12 Dec 2010
(by Andreas Stephan) In a CCP seminar and ensuing discussion led by two internationally recognised compliance experts, serious questions were asked about the approach some competition authorities take to organisational compliance. The incentives currently posed by enforcement policy may actually discourage compliance and reflect fundamental misconceptions about the drivers of effective compliance within the firm.
Between them, (Compliance Systems Legal Group) and (Compliance Strategists, LLC) have around 50 years experience of organisational compliance. They provoked our thoughts particularly on three issues.
Lawyer’s monopoly on compliance in Europe
Unlike the US, internal legal documents in Europe are not subject to legal privilege. This means that many European firms must ‘contract out’ compliance work to external legal counsel, if they wish to preserve privilege. Generally compliance manuals, CEO letters and employee certification tend to be drafted in technical (and usually rather dry) legal language. Employees frequently fail to properly understand and/or engage with compliance material prepared in this way. Moreover, because discussions with internal legal counsel are not protected, the EU has created a structure that severely interferes with the ability of employees to seek advice. Very few employees in a company are ever authorised to approach outside counsel directly because of the expense. Thus, this legal bias against in-house counsel creates an obstacle to promoting compliance.
Murphy and Boehme emphasised the importance of an internal compliance infrastructure within firms, led by a strong compliance officer reporting to the board or highest governing authority. Risk assessment, periodical screening for ‘red flags’, publicising misconduct within the corporation, and effective systems of reporting and of getting competent advice, are all seen as key. Also, they point out that effective programs should be part of an overall framework of compliance. Stand-alone, bolt-on efforts directed only at competition law to the exclusion of other risks (e.g. corruption) will generate duplicative and overlapping efforts in each risk area that can undercut one another.
They also noted that because of a perceived aggressive overreaching by governmental privacy authorities in the EU, company internal compliance reporting systems throughout Europe have been attacked and weakened. Even where employee calls to such systems are permitted, competition offenses may be excluded from the list of matters that may be reported. This further weakens the ability of employees to report possible compliance concerns. (In one country, competition authorities actually had to ask permission of the national privacy council, to require cartel members who were settling a case to institute reporting systems.)
Individuals within firms are Humans not Econs*
An employee’s willingness to engage in anticompetitive conduct is far more likely to be shaped by the prevailing environment and attitudes within the firm, than by any estimation of the potential benefits, sanctions and likelihood of getting caught. Many individuals have a poor grasp of what is illegal and why (especially if they work for a dominant firm!). Indeed, unless they avidly read the business sections of The Times or Financial Times, they may rarely come across the reporting of competition law sanctions. These individuals have to be engaged and educated by a culture of compliance within the firm, in order to limit the likelihood of offending.
Do the Department of Justice and European Commission Care?
The US and EU competition authorities do not reward infringing firms for , indeed some feel they show disdain for such programs. Their stated rationale for this is that the existence of a serious infringement suggests that compliance efforts were inadequate or may have simply been window dressing. However, it is unreasonable to expect compliance programmes to be bullet proof or to prevent a small number of determined employees deliberately colluding with competitors. The absence of a carrot may be causing many firms to neglect competition law compliance and to hold back on more aggressive compliance efforts.
Obsessed with ever escalating levels of antitrust fines, one might suggest that US and EU regulators have little institutional interest in encouraging firms to comply with competition law. Particular criticism can be directed towards the European competition law enforcement regime. The rule on legal privilege discourages internal compliance efforts for fear that they will be used against the firm in a competition law investigation. It may also eliminate the ability of employees to effectively report and deal with violations internally. The situation in Europe is particularly worrying because the only sanction is corporate fines. These are typically imposed as long as a decade after an investigation was opened or offences were committed, by which time the individuals responsible may have left the firm or retired. It is current shareholders who pay the price, not even those who owned the shares when the offense occurred.
Murphy and Boehme rightly ask “who and what does this system deter?”. They contrast these negative approaches to compliance programs with the markedly different model in the area of corruption compliance, led by the OECD’s Working Group on Bribery, of active governmental promotion of such programs. They also point to a better, more results-oriented model set by a number of national competition authorities (e.g. Canada’s Competition Bureau) who seem far more willing to engage with firms and promote effective compliance. The UK’s Office of Fair Trading is another positive example and is currently undertaking a .
*Terms from Thaler & Sunstein’s Nudge (Penguin Books 2008)