Six Compliance Events to Watch in 2017
Welcome back to the grind, everyone! Before we all go back to audit committee meetings, anti-corruption training, and committing your travel budget before the CFO implements a freeze, let’s take a look at what events in 2017 will carry big consequences for the compliance community.
The arrival of the Trump Administration in particular sets up 2017 to be a potentially transformative year. Without any further delay, then, here are six issues I’ll have on my radar screen.
The Future of the FCPA Pilot Program
The pilot program was launched last April and scheduled to last for 12 months. Its parameters were straightforward: if a company discloses violations of the Foreign Corrupt Practices Act, cooperates in whatever investigation the Justice Department seeks, and remediates weaknesses found in its compliance program, that company is eligible for steep decreases in criminal penalties.
The Pilot Program has been welcome news to compliance officers, since it encourages companies to have a strong compliance program. Now we need to see whether new leadership at the Justice Department will expand the program further.
Compliance officers can be hopeful here. Attorney General-designate Jeff Sessions is a prosecutor, and will continue to punish FCPA violations where he finds them. He also dislikes widespread use of large corporate penalties, preferring to pursue individual offenders rather than the companies themselves.
That all suggests that Sessions might expand the concepts of the pilot program dramatically—perhaps automatically waiving penalties if companies meet pilot program criteria, or something like that. Which means companies will need a compliance program so they can take advantage of the pilot program, which is good for you.
The Walmart FCPA Settlement
Confession: I’ve named the potential settlement of Walmart’s long-running FCPA probe for four consecutive years, and we haven’t seen one yet. 2017 may be different.
First, we heard reports last fall that Walmart neared a settlement with the Justice Department, but balked at proposed fines north of $600 million. Then came the election of Donald Trump, and a flurry of large FCPA settlements with other businesses, including Teva Pharmaceuticals, JP Morgan, and Odebrecht-Braskem.
Clearly the Justice Department wants to close as many big cases as possible before the Trump Administration takes office. The question is whether Walmart will settle before Inauguration Day, or delay and hope for better terms from new Justice Department leadership.
Walmart spent many millions several years ago to build an impressive compliance program, and much of the early hysteria over possible misconduct has fizzled. So maybe waiting until the Trump Era arrives is the better move, with settlement costs pushed into Walmart’s next fiscal year to boot. Or if Walmart still pays a large penalty even under a new Attorney General Jeff Sessions, that’s a signal that no nonsense enforcement continues.
The SEC Office of the Whistleblower
This office became powerfully relevant to compliance officers in the last two years as it began granting large whistleblower rewards and waging a campaign against pre-taliation clauses in employment contracts. That was due to the stable leadership of inaugural director Sean McKessy (who left last summer) and his top lieutenant Jane Norberg (who succeeded him last fall).
Now compliance officers need to see whether the policies those two cultivated over the last five years will continue under new SEC leadership. Maybe Norberg will leave for the private sector, and a new director will have different standards for what qualifies as original information that merits a reward.
We could also see an end to the campaign against pre-taliation, if new SEC leadership doesn’t believe pre-taliation is a significant risk. Or maybe the SEC will start issuing Section 21(a) reports (policy pronouncements that warn companies of practices the agency doesn’t like) without imposing monetary penalties.
Will any of that lead to a retreat from compliance officers’ focus on nurturing a speak-up culture? Nobody knows yet. But changes to the Whistleblower Office could make it more difficult for you to argue that speak-up culture should be a priority for senior executives.
The Next PCAOB Chairman
The Public Company Accounting Oversight Board has been under the leadership of James Doty since 2011—including the last 15 months as interim chairman, since Doty’s term formally expired in October 2015 and he was not appointed to a second term. Now the next SEC chairman will get to name a permanent new chair (plus one new board member right away, since Jay Hanson resigned on Dec. 23).
Theoretically Doty could remain for a second term, but he has had plenty of critics among audit firms and Corporate America, and he nearly didn’t get named interim chair back in 2015. Keeping his job under Republican leadership seems unlikely.
A new PCAOB chair could take the agency in a very different direction. That person might loosen standards for auditing internal controls over financial reporting—achieving Republicans’ dream of neutering Section 404(b) of the Sarbanes-Oxley Act, without the bother of new legislation. Inspections of audit firms might relax. Enforcement of auditor misconduct might relax.
Changes in PCAOB priorities, especially around ICFR, could have large implications for compliance programs trying to keep business processes and technology investments current. One prediction of what won’t happen: your audit fees won’t decline by any material amount.
The Fate of New Overtime Rules
The Obama Administration’s expansion of overtime eligibility rules was supposed to go into effect on Dec. 1, but in November a federal judge blocked implementation nationwide. The Labor Department appealed that ruling, but an appellate decision isn’t likely to come before Inauguration Day.
This case is significant to compliance officers for two reasons. First, wage and hour compliance is still one of the biggest headaches that large organizations have. Companies invested a lot in 2016 to understand the rules, revise pay policies, and implement new procedures. In some instances, companies increased salaries to avoid “overtime risk” or re-classified workers from hourly wage to annual salary.
If the rules never go into effect, that’s a lot of wasted effort. Worse, rescinding pay increases or job classifications could be awkward or perhaps even forbidden, if such moves violate a union contract.
More broadly: Once Jan. 20 arrives, the Trump Administration will be in charge of arguing in favor of the expanded overtime rules. The Labor Department could decide to drop the appeal—which would be an early signal to Corporate America that the Trump Administration won’t fight outside litigation to kill off Obama-era rules.
The Barclays Trial
Deutsche Bank and Credit Suisse both reached deals with the Justice Department on Dec. 22 to settle charges of mortgage fraud related to the financial crisis. DB agreed to penalties of $7.2 billion, Credit Suisse $5.28 billion.
Barclays, however, did not agree to settle—so on that same day, the Justice Department proceeded with a lawsuit against the bank.
The question is whether DB and Credit Suisse saved themselves billions by holding out for so long, until the Obama Administration was scrambling to close these cases; or will Barclays save even more, by rolling the dice with a more favorable Trump Administration. If prosecutors drop their demands for penalties against Barclays, the usual strategy of settling early will look, ahem, less than astute.
Yes, each bank had its own particular fact pattern and strategic concerns that drove the question of whether to settle. As a whole, however, the compliance community wants to see how the Trump Administration handles corporate prosecutions and monetary penalties. Once its positions on those issues becomes clear, that could change a lot of thinking in corporate legal and compliance departments about how to handle tussles with regulators.
Those are the six items on my radar screen for 2017. Post your thoughts below, or email me at [email protected].