Top Five Ethics and Compliance Failures of 2015

Same story, different year: pressure from senior leaders, a laissez-faire attitude toward bribery and corruption, and middle managers that neither practice nor value a robust culture of ethics and compliance all resulted in some of the biggest corporate faux pas of 2015.

Corporate wrongdoing of the most egregious kind ran the gamut last year—from mercilessly skirting health and safety laws in the name of cost-savings to paying bribes to win contracts to brazenly overstating financials and violating sanction laws—pulling the wool over the eyes of regulators and shareholders alike.

Below is our list of the top five biggest ethics and compliance failures of 2015, and the lessons they impart.

#1 Volkswagen

Four months after Volkswagen (VW) confessed—and only in response to regulatory threats—that it had willfully designed and installed software known as “defeat devices” to evade federal emissions standards in 11 million of its vehicles around the globe, the aftermath of VW’s emissions evasion scandal continues to unfold.

The wrongdoing dates back to 2008, when several top managers who painstakingly spent several years developing what was to be VW’s most important new diesel engine, realized these engines were not able to meet U.S. emissions standards. Not wanting to halt production and toss years of investment down the drain, managers decided instead to evade emissions standards altogether.

From a compliance and ethics standpoint, however, the behind-the-scenes story of VW’s fallout is just as grim, perceived to be cultivated by the highest echelons of the company. One factor that contributed to the scandal, for example was a “mindset in some areas of the company that tolerated breaches of rules,” VW said on its website, discussing its reorganization plan. “It is clear that, in the past, deficiencies in processes have favored misconduct on the part of individuals.”

What did not help was a Board-level interest in both leading the world in new automobile sales, as well as a desire to provide job growth within the company itself. A persistent anti-environmental mindset within high levels of both managerial and engineering offices one set the stage further for disaster.

“This company has to bloody learn and use this opportunity in order to get their act together. Six hundred thousand people worldwide have to be managed in a different way. This is very, very clear.”

Michael Horn, CEO, Volkswagen Group of America

This is a case of a company so starving to be the best in its industry that it ultimately devoured itself. CEO Martin Winterkorn resigned. Several managers were fired. The fines and penalties alone could hit $20 billion. And sanctions and civil lawsuits are springing up like weeds, from Washington to Europe to state capitals all over the country.

“This company has to bloody learn and use this opportunity in order to get their act together,” Michael Horn, CEO of Volkswagen Group of America, candidly answered during congressional testimony when asked how Volkswagen intends to improve its corporate integrity. “Six hundred thousand people worldwide have to be managed in a different way. This is very, very clear.”

Very clear, indeed.

#2 Petrobras

The massive corruption probe surrounding Brazil’s state-owned oil company Petrobras began to unfold in 2014, when allegations surfaced that Petrobras awarded inflated contracts to construction and engineering companies, which then funneled kickbacks to Petrobras executives and politicians. In total, more than 200 companies and 80 individuals now face possible charges.

To put this scandal in its proper context, consider that Brazil is facing grave economic challenges across the board, including a recession so deep that it (among other things, including a campaign contribution scandal) threatens the job of embattled President Dilma Rousseff.

In an effort to clean up its act, Petrobras this month appointed João Adalberto Elek as its first governance, risk and compliance officer who will be responsible for mitigating future risk for the company, including instances of fraud and corruption. Elak’s appointment, however, may be too little, too late.

“An effective, independent compliance organization should be one of the first elements established in any company, and it certainly should have been present in a company the size of Petrobras,” says Randy Stephens, vice president of Advisory Services at NAVEX. Establishing an ethics and compliance program after a scandal has already erupted is “a bit like buying homeowner’s insurance after the house has already burned to the ground through neglect,” he says.

At Petrobras, the ethics and compliance program “should have been run by someone with a proven track record of independence and a demonstrated ability to run this type of organization free from undue influence,” adds Stephens. “Without top-down commitment, reinforcement, and support by example, this process will fail. Culture trumps compliance, so before anything else is done, the culture has to be reset.”

#3 FIFA

Few scandals have so completely permeated an organization—both in terms of geographical reach and number of officials involved—as the corruption scandal involving the Fédération Internationale de Football Association (FIFA), the international governing body of professional soccer.

As the bribery scandal unraveled, the Justice Department charged 14 defendants with racketeering, wire fraud, and money laundering conspiracies, among other offenses for engaging in a 24-year corruption scheme in which high-ranking soccer officials abused their positions of trust to acquire millions of dollars in bribes and kickbacks.

VOLKSWAGEN UPDATE

Below is an excerpt from Volkswagen, describing progress on its investigation, technical solutions, and plans to realign its management team.Group Audit has identified process weak points
Extensive internal investigations, which were subject to external independent review, did not confirm the suspicion of irregularities during the CO2 certification process. Now, the first significant findings in the investigation of the nitrogen oxide (NOx) issue are available. Group Audit’s examination of the relevant processes indicates that the software-influenced NOx emissions behavior was due to the interaction of three factors:
• The misconduct and shortcomings of individual employees
• Weaknesses in some processes
• A mindset in some areas of the Company that tolerated breaches of rules.
It is clear that, in the past, deficiencies in processes have favored misconduct on the part of individuals. This is true, for example, for test and certification processes affecting our engine control devices, which were not suited to preventing use of the software in question. Group audit has suggested specific remedies to correct this. We are concentrating on structuring these processes more transparently and systematically. For example, in the future, software for engine control devices will be developed more strictly in accordance with the 4-eyes principle. In addition, the bodies responsible for the release of such software are being reorganized. They will be given more sharply defined and binding powers and responsibilities. Deficiencies were also found in reporting and monitoring systems. The main problem there was that responsibilities were not sufficiently clear. Volkswagen will now further sharpen them. Group audit also found deficiencies in some areas of Volkswagen’s IT infrastructure. These deficiencies will also be remedied. Volkswagen will introduce IT systems that allow individual processes to be monitored with greater efficiency and transparency. This will simultaneously reduce our dependence on individuals when problematic processes have to be identified and, if necessary, escalated. As Pötsch stated: “Group audit’s investigation is producing valuable findings, which will help us create a structure that, rather than favoring breaches of regulations, will prevent them, or at least allow them to be detected early on.”
The company has already drawn a key conclusion based on group audit’s findings, namely that its testing practice must undergo comprehensive changes. Volkswagen has decided that in the future emissions test will be evaluated externally and independently. In addition, randomly selected real-life tests to assess emissions behavior on the road will be introduced. Chairman of the Supervisory Board Pötsch stated: “We hope that this will help Volkswagen regain lost trust.”
Source: Volkswagen

In December, FIFA’s ethics committee slapped an eight-year suspension on Sepp Blatter, the 79-year-old disgraced former head of FIFA, and UEFA president Michel Platini concerning a $2 million payment Platini received in 2011 from FIFA and authorized by Blatter. The continuing aftermath of the scandal took a new turn this month, when FIFA fired Secretary General Jerome Valcke amid corruption allegations involving World Cup ticket sales.

From a cultural standpoint, one factor that made the scandal so egregious was the “sense of entitlement that seems to have pervaded FIFA and the feeling by many accused officials—including Platini and Blatter—that they have done nothing wrong,” says Andrew Foose, vice president of Advisory Services at NAVEX Global. “The arrests and indictments of FIFA officials are riddled with lower-level and regional officials who likely saw their behaviors as a natural extension of what they saw at the central level. If an organization truly wants to promote an ethical culture, its leaders must lead by example every day.”

#4 Toshiba

When it was discovered that Japan-based Toshiba had overstated its earnings by $1.3 billion over the last seven years, an independent panel concluded that several top executives at the company not only tolerated but encouraged a profit-over-principle culture.

According to an investigation report, “a corporate culture existed at Toshiba whereby employees could not act contrary to the intent of their superiors.” This culture ultimately led to “inappropriate accounting treatments to achieve the targets in line with the will of their superiors.” The intentional overstatements of revenue and delay in booking losses ultimately led to demands for larger misstatements in succeeding periods.

The fallout from that scandal resulted in the resignation in of Toshiba’s then-CEO Hisao Tanaka and seven other executives, leading to a complete restructuring of its management team. In December, Toshiba announced a “Revitalization Action Plan,” which described, in part, how the company intends to reform its culture and prevent recurrence of inappropriate accounting.

“This is the greatest damage to our brand in our 140-year history,” said Tanaka before he resigned, underscoring what everybody already knows: that Toshiba surely has a long road of recovery ahead.

#5 Deutsche Bank

Deutsche Bank in November 2015 reached a $258 million settlement with the New York State Department of Financial Services and the Federal Reserve regarding transactions with countries and entities subject to U.S. economic sanctions.

From at least 1999 through 2006, Deutsche Bank used non-transparent methods and practices to conduct more than 27,200 U.S. dollar clearing transactions valued at over $10.86 billion on behalf of Iranian, Libyan, Syrian, Burmese, and Sudanese financial institutions and other entities subject to U.S. economic sanctions, including entities on the Specially Designated Nationals List of the U.S. Treasury Department’s Office of Foreign Assets Control.

What makes the case one of the worst ethics and compliance failures of 2015 is the brazen way in which bank employees intentionally went about circumventing U.S. sanctions controls. For example, bank relationship managers and other employees worked with the bank’s sanctioned customers on how to conceal the details about their payments from U.S. correspondents, according to the New York State Department of Financial Services (NYDFS).

“In addition, some evidence indicates that at least one member of the Bank’s Management Board was kept apprised about and approved of the Bank’s business dealings with customers subject to U.S. sanctions,” the NYDFS said.

The bank even had “OFAC-safe” handling procedures in which certain non-U.S. employees, especially those who managed relationships with a high number of sanctioned clients or who regularly processed U.S. dollar payments for sanctioned customers, regularly educated colleagues in other branches or in other divisions outside the United States about handling U.S. dollar payments. Newly hired payments staff in overseas offices received a training manual, including a section on how to handle payments with a sanctions connection. 

A Year of Behaving Badly

Each of the top five most significant ethics and compliance failures of 2015 have several factors in common: a poisonous culture that permeated from the highest levels of the company; middle managers who were not only willing but encouraging of other employees to bypass policies and procedures, and an overall attitude that bribery and corruption is merely a cost of doing business.

These are not new phenomena in the world of compliance. And the way in which these problems manifested themselves at each of these five companies is hardly novel. What these scandals do illustrate is that some times, the most far-reaching kinds of compliance failures are also the most fundamental ones.

For those companies looking to avoid this kind of significant wrongdoing that makes global headlines, they may want to review the lessons above. Then again, those companies concerned about significant wrongdoing in the first place are probably already off to a good start.