Risk Management

After the Settlement, He’ll Be Watching You

A court-mandated compliance monitor explains what happens after a company makes a deal with the government over bribery charges.
Sarah JohnsonJuly 11, 2011

The increasing number of settlements between companies and authorities over bribery-for-business cases usually include public promises to pay hefty penalties and clean up compliance programs. Added on top of the punishment is often an independent monitor to keep these companies in line.

What happens next occurs beyond the public’s view. In the following edited interview with CFO, Kevin Abikoff, a partner at law firm Hughes Hubbard & Reed who was recently appointed as Innospec’s compliance monitor, explains what companies can expect if they ever have to hire a monitor — plus how to avoid needing one.

Earlier this year, Abikoff was hired to keep an eye on Innospec, a chemical company that pleaded guilty in 2010 to wire-fraud charges related to kickbacks and violations of the U.S. Foreign Corrupt Practices Act (FCPA). As part of its $40.2 million settlement with U.S. and U.K. regulators, Innospec agreed to have an external compliance monitor for at least three years. The company expects Abikoff’s presence will cost it $3.9 million.

Abikoff has previous experience with FCPA investigations and served as an independent compliance monitor for a French inspection-services company. His appointment at Innospec comes as the U.S. Department of Justice considers FCPA enforcement a priority, new Securities and Exchange Commission rules could encourage more FCPA tips, and an FCPA-like law in the United Kingdom — the U.K. Bribery Act — goes into effect.

Abikoff

How did you get this new role?
I was short-listed as one of four potential monitor candidates by the company. I’d like to believe I was chosen because I bring to the engagement a deep and extensive background in anticorruption matters around the world. I’ve traveled extensively doing engagements for companies in every place you want to be and a lot of places you don’t. I was also a general counsel of a $23 billion company. You have to be able not only to understand what the U.S. Sentencing Guidelines and the new U.K. Serious Fraud Office [SFO] guidelines say, but you have to understand as a practical matter how to apply that in the context of a real operating company where people have to show up to work every day and actually live by the rules.

How much time do you spend in your monitoring duties? I assume you keep your day job, right?
I definitely keep my day job. Any client engagement is lumpy in that there are periods of intense activity and then periods of potentially diminished activity. There’s the creation of an initial work plan, the execution of that work plan, and then the preparation of a report. It’s worth mentioning I don’t execute this undertaking alone; I utilize the lawyers in the firm, including partner John Wood.

Whom do you ultimately work for?
The company pays my bills, but it’s not my client. There is no attorney-client relationship or privilege. On the other hand, I’m not paid by the Department of Justice or Securities and Exchange Commission or the SFO, but rather have to report to them. In a sense, I have no clients at all. We have obligations to the government and an obligation, indirectly, to the shareholders of Innospec to do a credible job to ensure going forward that this company is doing the right things.

What do you do as compliance monitor?
First and foremost, we collect and review potentially relevant documents, including things like the company’s polices and procedures related to anticorruption. We look at other things that will help us assess the tone at the top of the organization, including the seriousness with which management approaches anticorruption compliance, such as training and communication. Then we will go out and talk to people. We will also visit the company’s more remote locations for the purpose of understanding the extent to which the culture of compliance has been communicated and embedded into the operations in those places. Our duty is to ensure that there’s no conduct being undertaken today that poses significant risk of violating anticorruption standards.

What will your reports to the government entail?
We will produce an annual report for each of the three years this monitorship exists. There are also opportunities for informal communication as we go along to answer questions the government may have or to provide information as we deem appropriate. For example, if we brought evidence that we believe is tantamount to a violation of the law to the company and the company refused to respond in a credible way, there are procedures in place to bring that to the government’s attention.

Why are outside compliance monitors a key part of these settlements?
A company that has been found guilty of having violated anticorruption laws is in a difficult position. It has lost the trust and faith of the government in many ways. The compromised position is for the government to basically outsource to a qualified third party to go in and execute these monitoring obligations so that the government can get continuing assurance that the company is currently complying with the law and will continue to do so. There’s also a bit of an understanding that a company that settles can’t flip a switch and go from a company that did something wrong to a company that is perfect. Cultural changes take years. Also, the presence of the monitor gives the company’s compliance and legal people the bully pulpit to ensure that they get the resources they need to embed the kind of cultural changes that are necessary for compliance.

How do companies’ internal investigations — usually conducted before a settlement is reached — fall short?
Oftentimes companies spend a lot of resources on the investigation and then fail to put in place adequate policies and procedures to assure that there is not future conduct. The other issue is even when you put those policies in place, they’re meaningless if they just live on paper. Paper policies can in fact do you more harm then good because they’re the standard by which you are measured [by authorities]. And if they’re not properly communicated and they’re not taken seriously through appropriate tone driven from the top, then the changes to policies and procedures would be meaningless.

How can CFOs mitigate the risk of corruption occurring at their companies, particularly in far-off places?
If I were a CFO today or any senior corporate executive doing international business, I would be focused on what extent my company uses commercial agents for business-development purposes. I would look at the extent to which my company is involved with joint ventures and the extent to which we utilize distributors or subcontractors. I would be looking at how we do customs clearance and freight forwarding. By joint ventures, I’m not using the strictly legal sense of the word but consortia-type arrangements where you’re grouping yourself together with other companies, particularly local companies. For example, if you’re operating in Nigeria and you partner with a Nigerian manpower company, you’re going to have heightened risk compared to just opening your own company there.

Do you think the SEC’s new whistle-blower rules will result in more FCPA tips, as many people predict?
It’s like raising children. When you reward good behavior, you can expect to get more of it. The new rules are rewarding people for coming forward with information about potentially illicit conduct where the reward could be generational wealth. Some of these anticorruption settlements have been in the hundreds of millions of dollars. With rewards of 10% to 30% of that, even at the low end of a $250 million settlement — which is no longer aberrant — that would take care of [a whistle-blower’s] children and grandchildren for a long time. That will tempt a number of people.