Government Regulators Reject “Paper” Corporate Compliance Programs Lacking Actual Enforcement

By John Patzakis

Recently, US Government regulators fined Stanley Black & Decker $1.8m after its subsidiary illegally exported finished power tools and spare parts to Iran, in violation of sanctions. The Government found that the tool maker failed to “implement procedures to monitor or audit [its subsidiary] operations to ensure that its Iran-related sales did not recur.”

Notably, the employees of the subsidiary concealed their activities by creating bogus bills of lading that misidentified delivery locations and told customers to avoid writing “Iran” on business documents. This conduct underscores the importance of having a diligent internal monitoring and investigation capability that goes beyond mere review of standard transactional records in structured databases such as CRM systems. This type of conduct is best detected on employee’s laptops and other sources of unstructured data through effective internal investigations processes.Law Journal2

The Treasury Department stated the Stanley Black & Decker case “highlights the importance of U.S. companies to conduct sanctions-related due diligence both prior and subsequent to mergers and acquisitions, and to take appropriate steps to audit, monitor and verify newly acquired subsidiaries and affiliates for….compliance.”

Further to this point, the US Department of Justice Manual features a dedicated section on assessing the effectiveness of corporate compliance programs in corporate fraud prosecutions, including FCPA matters. This section is a must read for any corporate compliance professional, as it provides detailed guidance on what the USDOJ looks for in assessing whether a corporation is committed to good-faith self-policing or is merely making hollow pronouncements and going through the motions.

The USDOJ cites United States v. Potter, 463 F.3d 9 (1st Cir. 2006), which provides that a corporation cannot “avoid liability by adopting abstract rules” that forbid its agents from engaging in illegal acts, because “[e]ven a specific directive to an agent or employee or honest efforts to police such rules do not automatically free the company for the wrongful acts of agents.” Id. at 25-26. See also United States v. Hilton Hotels Corp., 467 F.2d 1000, 1007 (9th Cir. 1972) (noting that a corporation “could not gain exculpation by issuing general instructions without undertaking to enforce those instructions by means commensurate with the obvious risks”).

The USDOJ manual advises prosecutors to determine if the corporate compliance program “is adequately designed for maximum effectiveness in preventing and detecting wrongdoing by employees and whether corporate management is enforcing the program or is tacitly encouraging or pressuring employees to engage in misconduct to achieve business objectives,” and that “[p]rosecutors should therefore attempt to determine whether a corporation’s compliance program is merely a ‘paper program’ or whether it was designed, implemented, reviewed, and revised, as appropriate, in an effective manner.”

With these mandates from government regulators for actual and effective monitoring and enforcement through internal investigations, organizations need effective and operational mechanisms for doing so. In particular, any anti-fraud and internal compliance program must have the ability to search and analyze unstructured electronic data, which is where much of the evidence of fraud and other policy violations can be best detected.

To help meet the “actual enforcement” requirements of government regulators, X1 Distributed Discovery (X1DD) enables enterprises to quickly and easily search across up to thousands of distributed endpoints and data servers from a central location.  Legal and compliance teams can easily perform unified complex searches across both unstructured content and metadata, obtaining statistical insight into the data in minutes, and full results with completed collection in hours, instead of days or weeks. Built on our award-winning and patented X1 Search technology, X1DD is the first product to offer true and massively scalable distributed data discovery across an organization. X1DD replaces expensive, cumbersome and highly disruptive approaches to meet enterprise investigation, compliance, and eDiscovery requirements.

Once the legal team is satisfied with a specific search string, after sufficient iteration, the data can then be collected by X1DD by simply hitting the ‘collect’ button. The responsive data is “containerized” at each end point and automatically transmitted to either a central location, or uploaded directly to Relativity, using Relativity’s import API where all data is seamlessly ready for review. Importantly, all results are tied back to a specific custodian, with full chain of custody and preservation of all file metadata. Here is a recording of a live public demo with Relativity, showing the very fast direct upload from X1DD straight into RelativityOne.

This effort described above — from iterative, distributed search through collection and transmittal straight into Relativity from hundreds of endpoints — can be accomplished in a single day. Using manual consulting services, the same project would require several weeks and hundreds of thousands of dollars in collection costs alone, not to mention significant disruption to business operations. Substantial costs associated with over-collection of data would mount as well, and could even dwarf collection costs through unnecessary attorney review time.

In addition to saving time and money, these capabilities are important demonstrate a sincere organizational commitment to compliance versus maintaining a mere “paper program.”

1 Comment

Filed under Best Practices, Case Law, Case Study, compliance, Corporations, eDiscovery & Compliance, Enterprise eDiscovery, Information Governance

One response to “Government Regulators Reject “Paper” Corporate Compliance Programs Lacking Actual Enforcement

  1. Pingback: Government Regulators Reject “Paper” Corporate Compliance Programs Lacking Actual Enforcement — Next Gen eDiscovery Law & Tech Blog | Jim Ehrenberg (SharePoint Pros, Inc.)

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