Parsing the Role of the New Compliance Counsel

Now that the Justice Department has appointed a newly established compliance counsel for its Fraud Section, compliance officers may be wondering what that move means for the assessment of corporate compliance programs moving forward.

As a corporate function, compliance continues to evolve rapidly. More companies recognize the value in having a compliance program and are giving compliance officers their proverbial seat at the table. As a result, compliance programs continue to mature, with many now tailored to not only specific industries, but each company’s business operations, risk factors, geographic region, and more.

That drove the Fraud Section to hire its first-ever compliance counsel at the start of November. “We are prosecutors, not compliance professionals,” Leslie Caldwell, assistant attorney general for the Justice Department’s Criminal Division, said at a conference in New York earlier this November.

So who is the lucky person? Hui Chen, former global head of anti-bribery and corruption at Standard Chartered Bank. Prior to that she was as assistant general counsel at Pfizer within its compliance division, and she has held compliance positions at Microsoft in Beijing, New York, and Munich.

Historically, the Justice Department has struggled to determine whether a company has an adequate compliance program in place, says Scott Fredericksen, a former federal prosecutor and now a partner with law firm Foley & Lardner. Chen’s hiring is a response to that, he says.

“Companies can expect a very close look at the compliance programs they have in place, or that they intend to put in place,” Fredericksen says. “There will be no automatic pass for companies that say, ‘We’ve put in place a good compliance program. Let’s go from there.’ That’s not going to be enough.”

Chen said during a panel discussion at New York University that the most important asset she brings to the table is her in-house perspective, something the Fraud Section hasn’t had in the past.

“There will be no automatic pass for companies that say, ‘We’ve put in place a good compliance program. Let’s go from there.’ That’s not going to be enough.”
Scott Fredericksen, Partner, Foley & Lardner

“I would expect that the compliance counsel will be deeply involved in assessing the practical effectiveness of compliance programs when the Department is assessing how or whether to proceed against a company,” says David O’Neil, a former head of the Justice Department Criminal Division before joining Debevoise & Plimpton as partner in January.

In a recent speech, Caldwell expounded on Chen’s role: “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,” she said. “She also will be interacting with the compliance community to seek input about ways we can work together to advance our mutual interest in strong corporate compliance programs.”

For compliance officers, an end result of greater collaboration between the Justice Department and companies might be a good thing. “I would think in the future we will get more practical guidance out of the Department,” says Sigal Mandelker, a partner with law firm Proskauer.

Andrew Weissmann, chief of the Fraud Section, said during the NYU panel discussion that having a compliance expert to help ensure the Fraud Section evaluates compliance programs in a thoughtful way should be a welcome development to compliance officers. “For companies that get it, this is going to be a big benefit to them,” he says.

CRIMINAL DIVISION COMPLIANCE COUNSEL

Below are the remarks of Assistant Attorney General Leslie Caldwell at the SIFMA (Securities Industry and Financial Markets Association) Compliance and Legal Society New York Regional Seminar, speaking about the Criminal Division’s new compliance counsel.
We want to get the benefit of the expertise of someone with significant high-level compliance experience across a variety of industries, which this person has.  Our goal is to have someone who can provide what I’ll call a ‘reality check.’   
First, the compliance counsel will help us assess a company’s program, as well as test the validity of its claims about its program, such as whether the compliance program truly is thoughtfully designed and sufficiently resourced to address the company’s compliance risks, or essentially window dressing. 
Second, she will help guide Fraud Section prosecutors when they are seeking remedial compliance measures as part of a resolution with a company, whether by prosecution or otherwise.  We don’t want to impose unrealistic, unnecessary or unduly burdensome requirements on companies.  At the same time, we want to make sure that appropriate compliance enhancements are included when they are needed. 
We understand that no compliance program is foolproof.  We also appreciate that the challenges of implementing an effective compliance program are compounded by the ever-increasing cross-border nature of business and of criminal activity. 
Many banks and financial institutions operate all over the world.  They are creating products and delivering services not only here in the United States but overseas and are operating across many different legal regimes and cultures. For this reason, we have chosen a compliance counsel who has the experience and expertise to examine a compliance program on a more global and a more granular level. 
I want to correct one impression that has been expressed elsewhere.  Some have suggested that our retention of a compliance counsel is an indication that the department is moving toward recognizing or instituting a “compliance defense.”  That is not the case. 
Rather, the Criminal Division will continue to review companies’ compliance programs as one of the many factors to be considered when deciding whether to criminally charge a company or how to resolve criminal charges. Our hiring of a compliance counsel should be an indication to companies about just how seriously we take compliance.
Source: Justice Department.

James Koukios, former senior deputy chief of the Fraud Section at Justice and now a partner at law firm Morrison Foerster, describes the appointment of a new compliance counsel as a “double-edged sword” for compliance officers. Although Chen can help bring to prosecutors “more realistic expectations” from an in-house perspective, Koukios says, it also means that she “knows where the bodies are buried and the tough questions to ask.”

Compliance Defense?

Both Caldwell and Weismann have denied speculation that the appointment of a compliance counsel is a hint that the Justice Department plans to implement a “compliance defense” for companies that have compliance programs in place but experience a corruption problem anyway.

“Rather, the Criminal Division will continue to review companies’ compliance programs as one of the many factors to be considered when deciding whether to criminally charge a company or how to resolve criminal charges,” Caldwell said. “Our hiring of a compliance counsel should be an indication to companies about just how seriously we take compliance.”

Justice Department officials, however, have been saying for a while now that they want to incentivize companies to cooperate, especially to provide information on employees who may have engaged in wrongdoing. “They very much have been trying to figure out ways to be more concrete and more transparent on the benefits of self-disclosure, cooperation, and remediation,” Koukios says.

At some point, something has to give. “If it’s going to get companies to cooperate, it has to provide some incentive,” O’Neil says.

Compliance Metrics

During the NYU panel discussion, Chen gave more detail on factors she will consider when assessing compliance programs. One of the first questions: “Does your program address the wrongful conduct in the first place? We want to see that your program has properly diagnosed the root causes of issues and attempts to address them,” she said.

Compliance programs should also be thoughtfully designed. Chen said compliance officers can expect that the Justice Department will ask questions about your payment systems, HR systems, vendor management systems, audit process, and investigation process. “Every piece of your program needs to actually be tied to the operations of your company,” she said.

For example, the Justice Department will not look favorably upon an internal process where employees must get approval to conduct transactions in one system and have to conduct the transaction in another. “When you don’t tie those systems together, it’s very easy to ignore the other system that’s not necessary to make the transaction happen,” Chen said.

The compliance program also needs to be well-resourced—and not just from a budget standpoint, Chen said. Aside from getting adequate funding, do compliance teams have access to necessary resources?

How often does the board and senior leadership communicate with, and listen to, the compliance officer? Do directors and senior managers provide strong, explicit, and visible support for its corporate compliance policies? “What we want to see is real attention, real dialogue, and executives walking the walk beyond talking the talk,” Chen said.

Whether the compliance officer reports to the general counsel or the CEO is “not going to govern an analysis of whether the compliance function is working,” Weismann added. What’s more important than where compliance is housed, he said, is the independence of the function, that the compliance officer has a “voice at the table” and can be heard by the board, he said.

Regarding policies, other questions that prosecutors will assess include:

Are the company’s compliance policies clear and in writing?

Does the company ensure that compliance policies are effectively communicated to all employees in all geographies?

Are the policies translated into languages spoken by the company’s employees?

Are written policies easy for employees to find?

Do employees have repeat training, including on what to do or with whom to consult when issues arise?

Does the company foster a speak-up culture where employees feel comfortable coming forward with issues?

The key lesson in all of this is that companies should not underestimate the value that a robust compliance function brings to a favorable settlement with the government. “The effectiveness of a compliance program so often plays a central role in the department’s decision about how to resolve a case against a company,” says O’Neil from Debevoise & Plimpton. “It can, and often does, mean the difference between a declination and some kind of criminal action against the company.”