China Syndrome: FCPA & Rating Agencies...

A modern day "Operational Risk China Syndrome" is making the Board of Directors nervous these days. The new syndrome otherwise called the Foreign Corrupt Practices Act (FCPA) has been the buzz at rating agencies for months. Are you sure about your ability to withstand the scrutiny of a FCPA litmus test? Board Member Magazine explains:

On June 2nd, Fitch Ratings agency announced that Foreign Corrupt Practices Act violations could result in ratings downgrades. That’s one more reason boards should educate themselves on FCPA and how their companies are monitoring FCPA-related risks. It appears, though, that many boards do not feel comfortable with their companies’ compliance programs. In a soon-to-be released survey from KPMG’s Audit Committee Institute, only 27 percent of U.S. audit committee members said they were satisfied that their company had an effective process to manage Foreign Corrupt Practices Act risks, and other risks associated with doing business in Brazil, Russia, India, China and other emerging markets. 35 percent of respondents were only somewhat satisfied, and 9 percent said process improvements were needed in conducting such business, which may include sourcing, outsourcing, manufacturing, or sales and distribution channels.

As your Business Development teams fan out across the globe to satisfy the appetite of the Chinese economy for critical infrastructure, establish a sound and effective awareness, training and audit program. What are the ramifications of putting unprepared personnel on the ground to do business in the Chinese Markets?

American companies or individuals who enter joint ventures with foreign partners, as well as those who hire foreign agents or distributors in China, must be extremely cautious of the vicarious liability that they may face as a result of a third party's violation of the principles set forth in the FCPA. According to the Justice Department, an American company will be subject to liability under the FCPA if it makes payments to an intermediary third party with the knowledge that such payments will go to a foreign official for corrupt purposes. Conscious disregard is enough to satisfy the requirement; if the American company is aware of a "high probability" that such payments will occur, the knowledge requirement will be satisfied. More importantly, a joint venture partner, agent, or distributor will be considered an intermediary third party for purposes of the FCPA. Therefore, any violation of FCPA standards by one of those parties could result in the American company being vicariously liable under the FCPA.

In order for the Board of Directors to have peace of mind on the emerging markets business opportunities first a substantial compliance framework needs to be established. Next, the implementation of predictive analytics software to manage the complexity of companies, people and relationships as you do business in any of these countries. This includes the subscription to several databases that include the constantly changing landscape of specially designated nationals (SDN) and politically exposed persons (PEP). World check explains:

During the period 2005 to 2007 alone, more than 310 elections and by-elections took place around the world – that’s an average of nearly 10 elections per month. (Source: ElectionGuide.org). This means that your existing clients may be elected to public office, and hence become PEPs, without your business knowing it. It may be that you only apply your due diligence processes to new customers and so miss a whole category of individuals that do not meet your corporate risk appetite. As such, routine and ongoing PEP risk screening is not only considered best practice, but is also a legal requirement.

In practice, full compliance with PEP legislation has not come without major operational challenges. In the post-9/11 era, the proliferation of regulatory compliance laws, combined with the need to screen hundreds of thousands of users and accounts on a routine basis, has created a substantial administrative burden for businesses subject to PEP legislation.

The sheer magnitude of the due diligence challenge has subsequently led to the adoption of a risk-based approach to regulatory compliance, but nevertheless Enhanced Due Diligence and ongoing risk management is still required for PEPs. Broadly speaking, the risk-based approach entails the identification of risks that exceed your business’ stated risk appetite (including the need for regulatory compliance), and then matching individuals and entities against these heightened risks during the preliminary stages of due diligence. Should a person fall into one or more of the specified heightened risk categories, additional due diligence is then required.

As your company establishes it new China-based strategy for partnerships, joint ventures or actually putting employees in country the operational risks become exponential. Remember, a sound and prudent risk framework includes a 4D approach:

• Deter
• Detect
• Defend
• Document

With these established and operating on a global basis the Board of Directors will be sleeping more soundly. Or perhaps not...learn more.

Remembering 9/11: Teaching the Children...

Where were you on September 11th, 2001? Everyone seems to remember...

On a cool sky blue morning, 9 years ago in Northern Virginia, sitting in a hotel restaurant having breakfast around 8:00AM with a business colleague. A little over 40 minutes into our discussion, we heard some people talking quite loud in the bar next to us as they tuned into CNN. As cell phones rang around us, they were all loved ones checking in and urging us to hurry home.

8:46:40: Flight 11 crashes at roughly 490 mph (790km/h or 219m/s or 425 knots) into the north face of the North Tower (1 WTC) of the World Trade Center, between floors 93 and 99. (Many early accounts gave times between 8:45 and 8:50). The aircraft enters the tower mostly intact. It plows to the building core, severing all three gypsum-encased stairwells, dragging combustibles with it. A massive shock wave travels down to the ground and up again. The combustibles and the remnants of the aircraft are ignited by the burning fuel. As the building lacks a traditional full cage frame and depends almost entirely on the strength of a narrow structural core running up the center, fire at the center of the impact zone is in a position to compromise the integrity of all internal columns. People below the severed stairwells start to evacuate—no one above the impact zone is able to do so.

8:49:34: The first network television and radio reports of an explosion or incident at the World Trade Center. CNN breaks into a Ditech commercial at 8:49. The CNN screen subtitle first reads "World Trade Center disaster." Carol Lin, the first TV network anchor to break the news of the attacks, says:

"This just in. You are looking at obviously a very disturbing live shot there. That is the World Trade Center, and we have unconfirmed reports this morning that a plane has crashed into one of the towers of the World Trade Center. CNN Center right now is just beginning to work on this story, obviously calling our sources and trying to figure out exactly what happened, but clearly something relatively devastating happening this morning there on the south end of the island of Manhattan. That is once again, a picture of one of the towers of the World Trade Center."

Walking to the parking lot, the proximity of the kids high school and middle school to the CIA created a feeling of great internal anxiety and it soon turned to fear.

9:37:46: Flight 77 crashes into the western side of the Pentagon and starts a violent fire. The section of the Pentagon hit consists mainly of newly renovated, unoccupied offices. All 64 people on board are killed, as are 125 Pentagon personnel.

Looking around the crowd this evening at our 9/11 Memorial Ceremony in our little village, some of the kids were not old enough to remember that day. We said prayers and recited the names of the six men and women who were from our little town. "Friends of the Freedom Memorial" formed in 2002 to build the site and dedicated to the residents who have given their lives for our freedom.

The Boy Scouts handed out programs and lead us in the Pledge of Allegiance. We sang the National Anthem. "America the Beautiful". We starred at the six candles lit in their honor.

What this day is about every year beyond these memories, is the renewed vow of vigilance. A time to revisit all the reasons why you have made the decisions you have since that Tuesday morning nine years ago. Never forget that day. Never forget why you wake each morning.

9/11 vigilance is about being adaptive. It is about resilience. For those of us who have never paid the same price as those who have served, supported and are the mothers, fathers, brothers, sisters or relatives of those who have, we can never know or really feel what they have. We can only pledge our vigilance in continuing our respective missions.

Most of all. The mission is not America's alone and the entire planet understands this. As they teach the history of 9/11 in the schools of New York City, Haiti, Chile, Pakistan, India and even Saudi Arabia, what do you think the lesson is about? If it is not about vigilance and resilience, then we are doing our children a disservice. We must be preparing them for the future threats that this globe will be facing in the years and decades before us.

Whether it is the wrath of "Mother Nature" or the evil planning of ordinary people does not matter. We can never predict exactly the day the hour or when and where the next attack will occur. Whether it will impact our buildings, bridges, rivers, schools or the Internet is unknown. If all of us on this 3rd rock from the sun, have done our job teaching our kids about vigilance and resilience, then we should all be able to have a peaceful nights sleep. Devoid of nightmares.

Remember that Tuesday in September across the globe for the lessons we have all learned since that infamous day in New York City, Washington, DC and Shanksville, Pennsylvania. For the children, teach them the truth.