Reading the news with Foreign Corrupt Practices Act goggles is an occupational hazard.
So it was with this recent Wall Street Journal article titled “Companies Silo China Businesses to Cut Risk.”
If you follow compliance lingo, you know that “silo” (an actual four letter word) is like other four letter words.
The article states “more western companies are siloing parts of their businesses in China as they try to lower risks from tensions between Washington and Beijing” and cites various examples of companies “effectively isolating its China businesses from its global operations.”
The article does not specifically mention compliance per se, but rather other business issues such as products and services, technology development, and supply chain issues. Even so, the article cites survey data which shows that 27% of member companies in a China focused Chamber of Commerce “experienced decoupling between headquarters and China operations over the past two years.”
If compliance – like other business functions – are siloed in China or decoupled from corporate headquarters, this could lead to problems.
It is clear that the FCPA enforcement agencies have come to the conclusion that decentralized compliance (whatever that may mean) is an internal control deficiency.
For instance, in the Walmart FCPA enforcement action, the DOJ stated:
“On or about April 6, 2009, Walmart International announced the creation of a Walmart International Compliance Office that revised the existing anti-corruption standard. The concept for the new standard was “Freedom within a Framework.” Instead of taking a centralized approach to ensuring that sufficient anti-corruption related internal accounting controls were implemented throughout Walmart’s foreign subsidiaries, the new anti-corruption standard allowed individual markets to design and implement their own program as long as it met certain global standards.”
Likewise, the SEC stated:
“In or around April 2009, Walmart informed its foreign subsidiaries that it would soon promulgate anti-corruption standards that would be more flexible and easier and quicker to implement. Instead of taking a centralized approach, each country would be required to devise its own program based on the standards. On or around June 11, 2009, Walmart circulated to the 10 subsidiaries a one-page document entitled Global Anti-Corruption Standards that: 1) summarized the FCPA; 2) acknowledged that in certain instances Walmart may provide gifts, meals, travel, and entertainment to government officials; 3) noted that the standards applied to TPIs; and 4) provided contact information for the Company’s global ethics office. The markets were instructed to design and implement risk-based internal accounting controls, procedures, and training to ensure the standards were met.”
Walmart was certainly not the only issuer to be whistled by the FCPA enforcement agencies for decentralized compliance.
In the 2013 Stryker enforcement action, the SEC found:
“Stryker’s foreign subsidiaries were organized in a decentralized, country-based structure, wherein a manager of a particular country’s operations had primary responsibility for all business within a given country. During the relevant period, each of Stryker’s foreign subsidiaries operated pursuant to individual policies and directives implemented by country or regional management. Stryker had corporate policies addressing anti-corruption, but these policies were inadequate and insufficiently implemented on the regional and country level.”
Likewise, in the 2013 ADM enforcement action, the SEC alleged:
“ADM’s anti-corruption policies and procedures relating to [a foreign affiliate] were decentralized and did not prevent improper payments by [foreign affiliate] to third-party vendors in the Ukraine or ensure that these transactions were properly recorded by [foreign affiliate]. In this respect, ADM failed to implement sufficient anti-bribery compliance policies and procedures, including oversight of third-party vendor transactions, to prevent these payments at [foreign affiliates].”
Likewise, in the 2014 Bio-Rad enforcement action the DOJ stated:
“Bio-Rad decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct […] Bio-Rad did not take sufficient steps to monitor its international offices.”
In the 2017 Orthofix International enforcement action, the SEC found:
“[Parent company’s] reporting structure and relationship with its subsidiaries was decentralized … complicating parent oversight, compliance monitoring, and communication with U.S. executives. [Parent company] lacked adequate training, policies, processes, and corporate culture that would have allowed employees at its subsidiaries to raise compliance concerns to the parent level.”
