The fallout from the Michael Cohen/Essential Consulting affair continues with the news that the general counsel of Novartis, one of the companies that retained Cohen’s services, is retiring from the company for his role in the scandal. Felix Ehrat said in a press release that he was retiring “in the context of discussions surrounding Novartis’s former agreement with Essential Consultants, owned by Michael Cohen.” Ehrat defended the contract as “legally in order; it was an error.”

This final statement by the now-disgraced executive illustrates two key themes. First, it highlights the difference between a corporate legal function and a compliance function. The only question in front of legal is whether the action the company is about to take is actually legal. While it is not clear if the company performed any legal analysis to ascertain if hiring the personal lawyer of a sitting U.S. president broke any Swiss law regarding the bribery and corruption of foreign (that is, foreign to Switzerland) officials, it is clear that Ehrat thought and continues to believe the contract was legal. 

The second theme: What is the business justification for doing business with this third party?  Presumably, the company knew Cohen was associated with President Trump, so why do business with him? This is a mandatory inquiry in any best practices compliance program. Failure to conduct such an inquiry before the third party is retained is clearly a red flag. In the case of Novartis, it was not until they had inked the $1.2 million contract that they discovered Cohen did not have the expertise they had been seeking. Of course, they continued to pay him, even after Cohen failed to perform under the contract, because they did not want to upset the President.

It was an error all the way around.