A compliance failure in a company can feel like a personal and professional failure to chief compliance officers. The more urgent question, however, is whether it might also bring personal or professional liability.
At Compliance Week 2015, enforcement officials with the Securities and Exchange Commission and the Justice Department, as well as compliance professionals themselves, tried to answer that question and explored how CCOs can protect themselves from such risk.
During a keynote speech, Leslie Caldwell, assistant attorney general for the Justice Department’s Criminal Division, tried to ease compliance officers’ concerns that they may be found personally liable for compliance lapses in oversight. “We view compliance as the frontline of defense against all the problems that come to our attention,” she said. “We’re not out there looking to make examples of, or prosecute, compliance officers.”
Stephen Cohen, associate director of the SEC’s Division of Enforcement, shared that sentiment during another panel discussion. “I can promise you we are not sitting around looking for ways to charge chief compliance officers,” he said. “In my opinion, we’re in the same line of work; we’re partners in ensuring sound and effective compliance cultures are part of the business.”
Regardless, the SEC and Justice Department are enforcement agencies, and they will prosecute individuals who fail to act in good faith, or who mislead regulators in any way. CCOs are no exception to this rule, as indicated by a handful of recent cases.
Last month, for example, the SEC brought charges against Bartholomew Battista, the former CCO of asset manager BlackRock Advisors, and fined him $60,000 for failing to report a “material compliance failure” to the firm’s board of directors. Blackrock agreed to a related $12 million penalty.
Specifically, Blackrock and Battista failed to disclose that Daniel Rice, a top-performing portfolio manager, was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned oil and natural gas company. Rice Energy later formed a joint venture with a coal company that eventually became the largest holding in the BlackRock Energy & Resources Portfolio.
“We view compliance as the frontline of defense against all the problems that come to our attention. We’re not out there looking to make examples of, or prosecute, compliance officers.”
Leslie Caldwell, Assistant Attorney General, Justice Department
“BlackRock knew and approved of Rice’s investment and involvement with Rice Energy as well as the joint venture, but failed to disclose this conflict of interest to either the boards of the BlackRock registered funds or its advisory clients,” the SEC said in a statement. “BlackRock additionally failed to adopt and implement policies and procedures for outside activities of employees, and Battista caused this failure.”
In another example, the Treasury Department’s Financial Crimes Enforcement Network last year fined Thomas Haider, the former CCO for MoneyGram International, $1 million for failing to ensure that his company abided by the anti-money laundering provisions of the Bank Secrecy Act. The Financial Industry Regulatory Authority similarly fined a compliance officer last year for substantial anti-money laundering compliance failures. In that case, Harold Crawford, former global AML compliance officer for investment bank and securities firm Brown Brothers Harriman, was fined $25,000.
It’s no wonder compliance officers are feeling the heat. As Ellen Hunt, director of ethics and compliance for AARP, quipped: “You can’t put corporate culture in an orange jumpsuit.”
A recent survey by Thomson Reuters echoed that concern. The report found that 59 percent of nearly 600 compliance professionals in financial services firms said they expect their personal liability to increase in 2015. That figure is up from 53 percent who gave the same response last year.
Preventing Personal Liability
Despite an increasing number of enforcement actions imposed on CCOs, the news isn’t as dismal as it sounds. “People who perform their responsibilities diligently, in good faith, and in compliance with the law are our partners, and they’re not responsible, typically, from a liability perspective,” Cohen said during a keynote panel at Compliance Week 2015.
The idea that a compliance officer would face criminal liability for acting in good faith, even in the event of a compliance failure, is “almost inconceivable,” Caldwell said. In reality, the CCOs who have faced a civil or criminal case either directly participated in the misconduct, mislead regulators, intentionally ignored their compliance responsibilities, or all of the above.
During an investigation, Cohen said, the first thing the SEC will examine is how the CCO handled an issue as it arose. That means compliance officers should document every decision they make to demonstrate that they took adequate measures, in the event that enforcement agencies come knocking.
Patrick Smith, co-chair of the white-collar corporate crime and investigations practice at DLA Piper, advised that CCOs further document every decision they make during the investigation phase and the resolution phase, including any disciplinary measures. “The most effective thing you can do when there is a significant compliance lapse is to fire someone,” he said.
In the MoneyGram case, for example, FinCEN particularly faulted Haider’s failure to suspend or terminate any agents participating in illicit activity. “His inaction led to thousands of innocent individuals being duped out of millions of dollars through fraud schemes that funneled, and sometimes laundered, their illicit profits through MoneyGram’s money transmission network,” FinCEN said at the time.
CCO PERSONAL LIABILITY CASES
Below is a summary of enforcement actions brought by various enforcement agencies against chief compliance officers for alleged compliance lapses in oversight.
Agency: U.K. Serious Fraud Office
Case Summary: On May 12, 2015, the U.K. Serious Fraud Office charged Jean-Daniel Lainé, former senior vice president of ethics and compliance of Alstom International Limited, with violating Section 1 of the Prevention of Corruption Act, as well as two offenses of conspiracy to corrupt in violation of Section 1 of the Criminal Law Act. The alleged offenses took place between 2006 and 2007 and concern the supply of trains to the Budapest Metro. The matter has been sent for trial at Southwark Crown Court.
Agency: Securities and Exchange Commission
Case Summary: On April 20, 2015, the SEC charged Bartholomew Battista, the former chief compliance officer of asset manager BlackRock Advisors and fined him $60,000 for failing to report a “material compliance failure” to the firm’s board of directors. Blackrock agreed to a related $12 million penalty. According to the SEC, Blackrock and Battista failed to disclose that Daniel Rice, a top-performing portfolio manager, was managing energy-focused funds and separately managed accounts at BlackRock when he founded Rice Energy, a family-owned and operated oil-and-natural gas company. Rice Energy later formed a joint venture with a coal company that eventually became the largest holding in the BlackRock Energy & Resources Portfolio.
Agency: Financial Crimes Enforcement Network
Case Summary: On Dec. 18, 2014, FinCEN fined Thomas Haider, the former CCO for MoneyGram International $1 million for failing to ensure that his company abided by the anti-money laundering provisions of the Bank Secrecy Act. Concurrently, the U.S. Attorney’s Office for the Southern District of New York filed a complaint in U.S. District Court that seeks to enforce the penalty and bar Haider from future employment in the financial industry.
Agency: Financial Industry Regulatory Authority
Case Summary: On Feb. 5, 2014, FINRA fined Harold Crawford, former global AML compliance officer for investment bank and securities firm Brown Brothers Harriman (BBH), $25,000 for substantial anti-money laundering compliance failures, including its failure to have an adequate anti-money laundering program in place to monitor and detect suspicious penny stock transactions. BBH agreed to a related $8 million fine.
Source: Compliance Week.
“When the investigation breaks out, your entire track record and your responsibilities as a compliance officer are going to be looked at,” Smith said. The question, he said, is, “Will you be deemed to have been willfully blind or constantly avoided the wrongdoing in your organization?”
Panelists also talked about the role of CCOs as whistleblowers. Generally, the expectation is that compliance officers who receive internal reports of wrongdoing will investigate those reports in the ordinary course of business. “We’re not looking to change that structure,” Cohen said. The idea of giving whistleblower awards to CCOs is “hopefully that it opens compliance officers’ eyes that there is another option—not the first option, but another option.”
Compliance officers’ eyes were certainly opened earlier this year, when one of their own received more than $1 million as a whistleblower award against his or her own company. The SEC has never identified the person, the company, or even exactly what he or she did there—the agency only disclosed that the winner was a “compliance or audit” executive.
The compliance officer in that case felt disclosure to the SEC was necessary, Cohen said, because management was aware of illicit activity and wasn’t doing anything about it. “The chief compliance officer wasn’t sitting around spotting wrongdoing and rushing to the SEC to try to make money,” Cohen said.
A requirement to report to the very same people who already know about wrongdoing “doesn’t make a lot of sense to me,” Cohen said. “This compliance officer did what, quite frankly, I think they ought to have done: They looked for another path to rectify [the problem].”
Whistleblower awards are “an important lifeline,” Hunt said. Although cleaning up misconduct internally is the best avenue to take, compliance officers know that “sometimes our colleagues lie to us,” she said. “They don’t tell us the truth, so you have to be diligent.”
You have to seek that balance between your loyalty to the company and doing what’s right, Hunt added. “Sometimes you’re going to have to die on that sword.”