Embed Size (px)
Citation preview
COMPLIANCE &
HOW IT STARTED AND WHY DO WE NEED IT?
Lucia Ana Tomić
Director Compliance and Management Board Support at HPB
MBA
University of Zagreb
Faculty of Law
Faculty of Economics and Business
Corporate law, Banking law, Financial law, Labour law
Is it definitely clear what is Compliance?
Book written by Dan Ariely‘The (honest) truth about dishonesty’
Story about All Art Enthusiasts
• Store – J.F.Kennedy Center for performing Arts in Washington D.C
• 300 well-intentioned volunteers
• 150.000,00 $ worth merchandise disappeared each year
• After discovering the theft stopped after discovering that oneemployee stole 60$?
• Moral story – We are going to take things from each other if we havechance, so many people need control around them, for them to do theright thing
WHAT IS IT?
• It is not just legal matter
• The term compliance describes the ability to act according to an order, set of rules or request
• In the context of financial services businesses compliance operates at two levels:
Level 1 - compliance with the external rules that are imposed upon an organization as a wholeLevel 2 - compliance with internal systems of control that are imposed to achieve compliance with the externally imposed rules
Conflict of interest, as a starting point
• We assume that people know what is wright and what is wrong
• Rising awareness of wrongful doing
• Built circle of trust
• Sherron Watkins, Former Vice President of Enron
• ‘I think it all began in 1996 when Kenneth Lay (the CEO) instructedeverybody in the company to use his sister's travel agency for businesstrips… There were many small steps in the wrong directions, andgradually we lost our way’
Is inside trading first step?
WHEN IT STARTED?
HOW IT STARTED?
• In June 1906, President Theodore Roosevelt signed into law the Food andDrug Act
• 1972 Watergate - Jimmy Carter passed the Foreign Corrupt Practices Act(FCPA) - mandatory ethics courses in Law schools
• Sarbanes-Oxley Act (SOX) of 2002: SOX was enacted in response to thehigh-profile Enron and WorldCom financial scandals to protectshareholders and the general public from accounting errors and fraudulentpractices in the enterprise
• Among other provisions, the law sets rules on storing and retainingbusiness records in IT systems
• Dodd-Frank Act: Enacted in 2010, this act aims to reduce federaldependence on banks by subjecting them to regulations that enforcetransparency and accountability in order to protect customers
Consequences
• Employing compliance officers – answer to every new scandal
• JP Morgan Chase & CO:
- London Whale scandal to cost JP Morgan 920mil$ in penalties
- USA biggest bank to pay penalties to US and UK regulators for ‘unsound practices’relating 6,2 bln$ losses that year
• After that 3.000 compliance officers were employed
• 750.000 hours of training regarding compliance issues
• Resulting for compliance officers to be at top 20 best jobs
https://money.usnews.com/careers/best-jobs/compliance-officer#close-modal
• Paul McNulty, Former U.S. Deputy attorney general ‘If you think compliance isexpensive, try non-compliance’
LEGISLATION
1. Primary legislation - refers to the Law, Act or Ordinance passed by thelegislative of a particular jurisdiction
2. Secondary legislation - In the context of financial services, secondarylegislation is generally legislation that has been drafted by a regulatory bodyempowered to do so pursuant to the primary law by which it is established(EBA, ESMA…)
Complay or explain rule
• Codes generally set out the broad principles by which a regulated business isexpected to conduct its business.
• Rules are generally very detailed and relate to every regulated activity andfunction.
• Guidance can either be in the form of a statement of best practice or a statementof minimum best practice - Anti money laundering and terrorist financing is one area where most regulators around the World have issued guidance
Where is Compliance in the company?Three lines of defence
The board provides direction to senior management by setting the organisation’srisk appetite
To ensure the effectiveness of an organization's risk management framework, the board and senior management need to be able to rely on adequate line functions –including monitoring and assurance functions – within the organization
How to build a Compliance program
Effective ethics and compliance programs exist to:
• Promote a culture encouraging ethical conduct and commitment to compliance with law
• Prevent and detect wrongdoing
• Enable and facilitate compliance with applicable laws, standards and corporate policies
Key elements and indicators of “effective” programs include:
• Clear and applicable Standards and Procedures
• High-level Oversight & Accountability
• Due care in Delegation of Authority
• Training & Communication
• Monitoring, Auditing and Reporting
• Consistent Enforcement & Incentives to promote Compliance
• Consistent Response & Remedial Measures
• Periodic and on-going Risk Assessment & Continuous program improvement
How to define a line?
Tone at the top, is it enough?
Compliance is responsibility of every employee
What does a Compliance Officer fulfill?
Compliance officers make sure companies and governing bodies stay in line with internal policies and regulatory requirements
• DUTY - The Compliance Officer has a duty to his employer to work with management and staff to identify and manage regulatory risk
• OBJECTIVE - the overriding objectives of a compliance officer should be to ensure that an organization has systems of internal control that adequately measure and manage the risks that it faces
• RESPONSIBILITY - The general responsibility of the Compliance Officer is to provide an in-house compliance service that effectively supports business areas in their duty to comply with relevant laws and regulations and internal procedures
Key functions of a Compliance Department
1. Identification - to identify the risks that an organization faces andadvise on them
2. Prevention - to design and implement controls to protect anorganisation from those risks
3. Monitoring and detection - to monitor and report on theeffectiveness of those controls in the management of anorganisations exposure to risks
4. Resolution - to resolve compliance difficulties as they occur
5. Advisory - to advise the business on rules and controls
Effective compliance programme
25 % - rules, legislation, procedure…
75 % - effective communication and education
WHISTLE - BLOWING
• Whistle-blowing is the act oftelling the authorities or the public that the organization you are working for is doingsomething immoral or illegal
How it all started?
• The False Claims Act (1863) also called the "Lincoln Law" is an American federal law thatimposes liability on persons and companies who defraud governmental programs.
• It is the federal Government's primary litigation tool in combating fraud against theGovernment
• EU – 1972 – Stanley Adams versus Roche
• The law includes to file actions on behalf of the government informally called"whistleblowing'' Persons filing under the Act stand to receive a portion (usually about15–25 percent) of any recovered damages
• As of 2012, over 70 percent of all federal Government FCA actions were initiated bywhistleblowers
• Claims under the law have typically involved health care, military, or other governmentspending programs, and dominate the list of largest pharmaceutical settlements
• The government recovered $38.9 billion under the False Claims Act between 1987 and2013 and of this amount, $27.2 billion or 70% was from cases brought by whistleblowers
CONCLUSION
• There is no model that oneCompliance model fits allcompanies – tailor made
• Easy compliance test - Everytime you have to face a difficultdecision, specially the one that ischallenged from ethical aspect,do not choose one that you don’twant to see on the cover ofnewspapers, because reputationmatters
