Ethikos May/June 2017 Cover Page

Before the government comes knocking: From the front lines of corporate law


While having lunch at our favorite spot, I began to ask Frank, a lion of the defense bar and my mentor, about a thorny problem I was having with one of my corporate clients. 

“The problem isn’t,” I noted, “that the company wants to do the right thing by its shareholders and its customers, which they do.  But they have the view that they shouldn’t overspend on a compliance program because their employees are honest and hard-working, they don’t do shady deals, and the CEO and management feel that employees are free to raise issues to them if they see something wrong, and shouldn’t that be enough?” 

Frank chuckled good-humoredly as he finished his bite of tunafish sandwich. 

“That reminds me,” he said, “of one of my big cases.”

* * *

I had been asked by a U.S. company to represent its Chairman and CEO in a joint U.S. Securities and Exchange Commission and Department of Justice investigation into the company’s accounting practices.  The company had discovered that a subsidiary in the Middle East had paid a small vendor as part of a large contract to provide services to a government hospital.  It turned out that the small vendor was actually controlled, through a nominee, by the minister under whose authority the government hospital services contract had been issued to the U.S. company and, allegedly, the monies paid to the vendor had ended up in the minister’s pocket.

I flew to the company headquarters in Chicago to meet with the CEO.  He had a lavish corner office in the top floor of one of those imposing buildings in the Loop.  As we looked out over the city, he told me he wasn’t sure why his general counsel had recommended that he and other members of senior management get their own lawyers. 

“I haven’t done anything wrong.  This government interest began when some disgruntled former employee looking for a big payday went to the SEC with allegations.  I know they turned out to be true, but it’s not as though we even knew this was happening at the time and we fired the manager of that subsidiary when we did find out.” 

I asked him to describe his company’s business.  They were a company with employees on several different continents, providing business consulting and project management services to hospitals, financial firms, and manufacturers worldwide.  I asked him to describe what kinds of safeguards were built into the contracting process to ensure due diligence was done on prospective customers, suppliers, and partners prior to entering into a deal. 

The CEO told me that sales staff are expected to know their customers and to ensure that the economics of every deal met the profitability requirements established by the company’s strategic business plan. 

I asked him what sort of compliance structure the company has put in place and he responded, “We have a Chief Compliance Officer here in Chicago.  She reports to the general counsel, I believe.  At least, her office is next door to the general counsel.” 

Upon further inquiry, the CEO did not know what budget had been provided to the CCO or whether she had any staff. 

When I asked, “Do you meet with the CCO regularly?” he snorted and said, “I don’t have the time.  Have you seen my calendar?” 

And he began looking at his watch and toward the door, where his assistant was waiting to usher in his next appointment.

Well, the rest of my discovery produced consistent information.  It turned out the CCO didn’t have an independent budget, and only had two people on her staff.  One was an administrative assistant and the other was supposed to monitor the company’s hotline and address issues that were called in from the company’s 85,000 employees around the world.  The hotline administrator only spoke English, although about 50% of the company’s employees were located in non-English speaking countries, and the company’s Code of Conduct, policies, and hotline instructions were all in English.  There was no periodic training on the Code, on anticorruption policies and procedures, on data privacy, or on international trade issues, even though the company was subject to regulation in all of these areas.  Also, it turned out that the employee who had made the original complaint to the SEC had first tried contacting the company hotline, but since English was not his first language, his call had been understood as a complaint about his boss and turned over to HR.  And his boss terminated him after finding out he had complained to headquarters about business practices in the region.  It turned out that his employment lawyer spoke excellent English and knew to contact the SEC about his client’s concerns.  This triggered the investigation and criminal interest from the Department of Justice, and ultimately my retention to represent the CEO.

The DOJ and SEC both were very interested to speak to my client.  Contrary to his expectations, they did seem to have definite views about the requirement that companies have an “effective compliance and ethics program.”[1]  They also strongly believed that senior management and the Board of Directors must be “knowledgeable about the content and operation of the compliance and ethics program and shall exercise reasonable oversight with respect to the implementation and effectiveness of the compliance and ethics program”[2] and that “[h]igh-level personnel of the organization shall ensure that the organization has an effective compliance and ethics program.”[3]  Because the government was evaluating both whether to charge the company criminally and whether to charge individual officers and directors as “causing” the company’s alleged legal violations, the investigators’ questions were rather pointed along these lines.  I, of course, had been hoping to find evidence of my client’s and senior management’s “efforts to create a sustainable compliance program” so as to gain “meaningful credit” for such activities from the government in its investigation.[4]  Admittedly, the company’s lack of attention to building and resourcing a compliance program suited to a global company with tens of thousands of employees did not impress the government’s investigators favorably.

Unfortunately, although I was able to persuade the DOJ that my client had not engaged in any criminal acts (because there was no proof that he had intended the company’s subsidiary to bribe the minister in order to obtain the contract), the company was required to enter into a Deferred Prosecution Agreement with the DOJ due to criminal violations of the FCPA and paid very substantial monetary penalties to both the DOJ and SEC, in addition to having to submit to the supervision of a corporate monitor for three years to, among other things, put in place an effective ethics and compliance program. 

My client, the Chairman and CEO, was prominently cited as having failed in his oversight responsibilities over the corporate compliance program and was terminated by the Board.  Even though he was not a party to the company’s settlement with the government, he was sued in a securities class action lawsuit brought by investors when the news broke about the government’s investigation.  I represented him through all of it and, even though I was able to engineer a favorable outcome for him, he never was tapped for another significant Board or management position and his reputation was in tatters.

* * *

As Frank ended his story, I finished paying for our meal and grabbed my jacket from the back of my chair. 

“Where are you going in such a hurry?  Don’t you want some coffee?” Frank asked. 

“No time,” I answered, “I need to talk to my client about performing an assessment of their ethics and compliance program right away, before the government comes knocking.”

Adriaen M. Morse Jr is a former Chief Ethics and Compliance Officer and senior attorney in charge of compliance, investigations, and litigation at two global, Fortune 500 companies. With over 20 years’ experience as a lawyer, he now practices law with a firm in Washington, DC. The events depicted in this article are fictitious and any resemblance to actual persons, living or dead, is purely coincidental.



[1] United States Sentencing Commission, Guidelines Manual, ch.8 (Nov. 2012).

[2] Id., § 8B2.1(b)(2)(A).

[3] Id., § 8B2.1(b)(2)(B).

[4] Criminal Division, Department of Justice and Division of Enforcement, Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act (Nov. 14, 2012), at 58, 62.