GRC: Compliance (Part 4).

November 12, 2012

This is the fourth and final installment in a series on devising a structure to address that ever-expanding and increasingly complex (and crowded) intersection of Governance, Risk, and Compliance (GRC).  This is the new paradigm for compliance programs in modern business, but one should always bear in mind that any Compliance Program should be structured with due consideration for the Scope (range of products and/or services offered), Size (number of employees), and Span (geographic spread, and number and range of legal regimes to which it is subject) regarding the entity; including any and all subsidiaries and any cross-national requirements.

Progress so far: What have we covered?

The corporate compliance function can be defined as “those persons, processes, and protocols whether active or automated, that are employed and deployed by the subject entity to ensure on a continuing basis that governing laws are adhered to, governance is responsible and responsive, risks are contained within acceptable parameters, and that failings on any or all of these priorities, are speedily and sufficiently addressed in accordance with applicable laws, whether general, or case- or situation-specific”.

We started in Part 1 (GRC: An Overview),[1] with a quick review of the essential requirements of an effective corporate compliance and ethics program as devised for Canadian and US. Federal jurisdictions, respectively.  We also looked at some of the similarities and differences between these two regimes, and some of the factors and related laws that impact upon ethics in general and corporate compliance functions.

Next, in Part 2 (GRC: Governance),[2] we set framework parameters in a chart or matrix.  There were 3 category columns on the X-axis, arranged horizontally; 7 category rows on the Y-axis (with 2 additional but reserved rows), arranged vertically; and as a third or “depth” dimension, containing 5 more categories.  We also ran through a much abbreviated presentation and analysis, using only the first category column (Governance), as we addressed some of its intersection points with the 7 category-rows, as well as with selected elements of the third simultaneous analytical element, the depth dimension (Function, Industry, X-national, Employee class, and Division).

Recently, in Part 3 (GRC: Risk),[3] We presented an analysis using only the second category column (Risk), and addressed some of that column’s intersection points with the 7 category-rows, as well as with elements of the depth dimension (F-I-X-E-D).

Compliance.

Now, we address some compliance or control options and arrangements (involving persons, processes, and protocols) as they intersect with category-rows and the depth dimension.  What additional compliance and control arrangements as encompassed by a compliance program, might be available to address the challenges of governance, government regulation, and the risks that have been identified in the preceding installments of this series?

Regulatory:

In the U.S. financial services industry, for example, passage of Gramm-Leach-Bliley in 1999 ushered-in a Financial Privacy Rule (mandating the entity’s provision, prior to commencing the business relationship, of a privacy notice to customers, and also restricting the entity’s collection, use, and disclosure of customer personal information without consent, along with instructions and the opportunity for customers to opt-out); a Safeguards Rule (mandating the creation by entities, if not already existing, of a comprehensive, written plan and procedures to secure and protect customer information, along with assigned oversight, risk analysis, testing, and modification as needed); and instituting Pretexting protections (primarily through ongoing training of financial industry employees in counter social engineering, to better detect, deflect and report unauthorized attempts to access protected, nonpublic customer personal information).[4]

An effective compliance program with regard to Gramm-Leach-Bliley, for example, would therefore involve entity leadership at the highest levels, recruitment and retention of competent advisors, access to industry best practices through associations, and a painstaking exercise of “checking all the boxes”.  Fraud Risk Assessments (FRA) should also be periodically conducted, with regard to the potential for collusion, whether between insiders, or between insiders and outsiders, combined.  Entities involved in ultra-hazardous activities, national security, or work with the vulnerable sector (children and youth, the elderly, and healthcare or social services), should also be especially mindful of their often enhanced regulatory compliance requirements – and not just with respect to financial disclosures.

Environmental:

Compliance with environmental law is an increasingly complicated task.  Pre-construction Environmental Risk Assessments (ERA) are common, as can be assessments of the cultural and community impacts in some jurisdictions.  Issues raised must be addressed to the satisfaction of regulators and even host communities, in order to proceed with confidence and at times, in peace.  Starting with a government agency’s own specific or omnibus roadmap for its own compliance,[5] is one option, and if it is somewhat dated (unlike the referenced resource at the time of posting this blog) there is no harm in asking a contact person at that agency for guidance on how to access updates or addenda, if any.  In addition, special attention should be paid to legal and regulatory requirements on engineering and efficiency; measurement, disclosure, and mitigation; and ongoing training on tools, threats, and a company-wide mandate for high ethical standards and corporate transparency when dealing with investors, employees, and regulators.

Accounting/Audit:

A study (released in 2005) on Revenue Recognition Practices in the wake of SOX,[6] found that in a survey of 162 public companies, contract management, revenue recognition, and tax provisions and related accounting were among the top 5 contributors of GRC challenges.[7]  As to the direct impact of SOX, both public (162) and private (238) companies were found to be closely aligned in the major factors impacting their revenue recognition policies, being: business model changes (approximately 25% and 30% respectively); new audit requirements (approximately 7% and 5% respectively); and SOX, itself (approximately 25% and 30% respectively).[8]  Being nevertheless well aware of the challenges they faced, the respondents at all 400 companies, both public and private, identified 10 areas where they were exploring and evaluating automation and compliance tools.  Amongst these ten, were: workflow and approval process, contract management, revenue recognition, tax, credit management, and expense reimbursement.[9]

The current fiscal landscape is no different, as fiscal challenges continue and accrue.  It is therefore critically important to first gain a better grasp on the fiscal landscape, in order to fashion a credible and comprehensive fiscal policy matrix, including revenue recognition (Framework).  The fiscal matrix comprises 9 (“nine”) main elements, termed “frapsra” (F, P3, S, R3, A); being:

(i) Framework;

(ii) Procurement (set price range, source or order, receive and verify, pay);

(iii) Projects (budget, issue requirements, evaluate options, start-manage-complete project, evaluate and commission, pay);

(iv) Personnel (establish requirement, interview and verify credentials and fit, hire and train, assign and promote, and otherwise manage);

(v) Sales (set price or range, fix essential terms, take order, ship and fulfill, invoice);

(vi) Receivables (management);

(vii) Revenue (recognition);

(iix) Receipts (apportionment); and

(ix) Audit (internal):

  1. Of Internal Controls ~ to prevent, detect, and timely correct and clarify mistakes and ambiguities before they are released and potentially impact upon the entity as either material misstatements or being materially misleading;
  2. Of Disclosure Controls ~ to give senior officers the confidence to present and defend credible MD&A and forward-looking statements, and certify statements of earnings and financial condition in accordance with law;
  3. Of the GRC Regime ~ to ensure that the 5 (“five”) questions ending this installment and this series, can be asked and answered appropriately.

The fiscal policy “Framework”, comprises 6 (“six”) main elements, being in no particular order:

(a)    Oversight and offshoring:

  1. Transfer costs,
  2. Customs duties,
  3. Country of origin rules,
  4. Tax treatment;

(b)   Business model:

  1. Description and rationale,
  2. Reporting lines and functions,
  3. Transaction example standards,
  4. Sample bottlenecks/sticking points with decision-tree tables;

(c)    Listed procedures for data capture, data control, data typing, and data verification, with backup, secure offsite replication, and recovery; including an identification of approved software tools;

(d)   Improper and prohibited practices identified;

(e)    GAAP and related accounting policies (the options to be applied, as these choices impact the rest of the Framework.  Once selected, these should only be changed on approval at the highest levels, but reviewed with (and preferably prior to) the introduction of any new product or service, or the addition of any sub-entity;

(f)    Effectiveness considerations:

  1. Segregation of duties,
  2. Contracts management with standardized forms and formats,
  3. Standardized sales and procurement forms and formats,
  4. Training and internal + external communications policies,
  5. Credit management for the entity, vendors, and customers,
  6. F-I-X-E-D (depth dimension) application, to share the Framework entity-wide, considering local or regional variations in line with overall GRC policy.

Lessons Learned:

The days of racing to the bottom (lax regulatory regimes of primary organization) and bottom-feeding (seeking out the most lax regulatory jurisdictions in which to operate), should be long gone in light of recent court Alien Tort Statute victories involving Ecuadorians[10] and Nigerians,[11] amongst others likely still to be filed, and the increasing push to recognize international environmental crimes as crimes against humanity and genocide.[12]  Other inroads are also being made in securing redress for colonial wrongs,[13] and so both memories and the retroactive reach of the law, can be extensive.

Additional lessons learned in compliance efforts should focus on industry-specific and geo-specific GRC efforts (labor relations, climate change).  In addition, scandals over the past decade should have proven beyond a doubt that only a combination of manual and automated controls can cover for gaps and human deficiencies, and that there must also be senior officer commitment with active project, process, and contracts management to ensure the proper creation, implementation, enforcement, and ongoing testing and improvement of an effective GRC and ethics program.  Special attention should also be paid to compliance with laws and regulations on Proxy Filings and voting, Stock Options, and Insider Trading disclosures.

Internal/Institutional:

As with compliance in the environmental field, touched-upon above, other industries also have their own compliance challenges, which can often be considered in light of specific guidance documents issued, for example in the United States, for the Steel industry,[14] regarding Patent and Trademark law compliance for small businesses,[15] and in the realm of trade compliance.[16]

Achieving compliance can be a significant distraction in some jurisdictions where new and sometimes highly complex laws, are issued[17] and updated[18] on a regular basis; whether in response to an emergency or other critical event, or to address an ongoing issue or series of issues.  In the case of the latter, the Dodd-Frank Wall Street Reform and Consumer Protection Act,[19] for example, ushered-in a sea change to the resource industry landscape with regard to public issuers.  Significant due diligence and disclosure requirements (claimed as onerous in some cases), are now mandatory in order to detect, prevent, and curtail the trade in conflict minerals,[20] which trade has had significant community and cultural impacts.  For instance, wherever “conflict minerals are necessary to the functionality of production of a product manufactured by such person”, annual reports must be filed containing: (i) “a description of the measures taken by the person to exercise due diligence on the source and chain of custody of such minerals”; and (ii) “a description of the products manufactured or contracted to be manufactured that are not DRC conflict free”.[21]

In terms of enforcement, recent caselaw in the United States has expanded the definition of who can constitute a whistleblower under Dodd-Frank.  We see from Kramer, that such a person can be almost anyone who discloses information about a possible violation (being a lower standard than for SOX, which requires disclosure to the SEC of information concerning a securities law violation, as backed by reasonable belief that a possible violation occurred).  We also see from Ott, that a person asserting a retaliation claim under Dodd-Frank need not necessarily/always be a person who would (or could) also have qualified for the whistleblower bounty in making a disclosure in apparent accordance with law, in the first place.[22]

As a result of these laws (SOX and Dodd-Frank), and other laws requiring in-depth and ongoing compliance, appropriate ethics and regulatory compliance training should be developed and broadly instituted across the company.  This is especially critical in entities with depth, i.e. decentralized with multiple divisions or business segments, whether domestic, continental, or more transnational.  Additionally, internal investigations should be properly structured[23] and intermediaries closely monitored to avoid any third-party or vicarious liability, or conspiracy.

Structural/Systemic:

Securities laws in the United States,[24] across Canada,[25] and the European Union,[26] for example, specify the types and extent of information that issuers must disclose, both for registration and as an ongoing requirement.  Securities laws in India[27] and Australia,[28] and such United States amending laws as the Sarbanes-Oxley Act (SOX)[29] and the Gramm-Leach Bliley Act,[30] further address transparency, detailed compliance and reporting requirements, and mandatory aspects of corporate governance and ethics.  Except as otherwise specifically stated,[31] SOX compliance is mandatory,[32] and three noteworthy compliance provisions are Sections 404, 302, and 307.

SOX Section 404:

Section 404 specifies annual disclosure by corporate issuers, re: the existence, management responsibility for, and evaluation of their own internal controls; as further “attested to and reported on” (double-checked and verified as accurate), by the issuing entity’s auditors.[33]  Retaliation against whistleblowers,[34] failure to certify financial statements as required,[35] and evidence tampering that hampers or clouds an investigation,[36] will all now constitute criminal offences under SOX, with significant penalties.

SOX Section 302:

Section 302 further mandates that principal officers of issuers certify by signing that they have: (i) reviewed the subject quarterly or financial report; (ii) found the same to be accurate (“does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading”); (iii) found same to be complete (in that the information therein does “fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report”); (iv) have appropriately established and maintained and evaluated internal controls; with (v) disclosure to the issuer’s auditors and the audit committee of all “significant deficiencies” and “material weaknesses” of internal controls, as well as “any fraud whether or not material that involves management or other employees who have a significant role in the issuer’s internal controls”; as well as any corrective actions.[37]

SOX Section 307:

Finally, Section 307 provides for a heightened duty of legal counsel to report up the line when finding evidence of any “material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof”[38]  Counsel has an additional duty to report further up the management chain to the Audit Committee or another appropriate Committee of the Board of Directors, if the first person hearing the complaint and report “does not appropriately respond to the evidence”.[39]

Technical/Tactical:

Segregation of duties should be rigorously enforced in accordance with industry best practices, or in excess of industry best practices, where warranted.  Spot audits of social media usage policy compliance should be ingrained, as should be disciplinary procedures for infractions and industry (or above-industry) best practices in IT management policies and procedures; some of which practices I earlier identified in part 3 of this series.

Further technical and tactical compliance efforts should focus on industry-specific and geo-specific risks (earthquake, hurricane or tornado, fire and flood).  Sometimes, however, even the best-laid plans and safety precautions[40] can be overwhelmed under the onslaught of concurrent multiple perils, such as the earthquake and Tsunami in Fukushima, Japan of Monday April 11, 2011.  In any case, there should be interim testing and updates of the written, shared, and practiced compliance guidelines; especially in the rapidly developing e-Commerce and social media realms with regard to Cybersecurity and privacy rights (PIPEDA and provincial privacy laws in Canada, and state privacy laws in the United States); online spam protections in the American CAN-SPAM Act,[41] along with Canada’s equivalent in the Canada Anti-Spam Law;[42] Online copyright infringement protection for ISPs in the American Digital Millennium Copyright Act (DMCA), and Canada’s equivalent Copyright Modernization Act[43], all added areas of concern for entities involved in that space, requiring inclusion in their compliance plans.

Two Additional (reserved) Categories:

The first reserved category is Implementation (covering investigations and improvements; staff inclusion as stakeholders; and inspired giving as a corporate social responsibility).[44]  The second reserved category is Climate (covering conflicts of law; conflicts of culture – whether business or natural; and contingencies – environmental, political, technical, man-made, and popular (with “popular” including riot, insurrection, sit-in/occupation, and pre- or post-sporting event mayhem tantamount to riot or insurrection.[45]  Some of these were touched-upon in the above analysis or earlier installments.  However, being essential to the overall success of any GRC program, they should be checked and re-checked, often and at length, against the F-I-X-E-D (depth dimension).

Summary.

Essentially, a company needs to be able to ask all of its officers, employees, and directors the following 5 questions.  A perfect score includes 4 x yes answers (questions 1, 2, 4, and 5), and 1 x no answer (question 3).  If question 5 yields any or many “no” answers, then the company needs to realize and accept that there is a problem, because over time its business will evolve, the applicable regulations will change, and the market is dynamic, so a functioning and responsive GRC program, if left static and unchanging, cannot be so perfect for all cases, and over all time!

Question 1: Would you take issues and complaints to a responsible officer or director? (are there internal complaints procedures in place, and do all within the company know how to avail themselves of same?);

Question 2: Are you confident that the issues or complaints raised will be adequately and timely addressed?  (do the responsible officers and the set procedures inspire credibility, by a demonstrated commitment of senior management to both GRC and the established complaint procedures?);

Question 3: Do you fear retaliation or punishment for raising issues or complaints in accordance with the established complaint procedures?  (is there a compliance culture, and are there adequate whistleblower protections?);

Question 4: Are these reporting behaviours championed within your organization?  (is there a clear commitment by all management levels to establishing, enunciating, and upholding the entity’s values and mission, and ethical behaviours; and are internal controls established, communicated, and enforced on a uniform and consistent basis?);

Question 5: Is there anything that you can think of and suggest to improve the GRC processes at your place of work? (this includes both the overall employing entity or head office, and suggested local variations for legal jurisdiction; business or actual culture; changing times, climes, and circumstances; and deficiencies or lessons learned).

*****************************************************************************

Author:

Ekundayo George is a sociologist and a lawyer, with over a decade of legal experience including business law and counseling (business formation, outsourcing, commercial leasing, healthcare privacy, Cloud applications, and Cybersecurity); diverse litigation, as well as ADR; and regulatory practice (planning and zoning, environmental controls, landlord and tenant, and GRC – governance, risk, and compliance investigations, audits, and counseling in both Canada and the United States).  He is licensed to practice law in Ontario, Canada, as well as in New York, New Jersey, and Washington, D.C., in the United States of America (U.S.A.).  See: http://www.ogalaws.com

Backed by courses in management, organizational behaviour, and micro-organizational behaviour, Mr. George is a writer, tweeter and blogger (as time permits), and a published author in Environmental Law and Policy (National Security aspects).

Mr. George is an experienced strategic and management consultant; sourcing, managing, and delivering on high stakes, strategic projects with multiple stakeholders and multidisciplinary teams.  See: http://www.simprime-ca.com

Hyperlinks to external sites are provided to readers of this blog as a courtesy and convenience, only, and no warranty is made or responsibility assumed by either or both of George Law Offices and Strategic IMPRIME Consulting & Advisory, Inc. (“S’imprime-ça”), in whole or in part for their content, or their accuracy, or their availability.

This article does not constitute legal advice or create any lawyer-client relationship.


[1] Ekundayo George.  GRC: An Overview (Part 1).  Published on ogalaws.wordpress.com.  October 21, 2012.  Online:>https://ogalaws.wordpress.com/2012/10/21/grc-an-overview-part-1/<

[2] Ekundayo George.  GRC: Governance (Part 2).  Published on ogalaws.wordpress,com.  October 29, 2012.   Online:>https://ogalaws.wordpress.com/2012/10/29/grc-governance-part-2/<

[3] Ekundayo George.  GRC: Risk (Part 3).  Published on ogalaws.wordpress.com.  November 6, 2012.  Online: > https://ogalaws.wordpress.com/2012/11/06/grc-risk-part-3/<

[4] See infra, note 30.

[5] United States Department of Commerce.  Energy and Environmental Management Manual.  Released in September, 2012.  Online: >http://www.osec.doc.gov/oas/Documents/OSEEP/Docs%20&%20Newsltrs/Documents/EEMM_FINAL_%2826_Sept._2012%29.pdf<

[6] RevenueRecognition.com.  Sarbanes-Oxley and Revenue Recognition Practices: Financial Executive Benchmarking Survey, Revenue Recognition Edition. 2005.  Online: > http://www.complianceweek.com/s/documents/RevRecandIDC-RevenueRecognitionPractices.pdf<

[7] Id. at page 5, figure 6.

[8] Supra. note 6 at page 4, figures 3 and 4.

[9] Supra. note 6 at page 6, figure 7.

[10] See e.g. Karen Gullo and Mark Chediak.  Chevron Bid to Dismiss $18 Billion Award Rejected in Ecuador.  Bloomberg.com, January 4, 2012.  Online: >http://www.bloomberg.com/news/2012-01-04/chevron-loses-bid-to-throw-out-18-billion-award-in-ecuador-pollution-case.html<  Post-judgement actions on the award are ongoing.

[11] See e.g. the matter currently on Appeal to the United States Supreme Court of Kiobel v. Royal Dutch Shell.  Online: >http://www.supremecourt.gov/Search.aspx?FileName=/docketfiles/10-1491.htm<; on appeal from Kiobel v. Royal Dutch Pet. Co., 621 F.3d 111 (2d Cir. 2010), decided on September 17, 2010.  Online: >http://www.ca2.uscourts.gov/decisions/isysquery/3d9bbe68-742b-4422-9de6-1b3c3d48589b/7/doc/06-4800-cv_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/3d9bbe68-742b-4422-9de6-1b3c3d48589b/7/hilite/<

[12] The 2 essential questions to be answered in Kiobel, are: (i) whether corporate civil tort liability under the Alien Tort Statute (“ATS” 28 U.S.C. §1350) goes to subject matter jurisdiction, or goes to merits and has thus already been decided below; and (ii) whether a corporation can be sued as can a private party, or is immune to liability for violating the law of nations regarding genocide, extrajudicial killing, or torture as the 11th Circuit already answered in the affirmative, below.  See United States Supreme Court.  10-1491 Kiobel v. Royal Dutch Petroleum, Decision Below: 621 F.3d 111. Lower Court Case Number: 06-4800, 06-4876.  Questions Presented.  Online: >http://www.supremecourt.gov/qp/10-01491qp.pdf<

[13] See e.g. the ongoing case in the United Kingdom of Mutua and others v. The Foreign and Commonwealth Office (“Mau  Mau” case), [2012] EWHC 2678 (QB), judgement issued on October 5, 2012).  Online:> http://www.judiciary.gov.uk/Resources/JCO/Documents/Judgments/mutua-fco-judgment-05102012.pdf<

[14] United States Department of Commerce, International trade Administration, Import Administration.  Steel Import Monitoring and Analysis System.  Online: >http://ia.ita.doc.gov/steel/license/index.html<

[15] United States Department of Commerce and United States Patent and Trademark Office (USPTO).  Small Entity Compliance Guide: Request for Supplemental Examination.  Released in September, 2012.  Online: >http://www.uspto.gov/aia_implementation/supp-exam-compliance-guide.pdf<

[16] United States Department of Commerce, Bureau of Industry and Security.  Compliance Guidelines: How to Develop an Effective Export Management and Compliance Program and Manual.  Released in June, 2011.  Online: >http://www.bis.doc.gov/complianceandenforcement/emcp_guidelines.pdf<

[17] See e.g. United States Congress.  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001.  Pub. L. 107–56, Oct. 26, 2001; also sometimes referred to as Patriot I.  Online: >http://www.gpo.gov/fdsys/pkg/PLAW-107publ56/pdf/PLAW-107publ56.pdf

[18] See United States Congress.  USA Patriot Improvement and Reauthorization Act of 2005.  Pub. L. 109–177, Mar. 9, 2006; also sometimes referred to as Patriot II.  Online: >http://www.intelligence.senate.gov/laws/pl109-177.pdf<; See also United States Congress.  PATRIOT Sunsets Extension Act of 2011.  Pub. L. 112–14, May 26, 2011; also sometimes referred to as Patriot III.  Online: >http://www.gpo.gov/fdsys/pkg/PLAW-112publ14/pdf/PLAW-112publ14.pdf<

[19] United States Congress.  The Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, July 21, 2012.  Online: >http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf<

[20] Id. at Section 1502.

[21] Id.

[22] See Kramer v. Trans-Lux Corp., No. 3:11cv1424, 2012 U.S. Dist. (D. Conn. Sept. 25, 2012), at page 11 of the Order.  In partially denying the defendant’s Motion for Summary Judgement (seeking dismissal of the plaintiff’s Complaint for failure to state a claim for which relief can be granted, under FRCP 12 (b)(6)), the Honorable Stefan R. Underhill, U.S.D.J., held that “Sarbanes-Oxley protects persons who disclose information they reasonably believe constitutes a violation of SEC rules or regulations (…) by the language of the whistleblower provision, the whistleblower need only have reasonably believed that it was a violation (…) [t]herefore, Kramer has alleged sufficient facts to support a Dodd-Frank Act whistleblower claim based on his internal and external communications”.  Online: >http://courtweb.pamd.uscourts.gov/courtwebsearch/ctxc/11cv1424mtdrul.pdf<

See also Ott v. Fred Alger Management, Inc., No. 11 Civ. 4418, 2012 U.S. Dist. (SDNY Sept 27, 2012), at page 9 of 20 in the Order.  In her Memorandum and Order denying the defendant’s Motion for Summary Judgement under FRCP 12(b)(6) and FRCP 23.1 (Derivative Actions by Shareholders, of which this was one such), the Honorable Loretta A, Preska, U.S.D.J., held that the “anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”  The American Law Institute, Continuing Legal Education.  The SEC’s Whistleblower Program: One Year Later Cosponsored by the ABA Business Law Section and the ABA Section of Public Utility, Communications and Transportation Law.  Telephone seminar/audio webcast as delivered on October 9, 2012.  Online: >http://files.ali-cle.org/files/coursebooks/pdf/TSUP04_chapter_02.pdf<

[23] Caselaw in the European Union has left In-House Counsel somewhat exposed when rendering advice or conducting In-House investigations, as there is an absence of effective privilege.  See e.g. Akzo Nobel Chemicals & Akcros Chemicals v Commission (Competition) [2007] EUECJ T-125/03 (17 September 2007).  Online: >http://www.bailii.org/eu/cases/EUECJ/2007/T12503.html<  On the part of outside Counsel, another risk that he or she may face is to be (or find oneself alleged to be) caught-up in the misconduct of a client as more than an innocent advisor.  Joseph P. Collins has so far been able to secure a retrial since his earlier criminal conviction.  See US v. Joseph P. Collins, 10-1048-cr, NYLJ 1202537905466, at *1 (2d Cir., Decided January 9, 2012).  Online: >http://www.law.com/jsp/decision.jsp?id=1202537905466<

[24] United States Congress.  The Securities Act of 1933 (Truth in Securities Act), 15 U.S.C. §77a et seq.  Online: >http://www.sec.gov/about/laws/sa33.pdf<; The Securities Act of 1934 (Securities Exchange Act), 15 U.S.C. §78a et seq.  Online: >http://www.sec.gov/about/laws/sea34.pdf<

[25] Each province creates, implements, and enforces its own securities laws, as there is no national regulator.  Indeed, this may remain the case for the foreseeable future as a “Reference” question put to the Supreme Court of Canada approximately one year ago, was returned with a decision that the federal power granted under the 1867 Constitution Act to regulate trade and commerce was insufficient to authorize creation of a national securities regulator over and above the existing provincial securities regulators.  See Reference Re Securities Act, 2011 SCC 66, [2011] 3 S.C.R. 837.  Online: >http://www.scc-csc.gc.ca/case-dossier/cms-sgd/dock-regi-eng.aspx?cas=33718<  However, the Province of Ontario passed An Act to implement Budget measures and other initiatives of the Government, S.O. 2002, S.O. 2002, ch. 22-bill 198 (effective April 7, 2003), which at its Title XXVI amended the Ontario Securities Act with: (i) updated definitions for materiality, (i) clarification of continuing disclosure provisions, (iii) encoding of privacy protections for issuers under the Freedom of Information and Protection of Privacy Act, R.S.O. 1990, Chapter F.31, (iv) raising the fine levels from $1 million to $5 million in certain cases, (v) barring fraud, market manipulation, and the making of misleading or untrue statements, and (vi) imposing liability on directors and officers or a “person who authorized, permitted or acquiesced in the non-compliance”.  Online:  >http://www.ontla.on.ca/web/bills/bills_detail.do?locale=en&BillID=1067&isCurrent=false&ParlSessionID=37%3A3<.  This laid the groundwork for Canada’s security regulators to work together and issue what became National Instrument 52-109: Certification of Disclosure In Issuer’s Annual and Interim Filings; also sometimes termed SOX Canada.  Online: >http://www.bcsc.bc.ca/uploadedFiles/securitieslaw/policy5/52-109NI_Advance_Notice.pdf<  Subsequent amendments and collateral instruments have strengthened the disclosure regime for public issuers in Canada’s various provinces.

[26] European Commission.  Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004, on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC.  Online: >http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:390:0038:0057:EN:PDF<

[27] National Stock Exchange of India Limited.  Listing Agreement, §49 at pages 77-91; also sometimes termed SOX India.  Online: >http://www.nse-india.com/getting_listed/content/listing_agreement.htm<

[28] Government of Australia.  Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004; also sometimes termed SOX Australia.  Online: >http://www.comlaw.gov.au/Details/C2004A01334/Download<

[29] United States Congress.  The Sarbanes-Oxley Act of 2002 (The Public Company Accounting Reform and Investor Protection Act), Pub. L. 107–204, July 30, 2002, 116 Stat. 745.  Online: >http://www.sec.gov/about/laws/soa2002.pdf<

[30] United States Congress.  The Gramm-Leach-Bliley Act (Financial Services Modernization Act of 1999), Pub. L. 106-102, November 12, 1999, 113 Stat. 1338.  Online: >http://www.gpo.gov/fdsys/pkg/PLAW-106publ102/pdf/PLAW-106publ102.pdf<

[31] For example, limited exemptions exist under Securities and Exchange Commission (SEC) Final Rule 33-9142: Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers. 17 CFR Parts 210, 229 and 249.  Effective September 21, 2012.  Online: >http://www.sec.gov/rules/final/2010/33-9142.pdf<

[32] Some additional SOX carve-outs and modifiers were created by the JOBS Act, which passed with the strong support of both parties (380:41 in the House with 10 more not voting, and 73:26 in the Senate); although not without some controversy from interest groups.  See e.g. Congress of the United States.  Jumpstart Our Business Startups Act (“JOBS Act”).  Pub. L. 112-106, Apr. 5, 2012.  Online:>http://www.gpo.gov/fdsys/pkg/PLAW-112publ106/pdf/PLAW-112publ106.pdf<.  See also JOBS Act Critique: Consumer Federation of America. Public Interest Groups Oppose Anti-Investor “Capital Formation” Bills.  March 5, 2012 Open Letter to the United States Senate, Committee on Banking, Housing and Urban Affairs.  Online: >http://www.consumerfed.org/news/467<

[33] Supra note 29, SOX at Section 404 (Management assessment of internal controls)See also United States Securities and Exchange Commission (SEC) Final Rule 33-8238: Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports.  17 CFR Parts 210, 228, 229, 240, 249, 270 and 274.  Effective August 14, 2003.  Online: >http://www.sec.gov/rules/final/33-8238.htm<

[34] Supra note 29, SOX at Section 1107 (Corporate Fraud Accountability Act of 2002), within SOX Title XI.

[35] Id. at SOX Section 906 (White Collar Crime Penalty Enhancement Act of 2002), within SOX Title IX.

[36] Supra note 29, SOX at Section 802 (Corporate and Criminal Fraud Accountability Act of 2002), within SOX Title VIII.

[37] This section applies to all U.S. issuers regardless of their place of incorporation or re-incorporation.  Supra note 29, SOX at Section 302 (Corporate responsibility for financial reports)See also United States Securities and Exchange Commission.  Final Rule 33-8124: Certification of Disclosure in Companies’ Quarterly and Annual Reports.  17 CFR Parts 228, 229, 232, 240, 249, 270 and 274.  Effective August 29, 2002.  Online: >http://www.sec.gov/rules/final/33-8124.htm<

[38] United States Congress.  The Sarbanes-Oxley Act of 2002 (The Public Company Accounting Reform and Investor Protection Act), Pub. L. 107–204, July 30, 2002, at Section 307(1): Rules of Professional Responsibility for Attorneys.  Online: >http://www.sec.gov/about/laws/soa2002.pdf<

[39] Id. at Section 307(2).  Pursuant to that section, the Securities and Exchange Commission has issued Final Rule 33-8185: Implementation of Standards of Professional Conduct for Attorneys, 17 CFR Part 205, effective August 5, 2003).  See Securities and Exchange Commission (SEC).  Online: >http://www.sec.gov/rules/final/33-8185.htm<

[40] In the lead-up to Hurricane Sandy of October, 2012, that wreaked havoc on Cuba, Jamaica, Haiti, and the Bahamas in the Caribbean, and had its heaviest U.S. impact on New York and New Jersey, some businesses including AT&T in New Jersey, purchased entire fuel tanker trucks as part of their contingency planning, in order to avoid the line-ups at empty filling stations, the business interruptions caused by employees unable to get to work, and the inability to themselves operate due to lost power and gasless backup generators.  See Katie Eder.  Gas becomes hot commodity for N.J. businesses, post-Sandy.  Published on njbiz.com, November 5, 2012.  Online: >http://www.njbiz.com/article/20121105/NJBIZ01/121109942/-1/enews_dailyT1See also The Associated Press.  Hurricane Sandy Hits Bahamas After Sweeping Through Cuba and Haiti.  Published on nytimes.com, October 25, 2012.  Online: >http://www.nytimes.com/2012/10/26/world/americas/sandy-hits-bahamas-after-havoc-in-cuba-and-haiti.html<

[41] United States Congress.  Controlling the Assault of Non-Solicited Pornography And Marketing Act of 2003.  Pub. L. 108-187, Dec. 16, 2003 (CAN-SPAM Act).  Online: >http://www.gpo.gov/fdsys/pkg/PLAW-108publ187/pdf/PLAW-108publ187.pdf<

[42] Government of Canada.  An Act to promote the efficiency and adaptability of the Canadian economy by regulating certain activities that discourage reliance on electronic means of carrying out commercial activities, and to amend the Canadian Radiotelevision and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act.  S.C. 2010, c. 23 (also termed the “Canada Anti-Spam Law”).  Online: >http://laws-lois.justice.gc.ca/PDF/E-1.6.pdf<

[43] Bill C-11, The Copyright Modernization Act, received Royal Assent on June 29, 2012.  Notification and counter-notification provisions for ISP’s and certain other webhosts – as akin to the DMCA – can be found in sections 41.25, 41.26, and 41.27 of the Act.  Admittedly, certain public interest entities are protected against harsh penalties in Bill C-11, with the delineation of an injunction as the appropriate penalty for their non-willful copyright infringement.  However, due to the threat (and very real legal option) for infringing websites to be blocked outright in certain jurisdictions, Canadian entities hosting content that might infringe the copyright of ”someone, somewhere” (such as blogs and other social media sites) might include notification and counter-notification measures in their online usage policies and contact forms.  We have been approached, and advised, with regard to this option as a potential demonstrated due diligence compliance measure.  See Government of Canada.  Copyright Modernization Act, S.C. 2012, c. 20.  Online: >http://laws-lois.justice.gc.ca/eng/AnnualStatutes/2012_20/page-1.html<

[44] Undoubtedly, employees who see their employer taking a lead when the situation requires it, and who are encouraged to find ways to become personally involved – whether by selecting and presenting CSR opportunities, enjoying matching donations from the employer, volunteering, or otherwise, will be more likely to buy-in to the company’s values, mission, and longevity (by mutually enforcing amongst their peers, improving by individual or group and committee contributions, and themselves personally adhering, each and all, to its compliance and ethics program).  See generally Beth Fitzgerald.  N.J. business community pitches in for Sandy relief.  Published on NJBIZ.com, November 6, 2012.  Online: >http://www.njbiz.com/article/20121106/NJBIZ01/121109925/-1/enews_dailyT2<

[45] Those who have had the foresight and planning to secure appropriate insurance coverage for wind, fire, flooding, and business interruptions, are always happier than others when their paid-up policies are available for claims in times of great need after such “contingencies”.  See e.g. Joseph N. DiStefano.  Philly Deals: Sandy incites twice as many insurance claims as Irene.  Published on phillydeals.com, Tuesday, November 6, 2012.  Online: >http://www.philly.com/philly/business/20121106_PhillyDeals__Sandy_incites_twice_as_many_insurance_claims_as_Irene.html<

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GRC: Risk (Part 3).

November 6, 2012

This is the third in a 4-part series on devising a structure to address that ever-expanding and increasingly complex (and crowded) intersection of Governance, Risk, and Compliance (GRC).  This is the new paradigm for compliance programs in modern business, but one should always bear in mind that any Compliance Program should be structured with due consideration for the Scope (range of products and/or services offered), Size (number of employees), and Span (geographic spread, and number and range of legal regimes to which it is subject) regarding the entity; including any and all subsidiaries and any cross-national requirements.

Progress so far: What have we covered?

The corporate compliance function can be defined as “those persons, processes, and protocols whether active or automated, that are employed and deployed by the subject entity to ensure on a continuing basis that governing laws are adhered to, governance is responsible and responsive, risks are contained within acceptable parameters, and that failings on any or all of these priorities, are speedily and sufficiently addressed in accordance with applicable laws, whether general, or case- or situation-specific”.

We started in Part 1 (GRC: An Overview)[1] with a quick review of the essential requirements of an effective corporate compliance and ethics program as devised for Canadian and US. federal jurisdictions, respectively.  We also looked at some of the similarities and differences between these two regimes, and some of the factors and related laws that impact upon ethics in general and corporate compliance functions.

Next, in Part 2 (GRC: Governance),[2] we set framework parameters in a chart or matrix.  There were 3 category columns on the X-axis, arranged horizontally; 7 category rows on the Y-axis (with 2 additional but reserved rows), arranged vertically; and a third or “depth” dimension, containing 5 more categories.  We also ran through a much abbreviated presentation and analysis using only the first category column (Governance), as we addressed some of that column’s intersection points with the 7 category-rows, as well as with elements of the depth dimension.

Risk.

Now, we address some risk factors as they intersect with category-rows and the depth dimension.

What are some of the risks that are identified or encompassed within laws and regulations, that otherwise challenge good governance, and that should be addressed with a compliance program?

Regulatory:

In this category, we can consider the risk of entity liability for any breach of law or regulation, generally, as well as the potential liability of officers and directors for the same infraction or series of infractions, whether willful or negligent.  Comprehensive General Liability (CGL) coverage is a base prerequisite for which proof will be required by many if not all business counterparties, and certainly competent commercial landlords.  Securing appropriate coverage in Errors and Omissions (E&O) and Directors’ and Officers’ (D&O) insurance as and where applicable, is also highly advisable.  Of course, the same is true for business interruption, receivables, and increasingly now, employment practices in a challenging economic climate with the additional complexity of social media, and employment practices – including candidate sourcing, candidate background checks, hiring and retention (especially with regard to non-competes, work-product ownership and attribution, and compensation and executive compensation for officers and directors generally), monitoring, investigations, discipline, and firing) impacted by increasing employee and contractor use of social media.  Also rising quickly is demand for privacy breach insurance, due to the costly and onerous reporting, remediation, credit monitoring (and sometimes restitution requirements if funds or properties are actually lost), that can result from a large-scale privacy breach.

Environmental:

Avoiding environmental liability is critical to those industries that I identified in Part 2 as amongst the most closely regulated (food processing, manufacturing, healthcare, energy, natural resources, refining or distilling, construction, chemical manufacturing, information technology, automotive, and transportation).  Emissions should be monitored, contained within acceptable limits, and promptly reported and remediated when they leak as gas or fumes, as required by law.  Effluent, whether leachates (as with an improperly lined landfill) or liquid waste and runoff from some manufacturing, distillation, or extraction process, should likewise be monitored, contained within acceptable limits, and promptly reported and remediated, as required by law.  Finally, the entity must have in-depth knowledge as to what they are, how toxic they are, and how it deals with, its sludges and solids, if any – whether bio-solids (municipal services), manufacturing and natural resources byproducts (pulp and paper mills, or mining), or packaging wastes from inventory and work in progress.  The practice of “Reduce, Reuse, and Recycle” has now added promising legal options (such as plasma gasification and more widespread deployment of renewable energy sources), but must still contend with persistent illegal options (ocean dumping, prohibited re-use of contaminated materials,[3] and undeclared transboundary movements to jurisdictions having “low-to-no regulation”,[4] with devastating effects on flora, fauna, and human life through increasingly toxic and bio-accumulative heavy metals, persistent organic pollutants, and endocrine disruptors; all of which the locals are invariably unaware, but that can cause significant reputational damage, injury, death, and even entity termination for fines and regulatory sanctions,[5] as well as legal actions.[6]

Accounting/Audit:

Accounting and audit risks can impinge upon industry-specific standards, such as the new Basel III capital requirements for the financial services industry; or broadly applicable standards such as Generally Accepted Accounting Principles (GAAP), and the determination of safe harbours in GAAP equivalents, as applied in other jurisdictions.[7]  Procedures, competent personnel, kept current accounting and reconciliation tools, and appropriate policies must be in place to address the risks of improper revenue recognition, transfer pricing, tax remitting, budgeting, and collection practices.  Additional risks must be addressed in the realms of loss control, contract management, and now, various national and transnational Anti-Money Laundering (AML) regulations.

Lessons Learned:

Political risk (government changes, electoral malfeasance as actual or alleged, and unfavourable policy somersaults), reputation risk (employee, operational, and business crises), counterparty risk (contractor malfeasance, insolvency, or non-performance), and business interruptions (human error, accident, utility failure or natural disaster) including as a result of climate change and climatic events such as hurricanes and tornados, are always potential stressors that must be considered in the risk analysis.[8]  One lesson learned should be the regular commissioning and performance of Gap Analyses and SWOT (strengths, weaknesses, opportunities and threats) analyses, or the like, in order to identify, assess, categorize, quantify, rank, and address existing, emergent, and fast-evolving risks in an increasingly competitive and hyper-dynamic business environment.

Furthermore, when a serious issue arises that could put many third parties at risk and result in significant reputational damage and litigation, such as the recent revelation of some alleged flaws in hotel security locks.[9]  The ideal response should be strong and swift, with genuine attempts to work with regulators, counterparties, and the consuming public in addressing their concerns.  However, responses from both the main manufacturer and the hospitality industry, generally, have varied.[10]  A selection of recalls within recent memory shows a range of initial and subsequent responses by suppliers, regulators, and consumers to alleged and actual and repeated consumer health, and food or product safety issues, in Japan,[11] the United States,[12] and Canada.[13]

This underlines the importance of horizon scanning in ongoing hard media and social media monitoring (to be amongst the first to see and know of that posting or video that exposes some critical failing in governance, some hitherto unknown risk, or some compliance challenge that sorely needs to be addressed); having a well thought-out contingency plan in place (adequate preparation); proper proofing and stress-testing of all third-parties and third-party tools (due diligence);[14] good communication lines with vendors (towards a unified message or credible communications); and possessing sufficient, paid-up privacy and other insurance coverages, and accumulated goodwill and litigation reserves can prove most useful, if and as responsibly drawn-down in increments.

Internal/Institutional:

The risks of poor earnings results, liquidity crises, and adverse leadership events that might lead to hostile takeovers and other changes of control (including margin calls, lenders realizing on collateral, and critical talent departure for greener or apparently more fiscally secure pastures), should be addressed with appropriate succession plans and takeover defences lawful in the jurisdiction of overall organization.  A lifecycle management approach and other measures might also be used to address risks associated with internal document flow and external data leakage, especially where the entity has valuable intellectual property, sensitive client data, or a mission-critical role in an ultrahazardous industry or a Law Enforcement and National Security (LENS) capacity.[15]  Costly litigation was long a greater risk in some, more litigious jurisdictions than others.  However, the sheer volume of data currently kept and generated by businesses to include paper trails, electronic documents, email logs, voicemails, and mobile data – at the very least – can lead to crippling e-Discovery costs; not to mention their duplication in parallel regulatory proceedings, or regulatory proceedings combined with individual actions or one or more class actions.[16]  Complex Litigation brings dire realities!  At the risk of severe sanctions for not having, or being unable to find, some critical piece of evidence, great thought, expertise, and sometimes expense, must be put into planning the IT infrastructure, designing an appropriate IT architecture, and implementing a responsible document retention and management policy, along with off-site backup and a good disaster plan.

Structural/Systemic:

This category-row can include operational risk, credit risk, market risk, and a host of legal risks as ongoing concerns.  Occasional but increasingly real considerations, are kidnap and terrorism risk (which is certainly no longer restricted to hitherto readily identifiable industries, businesses, and jurisdictions), and Climate Change risk, which is still both debatable (as to its reality), and unpredictable (as to its severity).  Whatever those real answers are, many people can likely agree that the glaciers are melting and/or retreating; tree cover in the world’s rainforests that protects habitats, provides for carbon absorption, and regulates the weather is being depleted; and weather patterns are changing.

Technical/Tactical:

The risks of unauthorized operations or operators, loss or unauthorized disclosure of Personally Identifiable Information (PII), and exceeded authority, should be addressed with physical (access and surveillance), electronic (encryption and audit trails), and procedural (segregation of duties and “need to know” or “business purpose” criteria) security and intrusion controls.  This must be further buttressed with ongoing vulnerability testing in Privacy Impact Assessment (PIA), Data Protection Audit (DPA), and Threat Risk Assessment (TRA) as appropriate.  Outsourcing and offshoring should always be preceded by due diligence, especially with regard to any Cloud Services Provider (data custody, integrity, and replicability; immediate jurisdiction and long-arm third-party jurisdiction; and service levels),[17] or any offshore manufacturer (labour or health and safety issues).[18]  Pre-employment background checks are highly advisable to guard against bringing-on what you “knew or should have known” was a live liability; or once known or suspected, “turning a blind eye” or “promoting or condoning the conduct”, all of which can cause reputational damage, significant depletion of a famous brand, and legal action or sanction.[19]

Summary.

Effective risk identification, assessment, categorization, quantification, ranking, and addressing  (whether by containment, minimization, or elimination) is critical for a business, and like governance, it is no easy task.  However, with proper planning, advice, and application, it can be done. In the next installment, we will consider “Compliance” category column items, as they intersect with the 7 category rows and some of the 5 depth elements.

**************************************************************************

Author:

Ekundayo George is a sociologist and a lawyer, with over a decade of legal experience including business law and counseling (business formation, outsourcing, commercial leasing, healthcare privacy, Cloud applications, and Cybersecurity); diverse litigation, as well as ADR; and regulatory practice (planning and zoning, environmental controls, landlord and tenant, and GRC – governance, risk, and compliance investigations, audits, and counseling in both Canada and the United States).  He is licensed to practice law in Ontario, Canada, as well as in New York, New Jersey, and Washington, D.C., in the United States of America (U.S.A.).  See: http://www.ogalaws.com

Backed by courses in management, organizational behaviour, and micro-organizational behaviour, Mr. George is also a writer, tweeter and blogger (as time permits), and a published author in Environmental Law and Policy (National Security aspects).

Mr. George is an experienced strategic and management consultant; sourcing, managing, and delivering on high stakes, strategic projects with multiple stakeholders and multidisciplinary teams.  See: http://www.simprime-ca.com

Hyperlinks to external sites are provided to readers of this blog as a courtesy and convenience, only, and no warranty is made or responsibility assumed by either or both of George Law Offices and Strategic IMPRIME Consulting & Advisory, Inc. (“S’imprime-ça”), in whole or in part for their content, or their accuracy, or their availability.

This article does not constitute legal advice or create any lawyer-client relationship.


[1] Ekundayo George.  GRC: An Overview (Part 1).  Published on ogalaws.wordpress.com.  October 21, 2012.  Online:>https://ogalaws.wordpress.com/2012/10/21/grc-an-overview-part-1/<

[2] Ekundayo George.  GRC: Governance (Part 2).  Published on ogalaws.wordpress,com.  October 29, 2012.  Online:>https://ogalaws.wordpress.com/2012/10/29/grc-governance-part-2/<

[3] Jonathan Tirone and Subramaniam Sharma.  Radioactive Beer Kegs Menace Public, Boost Costs for Recyclers.  Bloomberg.com.  Published on November 11, 2008.  Online:>http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKNgo0CVJg9s<

[4] Fiona Harvey.  Trafigura lessons have not been learned, report warns: Amnesty International and Greenpeace say too little has been done to strengthen regulations on toxic waste dumping.  Guardian online.  Published September 25, 2012.  Online:>http://www.guardian.co.uk/environment/2012/sep/25/trafigura-lessons-toxic-waste-dumping<

[5] United States Sentencing Commission.  2011 Federal Sentencing Guidelines Manual, as effective November 1, 2011.  Chapter Eight – Sentencing of Organizations (Introductory Commentary).  Online: >http://www.ussc.gov/Guidelines/Organizational_Guidelines/guidelines_chapter_8.htm< “Second, if the organization operated primarily for a criminal purpose or primarily by criminal means, the fine should be set sufficiently high to divest the organization of all its assets”.

[6] Edward Broughton.  The Bhopal disaster and its aftermath: a review.  Environmental Health: A Global Access Science Source.  Published on 10 May, 2005.  Online: > http://www.ehjournal.net/content/4/1/6<

[7] See European Commission, Commission Regulation (EC) No 1569/2007 of 21 December 2007 establishing a mechanism for the determination of equivalence of accounting standards applied by third country issuers of securities pursuant to Directives 2003/71/EC and 2004/109/EC of the European Parliament and of the Council.  Online: >http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2007:340:0066:0068:EN:PDF<

[8] Of course, these perils bring with them a whole host of other added risks and ills for businesses, consumers, and governments alike.  See e.g. Amy Lieberman of the Christian Science Monitor.  Hurricane Sandy’s darker side: Looting and other crime.  Published on new.yahoo.com, Saturday, November 3, 2012.  Online:>http://news.yahoo.com/hurricane-sandys-darker-side-looting-other-crime-190000049.html<

[9] Andy Greenberg, Forbes Staff.  Hotel Lock Firm’s Security Fix Requires Hardware Changes For Millions Of Keycard Locks.  Published on Forbes.com, August 17, 2012.  Online: >http://www.forbes.com/sites/andygreenberg/2012/08/17/hotel-lock-firms-fix-for-security-flaw-requires-hardware-changes-for-millions-of-locks/print/<

[10] Id.

[11] The Associated Press.  Massive worldwide Toyota recall affects 7.4 million vehicles.  Published on ctvnews.ca, October 10, 2012.  Online:>http://www.ctvnews.ca/autos/massive-worldwide-toyota-recall-affects-7-4-million-vehicles-1.989540<

[12] April Fulton.  Same Plant, New Month: Cargill Ground Turkey Recall, Take 2.  Published on npr.org, September 12, 2011.  Online:>http://www.npr.org/blogs/health/2011/09/12/140398110/same-plant-new-month-cargill-ground-turkey-recall-take-2<

[13] CBC News.  XL Foods takes ‘full responsibility’ for meat recalled for E. coli.  Published on cbc.ca, October 4, 2012.  Online:>http://www.cbc.ca/news/business/story/2012/10/04/beef-recall-expansion-xl-foods.html<

[14] Under the United States Health Insurance Portability and Accountability Act (HIPAA) as amended, third-party health data outsourcing contractors or “Business Associates” are now directly responsible in their own rights, for compliance with applicable state and federal privacy and privacy breach laws and regulations.  In the past, primary entities bore the brunt of liability.  Nevertheless, 3rd party stress testing and due diligence are still best practices.

[15] Whether or not involved in one of those closely regulated industries or activities listed in the “Environmental” category row, above, any person or entity involved in research, especially Dual Use Research of Concern (DURC – meaning research that can have peaceful uses, as well as uses for terror and aggression), should take precautions and be particularly concerned about responsible publication (there are already plenty of mass disaster creation manuals on the internet), their access to funding (who really want to be linked to a toxic source), and their continued freedom (terrorism, terrorist conspiracy, failure to warn or inform, or properly register), and so forth.  See e.g. Office of Biotechnology Activities (OBA), Office of Science Policy, United States National Institutes of Health (NIH).  United States Government Policy for Oversight of Life Sciences Dual Use Research of Concern.  Released March 29, 2012.  Online: >http://oba.od.nih.gov/biosecurity/bio_usg_activities.html<

[16] With a major mis-step, government action for: (i) regulatory sanction, fine, and disgorgement against the company, may proceed with (ii) parallel criminal penalty actions against the company itself, and (iii) against culpable officers and directors (either or both of which the company may or may not pay to defend, and regarding either or both of which the company may or may not be forced to contend with an E&O insurer’s or a D&O insurer’s attempt to deny coverage).  These may also be joined by: (iv) direct individual or class proceedings against the company by third-parties who have been harmed by the alleged unlawful acts, and simultaneously joined or closely followed, by (v) a whistleblower Qui Tam action under the False Claims Act by the disclosing Relator (employee, contractor, or agent), perhaps with a (vi) wrongful dismissal/retaliation suit if already retaliated against in some prohibited fashion; along with (vii) one or more Shareholder Derivative Suits for diluting the value of public company stock through Board fiduciary duty breach.  Of course, (iix) other interests may always seek to intervene as actual parties, or leave to file Briefs; which will likely bring added heavy (and costly) motion practice.

[17] See e.g. Ekundayo George.  To Cloud or Not to Cloud: What are Some of the Current, Most Pertinent Pros and Cons?  Published on ogalaws.wordpress.com. December 28, 2011.  Online:>https://ogalaws.wordpress.com/2011/12/28/to-cloud-or-not-to-cloud-what-are-some-of-the-current-most-pertinent-pros-and-cons/<

[18] David Teather.  Gap admits to child labour violations in outsource factories.  Guardian.co.uk.  Published on Thursday, 13 May, 2004.  Online:>http://www.guardian.co.uk/business/2004/may/13/7<

[19] Neil Midgley.  Panorama: Jimmy Savile – What the BBC Knew, BBC One, review.  Telegraph.co.uk.  Published on Wednesday, 24 October, 2012.  Online: >http://www.telegraph.co.uk/culture/tvandradio/9625956/Panorama-Jimmy-Savile-What-the-BBC-Knew-BBC-One-review.html<

GRC: Governance (Part 2).

October 29, 2012

This is the second in a 4-part series on devising a structure to address that ever-expanding and increasingly complex (and crowded) intersection of Governance, Risk, and Compliance (GRC).  This is the new paradigm for compliance programs in modern business, but one should always bear in mind that any Compliance Program should be structured with due consideration for the Scope (range of products and/or services offered), Size (number of employees), and Span (geographic spread, and number and range of legal regimes to which it is subject) regarding the entity; including any and all subsidiaries and any cross-national requirements.

Progress so far: Where did we start?

The corporate compliance function can be defined as “those persons, processes, and protocols whether active or automated, that are employed and deployed by the subject entity to ensure on a continuing basis that governing laws are adhered to, governance is responsible and responsive, risks are contained within acceptable parameters, and that failings on any or all of these priorities, are speedily and sufficiently addressed in accordance with applicable laws, whether general, or case- or situation-specific”.

We started with a quick review of the essential requirements of an effective corporate compliance and ethics program as devised for Canadian and US. Federal jurisdictions, respectively.  We also looked at some of the similarities and differences between these two regimes, and some of the factors and related laws that impact upon ethics in general, and corporate compliance functions.  The next step is to draw many disparate elements together, and start to create an operational framework.

Setting Framework Parameters.

Conceptually, the contemplated framework resembles a chart or matrix.  On the X-axis (running diagonally), there are 3 (“three”) category columns; running from left to right as “Corporate Governance” (Governance), “All-hazards Risk” (Risk); and “Regulatory Compliance” (Compliance).  On the Y-axis (running vertically), there are 7 (“seven”) main category rows and 2 (“two”) reserved category rows which will be identified later.  Those 7 main categories, as read from the top, downwards, are: Regulatory, Environmental, Accounting/Audit, Lessons Learned, Internal/Institutional, Structural/Systemic, and Technical/Tactical.[1]

A third “F-I-X-E-D” or “depth” dimension, accounts for entity scope, size, and span by focusing on “Function” (Human Resources, purchasing, distribution, accounting and audit, and reporting); “Industry” (some of the most closely regulated being food processing, manufacturing, healthcare, energy, natural resources, refining or distilling, construction, chemical manufacturing, information technology, automotive, and transportation); “X-national” aspects (per governing jurisdiction, including states and territories within nations, and multilateral treaties and accords); “Employees” by class (full-time, part-time, contract, line or staff, and officers and directors); and “Divisional” (per business line, sub-entity, product, or service in both centralized and decentralized organizations).  This GRC series includes selections from the F-I-X-E-D, but in no particularized order.

Governance.

The current installment will focus on the “Governance” category column.  Here, we speak of governing laws being adhered to, and of governance as both responsible and responsive.

Regulatory:

Every business entity has one or more laws with which it must comply when forming, whether this is a corporation, a partnership, or a sole proprietorship.  This may include qualifications for and residence of directors, the minimum number of directors, which types of business conduct may or may not be engaged in through a partnership, restrictions on the limitation of liability, and mandatory insurance requirements.  Certain specialized professions may also have mandatory training, licensing, and certification requirements, and certain regulated industries will include detailed regulations for the construction, installation, deconstruction, maintenance, repair, and upgrade or modification of assorted installations and equipment.  Health and safety regulations may also come into play, whether at the formation stage or later with the going concern.  It is always best to: (i) have knowledgeable advice and counsel on which of these laws and regulations are applicable; (ii) secure and assign certified and insured professionals to perform the work; and (iii) assign the compliance function to a senior officer of the entity as early into operations as possible; if not at or even prior to formation, as a matter of good governance best practices.  The compliance officer should be sufficiently independent of day-to-day management and have adequate authority and resources to fulfill his or her role, as well as access to the Board and a mandatory responsibility to make periodic reports to the Board.

Environmental:

The environment is an increasingly critical area of concern in terms of government regulation and corporate governance.  Canadian businesses doing business entirely within Canada must contend with applicable provincial laws, and the authority of the 5 (“five”) federal departments with responsibility for environmental issues (Environment Canada, Agriculture and Agri-Food Canada, Fisheries and Oceans Canada, Health Canada, and Natural Resources Canada), that not only regulate, but also “collaborate on research, share success stories, and disseminate information”.[2]  In addition, those entities that handle (or have their employees handle) hazardous substances, must abide by the national Workplace Hazardous Materials Information System (WHMIS).[3]  In the United States, state laws and state regulators (sometimes titled Departments of Environmental Protection) supplement the work of the primary federal regulators (Environmental Protection Agency and Food and Drug Administration), and the principal federal laws (Clean Air Act, Clean Water Act, and Environmental Protection Act).  Canadian or American businesses operating in or to the European Union must add compliance with the REACH,[4] ROHS,[5] and WEEE.[6]  Along with a rising concern over carbon capture, carbon trading, and Greenhouse Gas (GHG) emissions (which prompted the EU inclusion of air transportation emissions in its emissions trading scheme),[7] entities operating on a global basis, such as aviation, shipping, electronics, and natural resources, must also consider the applicability of the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal.[8]  It is important to be properly advised in this area, to avoid costly mis-steps, fines, and potentially severe reputational damage.

Accounting/Audit:

With regard to expenditures, expense budgets, and projects, it is good governance practice to have detailed procedures for approval, review, reconciliation, query and follow-up.  There should be strict Separation of Duties (SOD) between approval and audit, and individual and departmental spending and budgetary approval limits should be known and strictly followed.  On the audit side, the independence of auditors should be assured, and conflicts of interest (real or potential), must be completely avoided.  Accounting, oversight, and audit failures have been implicated as far back as the savings and loan crisis; through the Enron, Arthur Andersen, Worldcom, Global Crossing, and Tyco International GRC failures (as listed here in no particular order); and now in the Madoff and Lehman Brothers debacles, the recent U.S. housing crisis, and the current and lingering global financial crisis and economic downturn.

Lessons Learned:

Policies, policies, and more policies!  The entity must create, document, and distribute amongst its staff (with signed acknowledgements of receipt and understanding), internal policies on best and advisable practices, and employee and director charters and codes of conduct and ethics, as and where applicable.  These must be shared with appropriate personnel on a need to know basis, and regularly audited, stress-tested, compared with those of industry peers as and when available, and updated as advisable, all on an ongoing basis.  Incident reports should be kept and detailed after-action assessments made, in order that the entity can learn from past experiences, whether mistakes, or home runs, or something in between; and whether its own or those of another more fortunate or less fortunate peer.  Contractual counterparties will at times try to shift the risks and costs or responsibilities for certain GRC talking-points.  However, these are better if negotiated and not accepted “as is”, for the costs of compliance and consequences of failure, can be high.

Internal/Institutional:

Other governance best practices include having specified and written roles for all directors and officers, as well as detailed job descriptions for employees.  Reporting and communication lines should be clear, and decision-making at the highest levels should be backed by a paper trail with reasons; done by committee with regard to the Board of Directors; and done personally on appropriate advice or direction with regard to senior leadership and middle management, respectively.  Due care and diligence should always be taken in assigning work, staff, and functions, as well as in giving supervisors and subordinates the powers to do the same (authority, administrative, accreditation and assignment delegations).

Structural/Systemic:

It is always a good idea to join an industry or trade group, or another association appropriate to the entity’s main line or lines of work or business.  This helps with timely updates on critical legislation (both as enacted, and pending or under consideration and debate), occasional lobbying efforts, and pertinent suggested best practices.  There is no need to create the wheel anew, if someone else has already made one that works, and that can be tweaked for a better fit.  In the field of IT, for example, myriad standards exist such as Control Objectives for Information and Related Technologies (COBIT), several recommended protocols from the International Standards Organization (ISO), and the Information Technology Infrastructure Library (ITIL).  Major Enterprise Risk Management challenges (to avoid damaging consumer consequences) persist in ensuring that SSL and other credentialing certificates remain valid, proprietary, and up to date,[9] and otherwise compliant with applicable and fast-developing laws.[10]  Furthermore, evolving technology and litigation preservation and production requirements have ushered-in additional protocols such as the Sedona Canada e-Discovery Principles,[11] and the Patent Litigation e-Discovery “Model Order” announced by the Federal Circuit Appellate Chief Judge, the Honorable Randall R. Rader.[12]

Technical/Tactical:

Engagement/Employment Agreements that detail the rights and responsibilities of both sides are also advisable best practices to the extent practicable; for both full- and part-time employees, and contractors.  In the current economic environment, shorter term engagements with fewer strictures and formalities may be the preferred norm, but insurers favour a clearer demonstration of good governance, of which these are a prime example.  Detailed procedures should also be in place to govern company assets (securing facilities, fleets, IT infrastructure, and personnel), as well as the company’s reputation and intellectual property.  Two measures available to better secure the latter (reputation and intellectual property), are through institutionalized training on counter social engineering, and strictly enforced social media usage policies for both intranets (including email and texting), and the internet (blogs, aps., networking, and tweets), in general.

Summary.

Effective internal governance of the entity, and identifying the applicable laws and regulations to include in a compliance program when considering multiple functions, operating units, divisions, and jurisdictions, are no easy task.  Governance offers myriad challenges to, and opportunities for, getting things right.  In the next installment, we will consider “Risks” category column items, as they intersect with points in the 7 category rows and selected “depth” elements.

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Author:

Ekundayo George is a sociologist and a lawyer, with over a decade of legal experience including business law and counseling (business formation, outsourcing, commercial leasing, healthcare privacy, and Cloud & Cybersecurity); diverse litigation, as well as ADR; and regulatory practice (planning and zoning, environmental controls, landlord and tenant, and GRC – governance, risk, and compliance investigations, audits, and counseling in both Canada and the United States).  He is licensed to practice law in Ontario, Canada, as well as in New York, New Jersey, and Washington, D.C., in the United States of America (U.S.A.).  See: http://www.ogalaws.com

An avid writer, blogger, and reader, Mr. George is a published author in Environmental Law and Policy (National Security aspects).

Mr. George is also an experienced strategic and management consultant; sourcing, managing, and delivering on large, high stakes, strategic projects with multiple stakeholders, multidisciplinary teams, and budgets of note.  See: http://www.simprime-ca.com

Hyperlinks to external sites are provided to readers of this blog as a courtesy and convenience, only, and no warranty is made or responsibility assumed by either or both of George Law Offices and Strategic IMPRIME Consulting & Advisory, Inc. (“S’imprime-ça”), in whole or in part for their content, or their accuracy, or their availability.

This article does not constitute legal advice or create any lawyer-client relationship.


[1] A number of options exist for establishing a compliance analytical framework, such as that of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which specifies 5 (“five”) main focal points: Control Environment, Risk Assessment, Control Activities, Information and Communication, and Monitoring Activities.  Additional considerations are the Limitations of Internal Control, and Roles and responsibilities, which appear to be an honest acceptance of the limitations of that framework and an attempt to address same.  However, as our above 3x5x7 matrix allows for more flexibility, we have foregone the COSO option per se, although the framework’s multidimensional nature must invariably persist.  See Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Internal Control – Integrated Framework.  Published in December, 2011.  Online: >http://www.coso.org/documents/coso_framework_body_v6.pdf<

[2] Environment Canada.  Our Key Partners: Other Federal Departments.  Online: >http://www.ec.gc.ca/default.asp?lang=En&n=BD3CE17D-1<

[3] Health Canada.  Workplace Hazardous Materials Information System: Official National Site.  Online: >http://www.hc-sc.gc.ca/ewh-semt/occup-travail/whmis-simdut/index-eng.php<

[4] European Commission.  Regulation No 1907/2006 of the European Parliament and of the Council of 18 December 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), establishing a European Chemicals Agency, amending Directive 1999/45/EC and repealing Council Regulation (EEC) No 793/93 and Commission Regulation (EC) No 1488/94 as well as Council Directive 76/769/EEC and Commission Directives 91/155/EEC, 93/67/EEC, 93/105/EC and 2000/21/EC EC 1907/2006, on the Registration, Evaluation, Authorization and Restriction of Chemical substances (“EU REACH Directive”).  Online: >http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2006:396:0001:0849:EN:PDF

[5] European Commission.  Directive 2002/95/EC of the European Parliament and of the Council of 27 January 2003 on the restriction of the use of certain hazardous substances in electrical and electronic equipment.  (“EU ROHS I”), online: >http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2003:037:0019:0023:en:PDF<).

See also European Commission.  Directive 2011/65/EU of the European Parliament and of the Council of June 8, 2011 on the restriction of the use of certain hazardous substances in electrical and electronic equipment.  (“EU ROHS II”), online: >http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0088:0110:en:PDF<

[6] European Commission.  Directive 2012/19/EU of the European Parliament and of the Council of 4 July 2012 on waste electrical and electronic equipment (“EU WEEE Directive”)Online: >http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:197:0038:0071:en:PDF<

[7] European Commission.  Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community (“EU Aviation Emissions Directive”).  Online:>http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:008:0003:0021:EN:PDF<

[8] Basel Action Network (BAN).  Basel Convention on the Control of Transboundary Movements of hazardous Wastes and their Disposal, as adopted by the Conference of the Plenipotentiaries on 22 March, 1989.  Online: >http://ban.org/about_basel_conv/baseleng.pdf<

[9] John P. Mello Jr.  How to protect yourself from certificate bandits.  PC World.  Published on Computerworld UK, 12 September, 2011.  Online: >http://www.computerworlduk.com/how-to/security/3302886/how-to-protect-yourself-from-certificate-bandits/<

[10] The European Union Data Protection Directive (95/46/EC), for example, which incorporated the 7 OECD model personal data privacy principles, has further led, inter alia, to Directive 2002/58/EC (the so-called “Cookie Directive”, as amended).  EU member states were of course obliged to implement national laws complaint with same, and the United States which has passed a number of privacy-impacting laws and regulations since that time, still has no blanket (outside limited Commerce/FTC options) data privacy protection reciprocity agreement with the EU.  Canada, however, does (the Canada-EU PIPEDA Safe Harbour).  Entities planning to operate in the EU or that know or suspect that they will regularly handle the personal information of EU Citizens should seek advice regarding the potential impact of prevailing laws on their privacy practices, general operations, and GRC duties.

See European Commission.  Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data (“EU Data Protection Directive”).  Online: >http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1995L0046:20031120:EN:PDF<

See also European Commission.  Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector (“EU Cookie Directive”).  Online: >http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:2002L0058:20091219:EN:PDF <

See also European Commission.  Data protection: Commission recognises adequacy of Canadian regime.  Brussels press release of 14 January, 2010 (“EU-PIPEDA Safe Harbour”).  Online: > http://europa.eu/rapid/press-release_IP-02-46_en.htm?locale=en<

[11] Sedona Canada, Working Group 7 (WG7).  The Sedona Canada Principles: Addressing Electronic Discovery.  A Project of the Sedona Conference, Working Group Series.  January, 2008.  Online: >http://www.lexum.com/e-discovery/documents/SedonaCanadaPrinciples01-08.pdf<

[12] Chief Judge Randall R. Rader, United States Court of Appeals for the Federal Circuit.  The State of Patent Litigation (with Model e-Discovery Order appended); as delivered at a September 27, 2011 speech to the E.D. Texas Judicial Conference.  The Model Order had been drafted and approved by the E-Discovery Committee of the Federal Circuit Advisory Council.  Online: >http://www.catalystsecure.com/blog/wp-content/uploads/2011/10/Rader-The-State-of-Patent-Litigation.pdf<

GRC: An Overview (Part 1).

October 21, 2012

This is the first in a 4-part series on devising a structure to address that ever-expanding and increasingly complex (and crowded) intersection of Governance, Risk, and Compliance (GRC).  This is the new paradigm for compliance programs in modern business, but one should always bear in mind that any Compliance Program should be structured with due consideration for the Scope (range of products and/or services offered), Size (number of employees), and Span (geographic spread, and number and range of legal regimes to which it is subject) regarding the entity; including any and all subsidiaries and any cross-national requirements.

Compliance, generally: Where to start?

The corporate compliance function can be defined as “those persons, processes, and protocols whether active or automated, that are employed and deployed by the subject entity to ensure on a continuing basis that governing laws are adhered to, governance is responsible and responsive, risks are contained within acceptable parameters, and that failings on any or all of these priorities, are speedily and sufficiently addressed in accordance with applicable laws, whether general, or case- or situation-specific”.

Admittedly, this is a very broad order and it can stand as a daunting obstacle to many small and mid-sized businesses that only see a rising stream of (in their eyes avoidable) costs between them and their devising, implementing, and sustaining an effective compliance program.  Fortunately, that is a misconception, as there are ways to achieve same without excessive expense.  First, one should start with the immediate jurisdiction of organization, and any specific guidance on devising and applying effective compliance programs.

Canada:

Canada is a federal state, meaning that competent authority over specific areas of law, including the organization and regulation of business entities, is shared between the central government (Canada) and its federating units, being the provinces and territories.  Most business entities will have the option of initially organizing or forming, either within a province or territory, or federally.  Provincial organization generally requires additional filings and fees for each one of the other Canadian jurisdictions within which it intends to operate.  These costs can rise rather fast, and so federal organization – which may still necessitate additional authorizations, with certain exceptions – is another option.

Concentrating then on the federal level, through which a number of nationally applicable laws are enacted and enforced, it is noteworthy that the Competition Bureau of Canada, states that a corporate compliance program is not mandatory,[1] but nevertheless provides the critical elements that such a program if devised and implemented by a Canadian business and potentially supporting any “due diligence defence”,[2] should include.[3]  Furthermore, changes in the Criminal Code of Canada made within the last decade, now provide for corporate criminal liability when directing the work of others,[4] including for death or serious injury by way of negligence.[5]  Amongst the penalties that a court may impose on a business entity, are the mandatory creation and use of a corporate compliance program,[6] and one of the sentencing considerations the court may consider is steps taken by the entity to ensure that the conduct is not repeated; in other words, strengthening (if already existing) or implementing (if not) a corporate compliance program.[7]  Hence, just like an “optional” insurance policy…. its “really” not a bad idea to have!

Those 5 (“five”) elements of an effective corporate compliance program, as revised and contained in a bulletin of September 27, 2010 (having been originally issued in 1997, revised in 2006, and subjected to further public consultations in 2008),[8] are:

1.         “Senior Management involvement and support;

2.         Corporate Compliance policies and procedures;

3.         Training and education;

4.         Monitoring, auditing and reporting mechanisms;

5.         Consistent disciplinary procedures and incentives”.

Additional details are then provided within the Bulletin under each one of these headings.

United States of America:

The United States of America also divides areas of legislative competence between the states and the central government, in accordance with the Constitution.  With a similar division of criminal enforcement authority between the states and the central government, the best place to start is with the United States Sentencing Commission (“Sentencing Commission”), which provides nationally-applicable guidelines for the sentencing of both individuals and organizations with regard to serious crimes and breaches of federal law;[9] with one chapter solely dedicated to the sentencing of organizations, and the provision of “key criteria” for establishing an “effective compliance program”.[10]

An overview provided by the Sentencing Commission, itself,[11] succinctly presents the 7 (“seven”) elements of an effective compliance program.  These are:

1.         “Compliance standards and procedures reasonably capable of reducing the prospect of criminal activity;

2.         Oversight by high-level personnel;

3.         Due Care in delegating substantial discretionary authority;

4.         Effective communication to all levels of employees;

5.         Reasonable steps to achieve compliance, which include systems for monitoring, auditing, and reporting suspected wrongdoing without fear of reprisal;

6.         Consistent enforcement of compliance standards including disciplinary mechanisms;

7.         Reasonable steps to respond to and prevent further similar offenses upon detection of a violation”.

Additional details are then provided within the body of Chapter 8 of the Sentencing Guidelines,[12] under each one of these headings.  Originally effective on November 1, 1991, the organizational sentencing guidelines apply to “corporations, partnerships, labor unions, pension funds, trusts, non-profit entities, and governmental units;”[13] and data collected over the years of their application shows that most common organizational infractions for which such organizational sentencing has ensued, are: (i)fraud; (ii)environmental waste discharge; (iii)tax offenses; (iv)antitrust offenses; (v) and food and drug violations (listed in descending occurrence order).[14]

As the foregoing shows, Canada and the United States[15] do appear to have major similarities in their approaches to corporate compliance programs, and one would likely not be far amiss in surmising the same for common organizational infractions.  However, additional areas of concern in light of advancing globalization and technology now include privacy breaches[16], and cybersecurity.[17]

Compliance, specifically: How to move forwards?

Now that the compliance function has been outlined in brief, with critical elements identified, one can move forwards and start to devise a structure for appropriately addressing governance, risk, and compliance (GRC) in the corporate context.  The following 3 (“three”) articles in this series will put together a matrix of suggested issues and addressable items to be considered in a competent GRC program.

***********************************************************************

Author:

Ekundayo George is a sociologist and a lawyer, with over a decade of legal experience including business law and counseling (business formation, outsourcing, commercial leasing, healthcare privacy, and Cloud & Cybersecurity); diverse litigation, as well as ADR; and regulatory practice (planning and zoning, environmental controls, landlord and tenant, and GRC – governance, risk, and compliance investigations, audits, and counseling in both Canada and the United States).  He is licensed to practice law in Ontario, Canada, as well as in New York, New Jersey, and Washington, D.C., in the United States of America (U.S.A.).  See: http://www.ogalaws.com

An avid writer, blogger, and reader, Mr. George is a published author in Environmental Law and Policy (National Security aspects).

Mr. George is also an experienced strategic and management consultant; sourcing, managing, and delivering on large, high stakes, strategic projects with multiple stakeholders, multidisciplinary teams, and budgets of note.  See: http://www.simprime-ca.com

Hyperlinks to external sites are provided to readers of this blog as a courtesy and convenience, only, and no warranty is made or responsibility assumed by either or both of George Law Offices and Strategic IMPRIME Consulting & Advisory, Inc. (“S’imprime-ça”), in whole or in part for their content, or their accuracy, or their availability.

This article does not constitute legal advice or create any lawyer-client relationship.


[1] Competition Bureau of Canada.  Corporate Compliance Programs, at Preface.  Released on September 27, 2010 to replace the Bulletin: Corporate Compliance Programs, as released on September 10, 2008.  Online: >http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/vwapj/CorporateCompliancePrograms-sept-2010-e.pdf/$FILE/CorporateCompliancePrograms-sept-2010-e.pdf<

[2] Id., at page 16.

5.2.4 Due Diligence Defence.

For certain false or misleading representations and deceptive marketing practices provisions under the Competition Act and certain provisions of the Consumer Packaging and Labelling Act, the Textile Labelling Act and the Precious Metals Marking Act, a company may argue that it had exercised due diligence to prevent the conduct.”

“Although the pre-existence of a program is not, in and of itself, a defence to allegations of wrongdoing under any of the Acts, a credible and effective program may enable a business to demonstrate that it took reasonable steps to avoid contravening the law. In this regard, such a program may support a claim of due diligence. Documented evidence of corporate compliance will assist a company in advancing a defence of due diligence, where available.

[3] The Competition Bureau of Canada administers the Competition Act, R.S.C., 1985, c. C-34; the Consumer Packaging and Labelling Act, R.S.C., 1985, c. C-38; the Textile Labelling Act, R.S.C., 1985, c. T-10; and the Precious Metals Marking Act, R.S.C., 1985, c. P-19 as the competent national authority.  However, a Canadian Corporate Compliance Program meeting the given standard could, doubtless, be adopted and applied by entities not directly subject to any or all of these 4 (“four”) competition-specific Acts.

[4] See Criminal Code, R.S.C., 1985, c. C-46.  §217.1 Duty of persons directing work.

Every one who undertakes, or has the authority, to direct how another person does work or performs a task is under a legal duty to take reasonable steps to prevent bodily harm to that person, or any other person, arising from that work or task”.  Online: > http://laws-lois.justice.gc.ca/eng/acts/C-46/index.html<

[5] Id.  §22.1 Offences of Negligence – organizations; §22.2 Other Offences – organizations.

[6] Supra note 4.  §732.1 (3.1) Optional conditions – organization.

[7] Id. §718.21 Sentencing Organizations.

A court that imposes a sentence on an organization shall also take into consideration the following factors: (…)

(j) any measures that the organization has taken to reduce the likelihood of it committing a subsequent offence”.

[8] Competition Bureau Canada.  Competition Bureau Revises Two Bulletins to Reflect Amendments to the Competition Act.  Announcements, September 27, 2010.  Online: > http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03292.html<

[9] United States Sentencing Commission.  2011 Federal Sentencing Guidelines Manual, as effective November 1, 2011.  Online:  >http://www.ussc.gov/Guidelines/2011_Guidelines/index.cfm<

[10] IdChapter 8 – Sentencing of Organizations.  Online: >http://www.ussc.gov/Guidelines/Organizational_Guidelines/guidelines_chapter_8.htm<

[11] Supra note 9.  Paula Desio, Deputy General Counsel, United States Sentencing Commission.  An Overview of the Organizational Guidelines.  Online:  >http://www.ussc.gov/Guidelines/Organizational_Guidelines/ORGOVERVIEW.pdf<

[12] See supra note 10.

[13] Supra note 11.

[14] Id.

[15] On a stylistic and grammatical note, the United States and Canada spell things differently, which I have accommodated in this series by using preferred forms of each jurisdiction where severable content is identifiable.

[16] See Sara Schmidt.  Federal government privacy breaches hit record number last year: Report.  PostMedia News, published November 17, 2011.  Online:  >http://news.nationalpost.com/2011/11/17/federal-government-privacy-breaches-hit-record-number-last-year-report/<

The federal government reported a record number of breaches of personal information to Canada’s privacy watchdog last year, new statistics show.”

“Sixty-four breaches in 2010-11, up from 38 the previous year and more than double the 27 breaches reported in 2004-05, are itemized in Privacy Commissioner Jennifer Stoddart’s annual report tabled Thursday in the House of Commons.

See also Heather Ormerod.  When using technology to safeguard personal information, sometimes small steps can prevent a big loss.  Office of the Privacy Commissioner of Canada.  Published on May 10, 2012.  Online: > http://blog.privcom.gc.ca/index.php/2012/05/10/when-using-technology-to-safeguard-personal-information-sometimes-small-steps-can-prevent-a-big-loss/<

An Office of the Privacy Commissioner of Canada (OPC) survey of 1,006 companies across Canada shows that many businesses are not employing recommended technological tools or practices to protect the digitally-stored personal information of their customers”.

See also United States Department of Health and Human Services: Health information Privacy.  As required under federal law (HIPAA, HITECH, Breach Notification Rule), the Department maintains an online, publicly-accessible, searchable catalogue of health record data breaches affecting 500 or more individuals.  As one can plainly see, the incidence and breadth of these breaches in the field of healthcare, alone, is really quite astounding.

Online: > http://www.hhs.gov/ocr/privacy/hipaa/administrative/breachnotificationrule/postedbreaches.html<

[17] See Division of Corporation Finance, United States Securities and Exchange Commission: CF Disclosure Guidance Topic No. 2 – Cybersecurity.  On October 13, 2011, the United States Securities and Exchange Commission (SEC), opined on the disclosure of both cybersecurity risk and actual cyber incidents for public issuers; but it stopped short of mandating disclosure in all cases.  Online:  >http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm<

See also Public Safety Canada.  On October 17, 2012, the Government of Canada announced that it was investing an additional $155 million in cybersecurity.  2012-10-17: Backgrounder: Investing in Cybersecurity.  Online: >http://www.publicsafety.gc.ca/media/nr/2012/nr20121017-1-eng.aspx<

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