Doug Cornelius on compliance for private equity real estate
New Year’s Eve is generally a time to reflect on the past and look forward to the future. For many it also involves an excessive amount of alcohol, an expensive dinner in a crowded restaurant, or a long wait for Chinese food delivery.
I’m sure there is a compliance story in there somewhere. But I’m just going to enjoy taking some time off. Enjoy the end of your year and the start of the next.
I’ve talked in the past about the Black Swan by Taleb and at other times about Free by Chris Anderson. I think I missed a connection between the two.
In looking at the Free model, is there a Black Swan connection? I think this cartoon puts it nicely.
The “Free” Model from Geek and Poke
The Massachusetts Secretary of the Commonwealth has been investigating hedge fund hotels. Start-up hedge fund managers receive reduced-rent office space in return for send their trading business to the landlord.
UBS AG has agreed to pay $100,000 to settle charges that it failed to disclose the relationship. Galvin charged there was a conflict that harmed investors who did not know the hedge funds were receiving beneficial treatment in return for sending the bulk of their business to UBS.
To me it seems more like a disclosure problem with the hedge funds, receiving reduced rent in exchange for the sending business to UBS. The Massachusetts regulator found fault with UBS for failing to enforce a requirement that its hedge fund hotel clients disclose the arrangements to their investors.
That’s a tough one to swallow from a compliance perspective.
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The London Olympics in 2012 will be a test of strength, agility and endurance. That’s just be for the corporate sponsors trying to comply with the UK’s Bribery Act.
Unlike the US Foreign Corrupt Practices Act, the UK’s Bribery Act applies equally to payments made to foreign government officials as it does to payment made to domestic companies. Should a potential bribery case arise under the Bribery Act, the only defense of the organization is to show that it had “adequate procedures” in place to stop bribery. Guidance on what are “adequate procedures” will not be promulgated until at least early 2011.
It is estimated that £100m will be spent on hospitality during 2012 London Olympic games. It will be a compliance headache for companies with hospitality tents, events and other rewards for customers.
Here in Massachusetts, you can’t offer a public official tickets to a playoff game or World Series game. That’s true even if the official pays for the ticket. It’s considered special access and you are getting a benefit of access that is not available to the general public.
If you take that same position, maybe corporate sponsors should only be handing out tickets to Olympic events that are not sold-out. That sounds silly. But it may be one of the challenges faced with corporate sponsors at the London Olympics in 2012.
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Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides an expanded whistleblower program that allows the whistleblower to get part of the money paid to the SEC for the violation. After several years of encouraging the development of internal complaint hotlines and compliance programs, Congress seems to now be encouraging a trip to the Feds before reporting a problem internally. On November 3, 2010, the Securities and Exchange Commission (SEC) published its Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities and Exchange Act of 1934.
I think the approach is poor and could undermine corporate compliance programs. On the other hand, I think employees are more likely to report the problem internally than externally. Reporting externally is a much bigger step. You don’t know who is getting the report or what they will do with it.
The promise of cash payments is a bit remote. It’s not like the SEC will be cutting a check once you make the call. There will months, if not years, of investigation and litigation before there is any money available. And that is assuming the Feds win. In the meantime, the reporter has jeopardized his or her job and career.
I think the typical person is much more likely to talk to their friendly, internal compliance people before they go racing off to the Feds seeking fame and riches.
Now there is some evidence that I’m correct. The National Whistleblowers Center has released a report on the Impact of Qui Tam Laws on Internal Corporate Compliance. Based on a review of qui tam cases filed between 2007-2010 under the False Claims Act, the overwhelming majority of employees voluntarily utilized internal reporting processes, despite the fact that they were potentially eligible for a large reward under the False Claims Act. 89.7% of employees who would eventually file a qui tam case initially reported their concerns internally, either to supervisors or compliance departments.
Their conclusion:
“The qui tam reward provision of the False Claims Act has existed for more than 20 years and has resulted in numerous large and well-publicized rewards to whistleblowers. However, contrary to the disingenuous assertions by corporate commenters, the existence of this strong and well-known qui tam rewards law has had no effect whatsoever on whether a whistleblower first brings his concerns to a supervisor or internal compliance program. There is no basis to believe that the substantively identical qui tam provisions in the Dodd-Frank law will in any way discourage internal reporting.”
It may not be meaningful for some time. The Securities and Exchange Commission is operating under budget constraints and put the whistleblower office on hold until funding clears up. The new Congress may repeal provisions of Dodd-Frank, but they can limit some of the funding.
Much of the whistleblower program is in SEC Release 34-6323. Comments are open until December 17, 2010. Certainly, the proposed rule could change significantly bases on the comments. There have been lots of comments from the compliance community at the public companies subject to this rule. I would like to see the rule changed as a validation of internal compliance programs.
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Even Santa Claus may have to face bribery and corruption on journey to deliver presents. What do you do when faced with a border guard demanding something on the side?
A funny video take on the issues from Transparency International:
For those of you who celebrate it, Merry Christmas.
Having someone else write you college term paper is cheating. There is no ethical debate. If you use one of these services you are passing off another person’s work as your own.
Since I was in college and law school before the rise of the internet, these services were not easy to find during my school years. Occasionally you would find an 1-800 advertisement in the back of a magazine. Maybe you heard through the rumor mill that someone could help.
Now, it’s easy to find hundreds of services to help you with your paper. I’m sure they are tempting after blowing off a class all semester.
The Chronicle of Higher Education recently ran an essay from one of the people working for a term paper mill. What caught my eye was not the topic of term paper mills, but the subject of the paper discussed in the story: business ethics.
The student used the term paper mill to help with the proposal for the paper, then came back for the seventy five page report, for a response and revision based on the professor’s criticisms, and finally used the ghost writer to produce the 160-page graduate thesis. All of it written by the term paper mill and none by the student.
Clearly, the business ethics professor did not get through to this student.
In an different story from another term paper writer, that writer when given an open topic assignment on ethics, would “write on the ethics of buying term papers, and even include the [term paper mill] broker’s Web site as a source.”
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Trusts and Company Service Providers (TCSPs) can provide an important link between financial institutions and some of their customers. TCSPs have often been used, wittingly or unwittingly, in the conduct of money laundering activities. The majority of TCSPs are established for legitimate purposes, the Financial Action Task Force’s research Shows that some TCSPs are being used, unwittingly or otherwise, to help facilitate the misuse of trust and corporate vehicles.
The FATF’s Money Laundering Using Trust and Company Service Providers report evaluates the effectiveness of the practical applications of the FATF’s 40+9 Recommendations as they relate to TCSPs. It also considers the role of TCSPs in the detection, prevention and prosecution of money laundering and terrorist financing.
The report is an update f the 2006 report: The Misuse of Corporate Vehicles, Including Trust and Company Service Providers, 2006. presents issues for consideration that should help to reduce the use of TCSPs for money laundering purposes.
There are no simple answers, other than knowing your business partner. Complex arrangement of entities are usually required to make structures tax-efficient across international borders, to isolate risk, to meet regulatory requirements, and to clarify management. On the other hand, bad guys can use these structures to hide the true ownership and that the true source of capital is dirty money.
The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing.
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Inside the company, you can take away your employees expectations of privacy when it comes to email. It has been unclear whether the same is true when it comes to the government inspecting your email. Surprisingly, there has been little law on whether your email would be subject to same protections as your phone calls from government snooping. Does the government need a warrant to obtain the contents of your email from your internet service provider?
The latest case to address the issue is U.S. v. Warshak
out of the Sixth Circuit Court of Appeals which held:
If we accept that an email is analogous to a letter or a phone call, it is manifest that agents of the government cannot compel a commercial ISP to turn over the contents of an email without triggering the Fourth Amendment. An ISP is the intermediary that makes email communication possible. Emails must pass through an ISP’s servers to reach their intended recipient. Thus, the ISP is the functional equivalent of a post office or a telephone company. As we have discussed above, the police may not storm the post office and intercept a letter, and they are likewise forbidden from using the phone system to make a clandestine recording of a telephone call—unless they get a warrant, that is.
The case is based on charges against the manufacturer of Enzyte with its Smilin’ Bob commercials. The company got into mess of mail and wire fraud because of their sales practices and banks closing down their accounts.
The government seized 27,000 emails from the company’s internet service provider under the the Stored Communication Act (18 U.S.C. §§ 2701 et seq.), a statute that allows the government to obtain certain electronic communications without procuring a warrant. As you might expect, the company objected to this government action.
Once you become a registered investment advisers, you are going to be subject to inspection by the Securities and Exchange Commission. The SEC will likely not need a warrant for any records or communication required to be kept under the Investment Advisers Act. You can’t have an expectation of privacy for stuff you are required to submit to SEC examination.
As an employer, you own the hardware and the network and you can decide how your employees use them. If you clearly state that your employees have no expectation of privacy for email on the company’s network then you are free to dig into their email traffic as part of an internal investigation.
The Warshak case is important for criminal law, but has no effect on corporate email policies.
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, Sixth Circuit Court of Appeals rulingHere are some compliance-related stories that recently caught my attention:
Additional Settlements in New York Pension Fund Investigation in the Pay to Play Blog
New York State Attorney General and Governor-Elect Andrew Cuomo has announced additional settlements in his investigation of “pay-to-play” practices and conflicts of interest at public pension funds.
FTC Gives Guidance on Securing Data on Digital Copiers by Melissa Klein Aguilar in Compliance Week
A gentle reminder from the Federal Trade Commission: Make sure your information security plan covers the digital copiers your company uses. The agency has some tips for businesses on safeguarding sensitive data, such as Social Security numbers, account numbers, or health records that may be stored on the hard drives of digital copiers, in order to prevent the risk of fraud and identity theft.