The State of Compliance Law in 2013

2012 was an eventful year with regard to corporate ethics and compliance legal issues. There were a number of important court decisions that will have an impact in 2013 and beyond, and several major corporate players found themselves a little lighter in the wallet due to ethical breaches and noncompliance.

Attorneys Jeff Kaplan and Rebecca Walker of Kaplan & Walker LLP, a law firm specializing in assisting individuals and corporations with issues related to compliance and business ethics, summarized the year’s happenings during a recent presentation entitled “Compliance and Ethics in 2013: The State of the Law.” Here are a few of the highlights:
Individual Liability for Directors and Officers

One 2012 court case spoke to the individual liability a corporation’s directors and officers have for the actions of company personnel. In Stone v. Ritter, the Delaware Supreme Court dismissed a suit brought by shareholders of AmSouth Bancorporation against the company’s board of directors. The suit alleged that the board failed to act in good faith, maintaining that the inadequacy of the company’s compliance program resulted in violations of the federal Bank Secrecy Act that led to substantial fines.

The Court dismissed the complaint, determining that directors can only be held liable in situations where the board’s sustained or systematic failure to exercise oversight occurs. According to the ruling, the complainants failed to establish that a lack of good faith on the part of the board existed in this situation.

A Costly Year for Many Companies

According to Kaplan, five of the 10 largest compliance-related fines in U.S. history were levied in 2012. At the top of the list was BP, which was assessed a fine in the amount of $1.265 billion for criminal environmental offenses it was found to have committed in relation to the 2010 crude oil spill in the Gulf of Mexico. Other notable companies receiving substantial fines included pharmaceutical giants Pfizer, Eli Lilly, GlaxoSmithKline, and Abbott Laboratories. Kaplan expects the trend of large fines for C & E failures to continue for the foreseeable future based on the current climate where Foreign Corrupt Practices Act (FCPA) prosecutions are on the upswing.
Notable Whistleblower Cases in 2012

In September 2012 the Internal Revenue Service awarded $104 million to Bradley Birkenfeld, a former employee of Swiss banking giant UBS. Birkenfeld helped the IRS uncover UBS’s fraudulent activities involving the hiding of billions of dollars in secret Swiss accounts for wealthy Americans seeking to avoid taxation. The award was the largest amount given to an individual corporate whistleblower in U.S. history.

In a separate case GlaxoSmithKline received a $3 billion fine and pleaded guilty to federal charges for its practice of offering bribes to physicians to induce them to push off-label drugs not approved by the FDA, and for illegally marketing drugs to children. The investigation into GSK’s activities stemmed in large part from information provided by two former company employees who said they were fired for failing to support the company’s tactics.
Social Media Case

A ruling by the National Labor Relations Board in 2012 set an important precedent regarding social media and corporations. In September the NLRB ruled that Costco Wholesaler Corp.’s policy of restricting what employees say about the company on social media sites was illegal. Costco’s policy indicated that any derogatory statements posted online about the company could result in disciplinary action, including possible termination.
Release of Key Government Publication

November 2012 saw the release of an important publication regarding the FCPA. A Resource Guide to the U.S. Foreign Corrupt Practices Act, a joint publication of the Department of Justice and the enforcement arm of the Securities and Exchange Commission, was developed to serve as a road map for companies looking to develop an effective compliance program. The guide addresses a number of pertinent issues including:

  • Risk assessment
  • Compliance program structure
  • Training
  • Codes of ethics
  • Discipline
  • Incentives
  • Reporting procedures
  • Investigations

Hallmarks of an effective compliance program are also included to serve as a model for corporations seeking to implement or enhance their own C & E program.

Lessons Learned in 2012

Kaplan and Walker pointed out that there are a number of lessons that companies can learn from what transpired in the realm of compliance and ethics in 2012:

  1. Make sure your compliance officer has proper authority to enforce compliance and ethics policies.
  2. Self-reporting is highly beneficial when attempting to minimize the damage when a major ethical breach occurs.
  3. Tying bonuses for senior executives to ethical performance is an effective means of enhancing compliance.
  4. Removing negative incentives can reduce the risk of ethical breaches.
  5. A compliance department that works hand-in-hand with the company’s legal department can help to minimize C & E risk.

For more information regarding how to remain in compliance with FCPA regulations, download the publication Prevention of Liability for FCPA Violations by Jeffrey M. Kaplan and Rebecca Walker.

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