Importance of Ethics and Compliance Programs
Ethics and compliance programs are an inevitable part of the internal control mechanism in every organization. The demand for strong ethics inside the companies is higher than ever, requiring transparency from consumers and stakeholders.
Weak programs may pose a high risk to the reputation of any business, subsequently causing moral and significant financial damage. Ethics is not only a test for internal integrity but also a mandatory federal requirement, which can be majorly punishable.
Several legal Acts exist in order to improve the business’s corporate responsibility and ensure the efficiency of compliance programs.
Embed ethical standards provide multiple benefits for any organization, from safeguarding reputation and creating a healthy corporate culture to transparent communication with the consumers and operating with no fear of judicial prosecution.
Federal Sentencing Guidelines for Organizations (FSGO)
Federal Sentencing Guidelines for Organizations is a crucial activity for the companies that ensures the correspondence of business ethics and compliance programs effectivity. Following The Savings and Loan (S&L) crisis of the 1980s, Congress enacted The Sentencing Reform Act in 1984, which included a set of federal sentencing guidelines for companies and subsequently created the US Federal Sentencing Commission.
Federal Sentencing Guidelines for Organizations
were enacted by the US Sentencing Commission in 1991 and served several purposes of administrating just sanctions, while acting as a restraint for businesses to avoid committing the crime. FSGO was the first to set clear expectations and requirements of powerful ethics and compliance programs for the organizations.
In 2004, after the enactment of the Sarbanes-Oxley Act and in 2010, after the Dodd-Frank Act, FSGO were amended, becoming mandatory for all organizations to adhere to these guidelines.
The passing of the Sentencing Reform Act created a set of mandatory sentencing guidelines for each organization. Until today, FSGO serves as a preventing mechanism for deterring crimes in organizations. It strengthened and clearly defined the suitable mandatory ethics and compliance programs so that the sentencing may be reduced in the case of conviction.
FSGO became a motivational method for companies to adopt practical ethics and compliance programs, which can significantly decrease the fines in case of any criminal activity. Within several years after the enactment of the guidelines, most companies improved their ethics programs, proving that the threat of stricter punishment and a possibility of avoiding prosecution altogether acted as a catalyst to the overall ethics improvement.
The enactment, of Federal Sentencing Guidelines for Organizations, significantly improved and structured ethics programs within the organizations. Many conferences were held, where companies shared their experience and best practices on creating plans adhering to FSGO criteria. Federal Sentencing Guidelines created an industry of ethics consulting, which not only aids and promotes companies to develop best practices, but also brings the country significant revenue. The report by Ethics & Compliance Initiative (2018) discovered that even the most simplified existing program affects the employees, where they are twice more likely to report suspecting behavior and four times more predisposed to express satisfaction with their company. Therefore, it is evident that FSGO not only makes it possible for firms to avoid prosecution but has an overall positive effect on the business by improving their ethics programs.
Sarbanes – Oxley Act (SOX)
Sarbanes – Oxley act is the law that was adopted because of a series of major corporate frauds between 2000-2002. It was a governmental response to the financial scandals with some publicly traded global companies as the perception of a vital need to infuse stricter economic governance laws (Gonzalez-Padron, 2015). These corporations were accused of issues related to conflicts of interest and incentive compensation practices.
The central figures in these events were Enron Corporation, Tyco International plc, and WorldCom. Intricate frauds caused a wave of resentment among the investors regarding the legitimacy of the financial statements, causing them a loss of billions of dollars.
This chain of unlawful and unethical behavior initiated the SOX passage in 2002. The act includes eleven titles, which legitimized strict responsibilities and regulations for the corporations and added criminal punishment for specific offenses.
Initially, the Sarbanes-Oxley Act of 2002 (SOX) was aimed at protecting investors by improving the accuracy and reliability of corporate disclosures, which caused a vocal biased reaction from the business owners.
In terms of business ethics, the SOX Act created a legal need to establish additional ethical policies for the top-management and audit committees in order to increase the accuracy and security of economic reports according to the Sarbanes-Oxley Act (Gonzalez-Padron, 2015). This Act promotes businesses to enhance internal control using ethics and compliance programs. It also decreases the chance of a conflict of interests, requiring the change of an audit partner every five years.
The laws imposed high responsibility for the directors to pay close attention to all financial operations and strengthen the companies’ disclosure, making them personally liable for the precision of economic statements.
A prominent example of The Sarbanes-Oxley Act happened in Indiana and became the state’s largest environmental security fraud. On April 30, 2020, the District Court issued a $69.6 million judgment against the defendants in the False Claims Act case. The qui tam case involves the disclosure of fraudulent transactions reported by 21-year old Alexandr Chepurko. Several employees in the public company of biofuel developed a complicated scheme to fraudulently sell biodiesel incentives (Kostyack, 2020). Chepurko voluntarily contacted the authorities and provided not only information about the fraud but also evidence of the crimes to the U.S. Attorney’s Office, which provided enough information for the Government to conduct criminal and civil investigations. The leading case defendant Jeffrey Wilson was indicted for criminal violations of the Sarbanes-Oxley Act and sentenced to 10 years in jail.
Consumer Financial Protection Bureau (CFPB)
Consumer Financial Protection Bureau (CFPB) was created after the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to develop regulations, hold supervision, and enforce laws to the companies with the goal of protecting financial transparency.
The Act initiated the creation of many new agencies, among which is CFPB. The United States President Barack Obama inaugurated the Dodd-Frank Reform and a Consumer Protection Act in 2009 as a way of a legislative response to stabilize the financial sector, improve its transparency and protect the taxpayers after the damaging economic crisis of 2007-2008 and subsequent Great Recession.
Due to a specific way the legislation was written, the Consumer Financial Protection Bureau could not perform its duties until the first Director was in place, which did not happen until July 21, 2011.
Consumer Financial Protection Bureau (CFPB) has enacted many rules and regulations that had a favorable impact on business ethics, protecting clients, and ensuring the rightful behavior from the businesses towards them. Apart from the authorization to create regulations, CFPB can examine financial firms and subsequently enforce federal actions on them.
Consumer Financial Protection Bureau is a necessary part of the unstable financial system as an attempt to increase consumer protection in a legal, rightful form. Numerous actions and laws adopted by CFPB have enhanced the client’s economic rights, and the country’s willingness to help the people with their financial burdens by forbidding structural dissolution of consumer rights.
Several laws initiated by CFPB include databases that provide consumers with accurate, transparent information about the companies. However, some businesses argue that CFPB’s approach creates legal uncertainty among firms and reduces their range of financial services.
Consumer Financial Protection Bureau (CFPB) has adopted many policies, regulations, and projects aimed to help consumers get the most transparent information about businesses and stabilize the financial situation in the country. One of the most prominent achievements of CFPB is the TRID mortgage disclosures, which is a series of guidelines aimed to eliminate loopholes that lenders would use to trick the consumers. A constant improvement manifests in the form of releasing a TRID interpretive rule providing pandemic guidance in April (Consumer Financial Protection Bureau, 2020). Such an initiative significantly enhanced people’s financial rights, contributing to protecting their properties.
Consumer Financial Protection Bureau is also actively returning payments to users as a result of the legal initiative of the CFPB, showing their eagerness to target large financial organizations creating a culture of pro-consumer behavior.
U.S. Securities and Exchange Commission held an investigation in the 1970s, discovering hundreds of U.S. companies making illegal payments of hundreds of millions of dollars to high governmental officials. These financial operations included bribery and facilitating payments to secure some actions or make the government discharge certain wrongdoings. The administration realized that there are no legal guidelines prohibiting bribery to foreign executives, therefore, deciding to take immediate action.
After numerous bribery scandals, Congress enacted the Foreign Corruptions Practices Act in response to these criminal actions, to bring an end to bribery and restore society’s trust in the American business industry.
FCPA’s main guideline is the prohibition of bribery payments to foreign officials to assist in obtaining or retaining business.
Foreign Corruptions Practices Act (FCPA)
The passing of the Foreign Corruptions Practices Act (FCPA) significantly affected the way of conducting business for many companies, enacting strict regulations for organizations. FCPA forced companies to maintain proper financial statements, knowing they can be thoroughly checked at any moment, and strengthen internal control to monitor any suspicious behavior of the employees, which affected the overall ethics culture. FCPA created such an atmosphere, assuring any foreign transactions under federal guidelines. Overall Foreign Corruptions Practices Act makes foreign business relationships more transparent and trustworthy, eliminating the possibility of cooperating with suspicious, corrupted organizations. As a result, many companies showed their ability or inability to act in a legal framework, gaining or losing the trust of investors and staff.
The central regulation of the Foreign Corruptions Practices Act is the prohibition of the intentional use of any communicational means to corrupt, make promises, or payments of any value to a foreign official, knowing that it will be used to omit or violate the federal guidelines to obtain or retain the business.
The Act includes the prohibition of even the intent of bribery, regardless of the material sum, including offering an illegal payment.
The first person who was charged under FCPA rules was Finbar Kenny, who gave $337,000 to the Prime Minister of the Cook Islands Sir Albert Henry to print stamps for his re-election campaign (Robinson, 1979). Kenny was fined $50,000, becoming the first to plead guilty to FCPA violation.
Airbus FCPA Violation Case
Airbus SE – a French global company providing civilian and military aircraft, was caught in the middle of an immense bribery scandal with the United States and the United Kingdom. The company developed a scheme, where they used third-party business partners to bribe official figures and airline executives to omit punishment for the company’s violation of the Arms Export Control Act and the implementation of the International Traffic in Arms Regulations (ITAR), in the United States (The United States Department of Justice, 2020). The scheme was used for years by Airbus involving senior executives of the companies, who were paid through shell companies created by managers.
The corporation admitted to creating fraudulent contracts and accepting false statements for inexistent services and falsification of the reports (The United States Department of Justice, 2020).
In January of 2020, Airbus has reached a consensus with French Parquet National Financier, the UK Serious Fraud Office, and the U.S. authorities. As a result of several years of investigation, Airbus has settled to pay penalties of more than $3.9 billion for the violation of the Foreign Corruptions Practices Act (FCPA) in the United States (The United States Department of Justice, 2020). Specifically, for the FCPA violation, the company will pay the United States $527 million for the bribes Aircraft paid to executives in multiple countries like Taiwan, Indonesia, Malaysia, Nepal, Russia, China, Colombia. Moreover, for the FCPA-related conduct, Airbus agreed to continue cooperating with the U.S. Department of Justice in any open investigations relating to the case.
The scandal Airbus was involved in caused significant damage to the company, affected thousands of employees, and stained the reputation of the second largest aircraft provider.
Surely that violation of the FCPA guidelines had a little positive impact on Airbus, provoking a wave of fervent backlash in France and around the world towards Airbus. Inside the company, the atmosphere became hostile and untrustworthy, following staff interrogation, confiscation of technical equipment, and the overall constant presence of investigating governmental figures. The settlement created significant financial uncertainty for the global corporation because of such a hefty penalty followed by the pandemic causing a considerable redundancy.
Nevertheless, the scandal is a new chance for the corporation to develop more reliable internal control and create more efficient ethics and compliance programs, subsequently redeeming their positions on the global market.
References
Consumer Financial Protection Bureau. (2020). TILA-RESPA integrated disclosures (TRID). Consumer Financial Protection Bureau. Web.
Ethics & Compliance Initiative. (2018). Measuring the impact of ethics & compliance programs.
Gonzalez-Padron, T. (2015). Business ethics and social responsibility for managers. Bridgepoint Education.
‌Kostyack, B. (2020). Court issues $69.6 million judgement in qui tam false claims act whistleblower case. Front Line Whistleblower News. Web.
Robinson, T. S. (1979). Justice department wins first victory under foreign corrupt practices act. Washington Post. Web.
The United States Department of Justice. (2020). Airbus agrees to pay over $3.9 billion in global penalties to resolve foreign bribery and ITAR case. Www.Justice.Gov. Web.