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The Integrity Agenda: Compliance news

By Matt Kelly

Tougher Enforcement Coming in Commodities World

A senior official at the U.S. Commodity Futures Trading Commission is warning of more vigorous enforcement against corporate offenders, including larger monetary penalties and the use of independent compliance monitors, as well as forcing companies to admit guilt as part of their settlements.

Ian McGinley, director of enforcement at the CFTC, offered his warning during a speech he delivered at New York University Law School on Oct. 17. McGinley said his agency’s more aggressive posture was part of a larger goal to “ensure accountability and minimize the likelihood of future misconduct.”

Larger monetary penalties, for example, are necessary so that companies will be deterred from committing misconduct. “Penalties need to exceed the costs of compliance, to avoid the risk of institutions viewing penalties as an acceptable cost of doing business,” McGinley said. “Higher penalties may also empower compliance professionals to make the business case to senior management for the resources they need.”

No company likes paying monetary penalties, but the even bigger punishments might be outside compliance monitors and admission of guilt. A compliance monitor can be an expensive proposition as he or she quizzes your enterprise for months on end and recommends changes, all while your business foots the bill for the monitor’s time. Admission of guilt can increase a company’s civil litigation risks from unhappy shareholders or other parties.

To avoid those expensive and unwanted outcomes, a commodity trader should — you guessed it — embrace the tenets of the Justice Department’s Corporate Enforcement Program, which has now been embraced by the CFTC and every other enforcement agency. That means (1) voluntary self-disclosure of misconduct; (2) cooperating in any ensuing investigation; and (3) remediating any underlying internal control failures that allowed the violation to happen. A company that follows those three rules is likely to win far more lenient treatment.

In other words, the CFTC is trying to encourage better compliance by offering larger carrots and larger sticks. McGinley’s speech was meant to show the bigger stick. Businesses would do well to focus on a stronger culture of compliance, to win the bigger carrot.

Citibank’s Ethics Enforcement Victory

Citibank recently prevailed in a lawsuit filed by one of its former bankers, who argued that he was unfairly fired for fibbing on a company expense report by a small amount of money.

The banker, Szabolcs Fekete, had worked in Citibank’s London offices when he was sent on a three-day business trip to Amsterdam in 2022. Fekete brought along his romantic partner, and during the trip he put the partner’s meal — one coffee and one sandwich — on his corporate expense card.

That was a violation of Citibank policy, which doesn’t allow employees to expense spousal meals. So when Fekete submitted his expense report listing two coffees and two sandwiches, his superiors became suspicious. At first Fekete lied about treating his partner, but his managers escalated the matter to Citibank’s ethics team; and under further questioning, Fekete admitted what he had done. The bank fired him in November 2022.

Fekete then filed a wrongful termination lawsuit against Citibank, claiming that since his expenses were well below the €100 daily limit Citibank allowed employees to claim, he hadn’t really done anything wrong. He also claimed that he was on medication at the time that clouded his judgment and led to confusing answers during the bank’s investigation.

An employment law tribunal ruled against Fekete this fall. The tribunal found that even if Fekete had submitted the extra costs by mistake, he had ample time to admit his error and offer to correct it. Instead, Fekete lied to the company — ruining the bank’s trust in him, and giving the bank clear rights to fire him for breaching company trust.

The lesson for other companies here is that sometimes enforcing ethical standards is messy. Citibank, one of the largest banks in the world, had to take a hard stance not because of the amount of money involved, but because Fekete lied about his actions. It’s a reminder that core ethical values, such as trust, are non-negotiable issues in the employer-employee relationship.

That’s something compliance teams should always keep in mind as you craft training materials, messaging about compliance, Code of Conduct policies, and the like. Ethical values really do have practical importance.

WPP Fires Shanghai Exec Amid China Probe

Advertising giant WPP has fired one of its executives in Shanghai, who had been detained by police amid accusations that he helped to orchestrate a bribery scheme there.

In mid-October Shanghai police raided the offices of GroupM, a subsidiary of WPP that operates in China. Police then announced they had detained one current and two former executives at GroupM, and charged all three with participating in a commercial bribery scheme (that is, bribery among private companies, not government officials.

The two former Group M executives charged in the case left the company before police raided the business. The third executive has been identified as a senior executive at GroupM who had been with the company for eight years. All three men are Chinese nationals.

For its part, WPP will only say that it has fired an executive at GroupM, and that WPP will cease doing business with any other company implicated in the bribery scheme Shanghai police are investigating.

WPP’s travails are only the latest example of Western companies struggling to do business in China. The country is notoriously corrupt, so it’s entirely possible that the three now-former GroupM executives were committing misconduct and WPP was wise to fire them. At the same time, China also uses investigations into Western businesses as a tool to push national security interests. For example, this summer China sanctioned two Western-based consulting firms that provide due diligence and investigation services in China, supposedly for violating the country’s extensive new anti-espionage law.

All of this underlines the precarious position Western companies face in China right now. On one hand, companies cannot shirk their obligations to perform due diligence, manage anti-corruption compliance programs, and take action against wrongdoing employees. On the other, China has little compunction about punishing executives working in China if that suits Beijing’s political interests. So Western companies need to think carefully about whether to operate in China, and how to document business decisions accurately and thoroughly so that if the worst happens, you can mount a vigorous defense of your actions.

Unfortunately, that state of affairs seems unlikely to change any time soon.

U.S. imposing sanctions against Hamas

The U.S. Treasury Department is stepping up sanctions against leaders of Hamas for its terrorist attack against Israel on Oct. 7. The department placed sanctions against 10 Hamas leaders personally and on the financial network that Hamas uses to fund its activities, a network that spans Turkey, Algeria, Sudan, Palestine, and Qatar.

The sanctions themselves shouldn’t be a surprise. U.S. authorities have had Hamas on their sanctions lists for decades, and in 2022 expanded those sanctions to include others who help Hamas manage its financial network. Given the United States’ strong support of Israel and the enormity of Hamas’ attack, sanctions were always going to be part of the U.S. response.

The sanctions mean that any business operating within U.S. jurisdiction (which is just about every financial firm and large corporation in the world) is not permitted to do business with any of those Hamas leaders, or with any business controlled by them. So companies will need to assure that their compliance programs can incorporate these new sanctions.

That won’t necessarily be easy. Hamas has no assets within the United States. Instead, it raises money through charities and other non-government organizations throughout the Islamic world, and relies on a secret network of investments that Western authorities estimate to be worth hundreds of millions of dollars.

So companies will need to perform sanctions screening against their third parties to see if those parties have any tangential relationship to Hamas: minority interests held by Hamas-affiliated persons or groups, previous allegations of ties to Hamas, or other questionable affiliations. In other words, you’re not going to see “Hamas Inc.” as a payee in your accounting system; you’ll need to look deeply and carefully to uncover potential ties.

Moreover, if your business does uncover any Hamas-related transactions, U.S. authorities will expect you to (1) self-report those activities to regulators; and (2) cease all business with those suspicious parties immediately. You’ll need clear policies, procedures, and training to that effect, so that all employees know what happens and what to do if they find a Hamas connection within your extended enterprise.

Matt Kelly

Matt Kelly is an independent compliance consultant and the founder of Radical Compliance, which offers consulting and commentary on corporate compliance, audit, governance, and risk management. Radical Compliance also hosts Matt’s personal blog, where he discusses compliance and governance issues, and the Compliance Jobs Report, covering industry moves and news. Kelly was formerly the editor of Compliance Week. from 2006 to 2015. He was recognized as a "Rising Star of Corporate Governance" by the Millstein Center in 2008 and was listed among Ethisphere’s "Most Influential in Business Ethics" in 2011 (no. 91) and 2013 (no. 77). He resides in Boston, Mass.

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