Carnival Dinged $20M on Compliance

Here’s a tale of corporate misconduct on the high seas that compliance officers will want to see: Carnival Corp. has agreed to pay a $20 million fine and hire a chief compliance officer for violating a corporate probation agreement over environmental pollution.

The headline is that Carnival had agreed in 2017 to a court-appointed compliance monitor, after years of dumping trash and polluted water directly into the ocean. Since then, however, the company violated its probation agreement in multiple ways — falsifying records, sending special teams to clean dirty ships ahead of inspections, trying to fudge the definition of a “major non-conformity” without consulting the court, and still dumping polluted water directly into the water.

And, yes, failing to hire a chief compliance officer as stipulated in the first probation agreement two years ago.

All of that follow-up misconduct prompted the Justice Department to haul Carnival back into court on Monday for a revised plea deal. Even better, district court Judge Patricia Seitz, who has been overseeing the case for years, demanded that the company’s chairman, CEO, and CFO all attend the hearing personally. They did, and brought along four board directors and more than a dozen other senior Carnival executives to boot.

Compliance professionals will be fascinated — and encouraged, really — because this case is all about Carnival failing to establish a strong, effective compliance function. That was the failure. Carnival was supposed to hire a CCO years ago to help strengthen a culture of compliance, it hasn’t done that yet, and that lack of leadership allowed a culture of non-compliance to continue.

The revised probation agreement announced this week shows all the specific ways that a culture of non-compliance continued. Among them:

  • Failing to establish a senior corporate officer as a corporate compliance manager with responsibility and sufficient authority for implementing new environmental measures required during probation;
  • Contacting the Coast Guard seeking to re-define the definition of what constitutes a major non-conformity under the original compliance settlement, without going through the required process and after the government had rejected the proposal and told the company to file a motion with the court if it wanted to pursue the issue;
  • Deliberately falsifying environmental training records aboard two cruise ships; and
  • Deliberately discharging plastic in Bahamian waters and failing to record the illegal discharges accurately. Apparently this particular instance was an example of a more widespread problem, identified by the external audits, in failing to segregate plastic and non-food garbage from waste thrown overboard from numerous cruise ships.

It’s fair to consider that Carnival has a complex structure, with multiple cruise lines operating around the world, each one responsible for multiple ships around the world, that dock in their own ports. Carnival is also just a large business operationally: 104 cruise ships, more than 1,000 voyages and 12.4 million customers annually.

So that’s a lot of data and operations, literally sprinkled around the world. The company does have a chief audit executive (Richard Brilliant) and a vice president of risk advisory services (Wayne Cimring). In 2018 it promoted Martha de Zayas from assistant general counsel to vice president for ethics and compliance. Given the sheer range of operations at Carnival, I’m sure their jobs around risk assurance and setting a single, enterprise-wide standard of conduct is challenging.

Carnival Compliance Commitments

Carnival CEO Arnold Donald did the expected kow-towing in court, promising that changes will happen. “I sincerely regret this case,” he said, according to an article in the Miami Herald. “We assure you we will remain transparent, learning from our mistakes so the same ones aren’t repeated. We will continue to invest heavily in technology and training for us to meet and exceed the expectations we’ve set for ourselves.”

As part of the revised probation agreement, Arnold is also supposed to publish a statement to all Carnival employees where he “accepts management’s responsibility for the probation violations.” As of midday Wednesday that statement wasn’t posted anywhere on Carnival’s media or business ethics websites, but perhaps the message will be circulated internally.

Other notable reforms Carnival promised to make:

  • Restructure the company’s corporate compliance efforts, including appointing a new chief compliance officer, creating an executive compliance committee across all cruise lines, adding a new member to the board of directors with corporate compliance expertise, and training its board of directors;
  • Pay for 15 additional independent audits per year conducted by a third-party auditor and court-appointed monitor (on top of several dozen ship audits and 6 shore-side audits currently performed annually);
  • Comply with new reporting requirements, including notifying the government and court of all future violations, and specifically identifying foreign violations and the country impacted; and
  • Make major changes in how the company uses and disposes of plastic and other non-food waste to address the problem of multiple vessels concerning illegal discharges of plastic mixed with other garbage.

That’s a lot of change supposedly coming in the next three years. Compliance officers with a knack for environmental issues and who like Miami, you might have a job opportunity to consider. Ambitious CCOs with governance experience might want to schmooze the company’s board to talk about that director with compliance experience the board needs to recruit. (Compliance officers serving on boards because business conduct is becoming so important to enterprise success and brand value; we’ve talked about this before, people.)

We have a colorful statement from  U.S. Attorney Ariana Fajardo Orshan, who said, “Carnival’s failure to comply with the terms of its probation and later, its attempt to drown its deceit goes against the fiber of corporate compliance.”

Clever maritime allusion aside, however, Carnival’s blunders here remind us, yet again, that a strong compliance function existing seamlessly within the leadership team matters.

You’d like to think an enterprise as large as Carnival would know that. So this case is also a reminder of how much more work the corporate compliance function still needs to do.

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