By Carlos Guillen, President & CEO BasisCode Compliance
In an effort to influence prospects or clients, corporate executives occasionally blur the lines between acceptable forms of persuasion and expense management misconduct. If there’s any message executives and compliance supervisors should communicate before employees turn above-board business into bribery, it’s: Do yourself a favor, and don’t do yourself a favor when wooing business.
Some savvy supervisors are taking steps to leverage technology to track and disclose employee gift giving and entertainment (G&E) activity as well as business expense management, including travel and lodging. As recent history shows, financial firms can pay a steep price for failing to do so.
In March, the Securities and Exchange Commission (SEC) imposed cease and desist proceedings against global wireless telecommunications behemoth Qualcomm for improper payment arrangements. Starting from at least 2002, Qualcomm executives provided gifts and entertainment to foreign officials and their family members to influence the officials to procure Qualcomm solutions. Many of the gifts, such as sightseeing for spouses and children, had no valid business purpose.
In another instance, just days before the Olympics in Beijing, Qualcomm rescinded lavish hospitality packages worth some $95,000 each for 15 officials, after Qualcomm execs raised compliance concerns. In addition, Qualcomm provided paid internships to foreign officials’ family members in an effort to obtain business in China. Qualcomm agreed to pay a $7,500,000 fine without admitting or denying the findings.[1]
In February, Financial Industry Regulatory Authority (FINRA) announced sanctions against New York-based investment bank and brokerage Banca IMI Securities for a slew of compliance lapses, including the former CEO’s purchase of $900,000 worth of artwork created and sold by friends and relatives. The firm failed to adopt and maintain written procedures to supervise expense reporting and prevent conflicts of interest. FINRA censured Banca IMI, which accepted a $250,000 fine without admitting or denying wrongdoing.
In late 2015, the SEC cited another company with multiple G&E infractions, including golf course memberships, automobiles and more—totaling some $500,000 in perks paid furtively to company executives.[2] The SEC charged yet another firm with multiple expense management violations, including the former CEO’s use of the company’s private jet for luxury overseas travels with a girlfriend for purported “site inspections,” and falsified expense reports for spa gift cards and plant-watering services for his home.[3]
By circumventing compliance controls, these firms are violating Recordkeeping and Internal Controls Provisions of the Securities Exchange Act of 1934.3[4] Rule 14a-3 of the Act also requires companies with Section 12 registered securities to provide proxy statements that fully disclose executive compensation.
While many violations may be unintentional, firms should give employees and affiliates of their firm the ability to confirm in advance if gifts or business expenses, such as a concert ticket, sporting event, gift card or dinner, would result in a violation. By checking gifting and expense thresholds in advance, employees can avoid infractions instead of being questioned or reprimanded after non-compliant behavior takes place.
Software makes it easier for staff and compliance supervisors to align G&E and expense management with a company’s compliance policies and procedures (P&Ps). For instance, for G&E activity and expense reporting, supervisors can set limits, such as annual dining and gifting allowances. Passive solutions require users to initiate G&E queries. More advanced automated tools display available expense headroom, and proactively alert users and supervisors before predefined limits are exceeded.
For compliance officers, the operational ideal is to ensure that everyone is aware of company policies and procedures, including appropriate G&E as well as charitable and business expense management. In this regard, executive compensation is material investor information that companies need to carefully document and disclose. Compliance supervisors should do themselves a favor, and adopt a technology-enhanced approach to expense management to reign in egregious behavior before misconduct occurs.
ABOUT THE AUTHOR: Carlos Guillen is president and CEO of BasisCode Compliance, www.basiscode.com or .
[1] https://www.sec.gov/litigation/admin/2016/34-77261.pdf
[2] http://www.sec.gov/news/pressrelease/2015-179.html
[3] https://www.sec.gov/litigation/complaints/2015/comp-pr2015-53.pdf
[4] https://www.sec.gov/spotlight/fcpa/fcpa-recordkeeping.pdf
