Roundtable: Mastering Compliance and International Disputes
Posted on Jul 15, 2015
From compliance to international disputes, what are the unspoken dimensions, recent trends and best practices? How to handle compliance in a global context where differences and diversity prevail? On June 24, 2015, five leading international experts gathered at the International Legal Alliance Summit & Awards (ILASA) in New York to share their insights and perspectives.
Speakers:
Suzanne Folsom, General Counsel, Chief Compliance Officer & Senior VP-Government Affairs, U. S. Steel Corporation
Zachary Klughaupt, Senior Counsel & Associate, Compliance Officer, Ansell
David Marriott, Partner, Cravath
Jean-Philippe Thibault, Partner, Altana
Glenn Ware, Principal Leader, U.S. Corporate Intelligence Practice Group, PwC
Moderator:
Pierre Lorenceau, Founder & CEO, Leaders League
Pierre Lorenceau. From pharmaceutical to banks, an increasing number of industries are highly regulated. Has compliance become a critical mission and core block of risk management?
Zachary Klughaupt. The key elements of compliance are the following: first, it involves a set of processes, usually owned more by the IT and finance departments rather than Legal or Compliance, to implement effective financial controls; second, compliance has a training core to make sure that everybody at the company has a basic idea of the roles and responsibilities of relevant departments, and knows where to report; third, company leadership must create a “culture of compliance”, a culture where people feel comfortable to report issues. You want people to be valued for whistle blowing and reporting dangers, and they must not feel like they are "being the rat."
Suzanne Folsom. A robust compliance program is a business necessity. When I joined U. S. Steel in January 2014, the first thing I did was bring in PwC to conduct a comprehensive compliance and risk assessment. It was an important first step because it introduced an external eye, which helped us to better understand the gaps and areas for improvement in our compliance program.
Additionally, this opening move proved to be very powerful because it sent a clear message to management and to all employees that compliance is and will be a major focus for the Company.
In my view, companies must view compliance as a living process, rather than a “we have thought about it and checked the boxes” sort of thing. This process requires constant tinkering and customization to meet the unique demands of your evolving company. Companies must understand that there is no one-size-fits-all approach to compliance. No single compliance program can effectively apply to two different companies because no two companies are the same. If you fail to recognize this very simple reality, it will leave your company unprepared, vulnerable to litigation or, worse yet, government investigations.
The real challenge for legal and compliance departments is to demonstrate to upper management that lawyers are also business leaders, and that a best-in-class legal department provides tremendous value to the company. It is not a profit-draining cost center. We must articulate the benefits of compliance: that it provides a tangible competitive edge because it sends a direct message to all your stakeholders that you are a reliable business partner. At the same time, it permits you to focus on the growth of your business rather than on litigation and other risks. No matter how you look at it, preventing and/or containing problems that carry significant costs is always an added value.
Pierre Lorenceau. If compliance does not work, litigation becomes the option. What are the trends in international litigation?
David Marriott. In an increasingly global world, the diversity of problems has never been so great. As such, we have observed three recent developments in complex international disputes. First, there has been an increase in the globalization of legal disputes. A good measure is the increase in both the number of international arbitration claims being filed each year and the aggregate value of those claims. Second, there has been an increase in the multinational dimension to litigation. Recently, I represented an Italian television maker who was in dispute with a Dutch company concerning a joint venture with a Korean company. While the trial took place in the US, the action was brought in the Netherlands and depositions were taken in Germany, Australia, Hong Kong, and other countries. This case speaks to the fact that one must anticipate the growing prospect of litigation spanning the globe.
Finally, there has been an increase in antitrust enforcement activity and cooperation. As of June 2014, there were approximately 130 agencies, on six continents, enforcing competition laws. The list of countries engaged in extra-territorial prosecutions continues to grow, with China, Brazil, Japan, and the EU aggressively pursuing anti-competitive activity beyond their own borders. This increased activity has led to heightened cooperation among international agencies. For example, between 2007 and 2012, there was a 35% increase in the number of merger investigations involving some international cooperation. Despite this trend of greater cooperation, examples of divergence between international antitrust enforcement agencies persist. A telling example is the differing approach to enforcement taken by different countries against Google with the US deciding not to bring charges and the EU formally bringing antitrust charges. The continued investigations into Google by India and Russia highlight how there is still divergence between international regulators despite the recent trend in cooperation.
Jean-Philippe Thibault. I want to share with you some specificity about Europe and in particular France.
The first is about the qualification. When facing anti-competitive practices and/or restrictive practices, companies often underestimate the strategic choices they have on procedural grounds: there is usually more than one course of action, and more than one sets of courts that they can activate, but some of the actions may backfire. For instance, if you complain to certain authorities about the market practices of your competitors, they may start dealing with your complaint and then inquire into the whole market (Competition Authorities have in rem jurisdiction), including your own practices! Instead, if you are less concerned by the practices than by the damages, you should go to commercial courts, where this type of "spill over" might be avoided and the damages go directly to your company.
Another essential factor to take into consideration is the elements of proof at stake:
• Competition Authorities have large powers to investigate beyond the elements of proof which are brought before them, and the nature of the anticompetitive issue can influence such choice because an anticompetitive agreement or a concerted practice is usually hard to prove (the key elements of proof are usually hidden at other companies’ premises)
• Courts do not have large powers to investigate: thus, the elements of proof brought before them must be quite convincing and must qualify the anticompetitive practice
Regarding the dominant position, international general counsels should keep in mind the following three thresholds when dealing with European countries such as France and Germany:
• When market share is below 40%: it is tough to prove a dominant position as there is no presumption of dominant position;
• When market share is above 40%: there is a rising presumption that the company could be dominant, and consequently that an abuse of dominant position may have happened;
• When market share is above 50%: the presumption of a dominant position is extremely strong.
Depending on the market position and/or if the threshold is exceeded, companies will, in particular:
• Carefully control & justify their selective distribution system;
• Abandon their exclusive distribution system;
• Carefully justify, economically, all commercial conditions (rebates, customer discounts, etc.)
David Marriott. I have a question: how does a company with a global presence like yours navigate the challenges posed by differing compliance regimes across the world?
Suzanne Folsom. Again, compliance is a living process, so you need dedicated resources and you need to stay vigilant. You need to take your time rolling out your general policy in different areas of the world. You must take your time and make sure that your staff is fully cognizant of specific local laws and regulations. And, by having your directives and policy come from one centralized office, you strengthen and facilitate the process.
Z. K. Legal counsel occasionally have to remind business people that laws can vary by country, because people tend to forget this elemental fact when businesses expand and treat everything from a global level. That being said, laws among countries do tend to have more in common than they have differences. Therefore I do not believe it is impossible to create a viable global code of conduct setting forth a company’s basic values and legal requirements, even if the details may vary by country.
Glenn Ware. This reminds me of the discussion about changing the title from “Chief Compliance Officer” to “Strategic Regulatory Officer.” The rationale for this change is that companies are all going global, and there’s opportunity in regulation, as well as risks and threats. Accordingly, a good "Chief Compliance Officer" should look for regulation that will be a benefit for a company in addition to looking for threats in the regulatory environment which is what a CCO traditionally only does. Moreover, complicating this problem, unlike governments, companies don’t have an "intelligence wing" to fully understand the opacity in international business operations. Accordingly, companies are increasingly finding an innovative way to gather information, stay agile, flexible and manage compliance in different domestic regulatory environments. I like the idea of “Strategic Regulatory Officer,” because it implies the idea of trying to put value into the equation by figuring out different ways to do operate a profitable business as well as finding ways to navigating the risks after taking into consideration different compliance challenges when operating in different environments.
Suzanne Folsom. I couldn’t agree more. The new global GC should have this strategic approach and profile as well. As in-house lawyers, we prefer less litigation; we must therefore be more strategic, business-oriented, proactive, and participative in the process. To that end, we must have our antennas up when we participate in business meetings. We must think about potential litigation consequences in real time.
We also need to be able to understand and articulate the pros and cons of one course of action as opposed to another. The only way effective in-house attorneys can weigh legal risks and add value to the discussion in today’s global economy is through active engagement, with a comprehensive understanding of your company’s business objectives.
Pierre Lorenceau. In Europe, a company under investigation could gain to some extent the “understanding” from the regulators by showing its good intention to build the compliance program. How about in the US and elsewhere?
Suzanne Folsom. I used to be the chief compliance officer at a major financial institution. During the time of the bailout, we were under constant scrutiny. In order to prevent unnecessary issues, we made sure that we were transparent and open with our regulators. My team was talking to our regulators every day. In fact, during this time we were in contact with over 500 regulatory bodies around the world. I would personally speak with at least 25 different regulatory bodies a week.
Of course, this process would not have been as cumbersome had we established a good relationship with our regulators before our issues arose. But we didn’t have that luxury, so it was a heavier lift. Yes, communication and cooperation with regulators about your compliance program and the remedial steps you’ve taken, especially in a time of crisis, is extraordinarily important and beneficial.
Pierre Lorenceau. Glenn, as head of the Anti-Corruption & Corporate Intelligence Practice of PwC, you have produced different trend reports on Fraud & Compliance and so forth. Can you share with us some unseen trends?
G. W. The risk of cybercrime is probably the greatest threat facing business today. The "hacktivist" or "State Actor" is a major problem and the scope and scale is only now becoming understood. Moreover, many companies don't even know that they have been victimized until years later when they start to see their intellectual property showing up on the shelves of their competitors. So the next tremendous challenge for businesses is hardening their IT infrastructure to prevent their company from being victimized by cybercriminals. Moreover, the modern general counsel must be "tech savvy" and understand the magnitude of the risk and not just leave it with the "IT department to figure out."
Another challenge is corruption. The asymmetrical enforcement among regimes creates a greater corruption risk than ever before. Moreover, ironically actions aimed and limiting the spread of corruption such as AML regulation and KYC procedures may have actually driven bad actors out of the current system into obscure areas wherein we can’t see what they are doing, such as shadow banking systems or into countries that don’t enforce their laws or have inadequate regulatory safeguards. This asymmetry creates distortions in the market and the enforcement landscape.
Pierre Lorenceau. To wrap up, almost all the major blow-ups came from companies with a very strong leader and a good business sword, which means aggressive growth through acquisition or other ways, but then comes the compliance and dispute settling, which is to rehabilitate the business shield. A great business should have a great sword to grow and a great shield to defend, and if you want to survive the war, meaning decades of long-term business, you probably need a strong culture for your sword as well as for your shield.
Photo: (from left to right) Pierre Lorenceau, Jean-Philippe Thibault, Zachary Klughaupt, David Marriott, Suzanne Folsom, Glenn Ware
J. Y.