georgina Philippou, Acting Director of Enforcement, FCA

Don’t expect that spirit of cooperation to be a two-way street, either. Aside from demanding an immediate mea culpa should any wrongdoing emerge, the SFO eschews providing any actual guidance. “As our director has memorably said in the past, we are not in the business of telling people how not to rob banks,” Morgan said. “We are in the business of catching those that do and holding them to account.” Cold comfort for compliance officers for whom failure to act fast enough will plainly be seen by the SFO as a suspicious act of obstruction.

A member of Lainé’s legal defense team at Wilmer Hale, Christopher David, declined to discuss specific details of the Alstom case, but he did have general advice for compliance officers. He calls the SFO’s current attitude and approach to compliance officers misguided and perhaps indicates a lack of awareness as to the role and function of a compliance officer within a multinational company.

“On a day-to-day basis, the SFO should be viewing the corporate compliance officer as the ‘good guy’ within a company who is trying to prevent illegal conduct,” David says. “The SFO could and should support compliance officers by providing as much guidance as possible,” as regulators are doing in the United States.

“Both the [Justice Department] and [Securities and Exchange Commission] are criminal prosecutors, yet Ben Morgan specifically said that he was not going to tell companies how to be compliant as the SFO is the ‘prosecutor,’ ” David says. “This is an odd distinction when surely it is in everyone’s interest that criminal offenses are not committed in the first place.”

While the SFO has not completed any cases against compliance officers yet, this isn’t the first time that British regulators have taken compliance officers to task for breach of duty. In fact, this year has been a trying time for compliance officers.

SFO TAKES ACTION

Below is an excerpt from the U.K.’s Serious Fraud Office regarding the charges it brought against Alstom’s former compliance director.
Further charges have been brought as part of the SFO's ongoing investigation of Alstom Network UK Ltd.
In addition to the charges that were announced as part of phase three in April this year, the SFO has charged Jean-Daniel Lainé and he appeared this morning, together with Michael John Anderson, 54, and representatives of Alstom Network UK Ltd, at Westminster Magistrates' Court. The matter has been sent for trial at Southwark Crown Court.
Mr Lainé, 68, is a French national who attended court to answer two charges of corruption contrary to section 1 of the Prevention of Corruption Act 1906, as well as two offences of conspiracy to corrupt contrary to section 1 of the Criminal Law Act 1977. The alleged offences are said to have taken place between 1 January 2006 and 18 October 2007 and concern the supply of trains to the Budapest Metro.
Prior to retirement, Mr Lainé was Senior Vice President Ethics & Compliance, and a director of Alstom International Limited. He is the sixth individual to be charged by the SFO in its investigation of Alstom.
In April, Alstom Network UK Ltd, formerly called Alstom International Ltd, a UK subsidiary of Alstom, was charged with a further two offences of corruption contrary to section 1 of the Prevention of Corruption Act 1906, as well as two offences of conspiracy to corrupt contrary to section 1 of the Criminal Law Act 1977.
Michael John Anderson, 54, of Kenilworth in Warwickshire, who was working as a business development director for Alstom Transport SA in France, has been charged with the same offences.
The alleged offences are said to have taken place between 1 January 2006 and 18 October 2007 and concern the supply of trains to the Budapest Metro.
The first hearing in this case will take place at Westminster Magistrates' Court on 12 May 2015.
Source: Serious Fraud Office.

In March, the Financial Conduct Authority settled with Stephen Bell, Financial Group’s former compliance director, to the tune of £33,800 over the failure of his compliance program to prevent breaches of service by its financial advisers. In May, the FCA fined the former compliance officer at the Bank of Beirut £19,600 for his part in the bank’s “repeatedly providing the regulator with misleading information after it was required to address concerns regarding its financial crime systems and controls.”

Show Backbone

Georgina Philippou, the FCA’s acting director of enforcement and market oversight, said of the case (which also fined the bank £2.1 million and its auditor Michael Allin £9,900), “We are reliant on compliance officers and internal audit to act as an important line of defense to support effective regulation at firms and to show backbone even when challenged by their colleagues.”

Compliance officers are most exposed within sectors regulated by the FCA, David says, and from a criminal exposure point of view, compliance officers are particularly vulnerable in circumstances where they are required to give direct approval of the payment of commission to third parties.

“This could create a situation where the business hides key facts from the compliance officer and, notwithstanding the need to have a robust compliance program, the compliance officer therefore inadvertently becomes complicit in the making of corrupt payments,” David says. “There should be a clear distinction between the compliance function and the business, particularly in relation to the approval of payments to third parties.”

Compliance officers who find themselves subject to prosecutorial scrutiny should seek independent legal advice as soon as possible and not give any on-the-record interviews until personal legal advice has been obtained, David says—including to internal or company-appointed investigators. “This is not always practically possible, but given the current regulatory climate, should be kept in mind,” he says.

To prevent an issue from arising in the first place, compliance officers, particularly those in highly regulated sectors, should make sure they understand all the products and services that their institution offers. This is an area of particular focus for regulators in the United States; the Justice Department has said it looks at a compliance officer’s technical background and ability when reviewing a business compliance program, “and where the U.S. goes, U.K. regulators and enforcement agencies often follow,” David says.

Given the SFO’s mission, it is primarily focused on specific areas of alleged misconduct, and less so on the bigger picture. As such, compliance officers at companies under investigation by the SFO should strive to educate and assist the SFO in understanding the wider context from an early stage. The goal is to help the SFO understand the extent of the company’s liability, as opposed to it being a case of rogue employees that the company could not have stopped.

“This is particularly important in the United Kingdom given our higher standards of corporate liability,” David says. For compliance officers, trying to resolve a potential issue internally is not a safe option.