Compliance into the Weeds

In this episode, Matt Kelly and I take a deep dive, literally into the weeds of the convergence of the compliance profession and the nascent cannabis industry. While several states have made pot for medical use legal and one state, Colorado has made it legal for personal consumption, it is still illegal under federal law. We consider such questions as:Lawyers and accountants are required to report large cash transactions to the federal government—but large cash transactions are common in the cannabis industry, since commercial operators don’t have easy access to the banking system. So if you report one of these transactions, are you turning over evidence of illegal activities of your client to authorities? Or do you not report, and risk sanctions against yourself?If the Justice Department does act against a commercial weed business, will prosecutors really seek to impanel a federal grand jury, with jurors drawn from a state where they voted to legalize? Could prosecutors ask a candidate juror whether he or she smokes weed? Could that juror invoke the Fifth Amendment?Should lawyers be allowed to own equity in a legally operating marijuana business? What about judges? Do the two groups need different standards? Professional conduct rules for lawyers require competency in rendering legal advice. What does competency even look like in this branch of business conduct, when the laws are so new and in conflict with federal law?Will the nascence of the cannabis industry allow for innovations such as incorporation of blockchain to create fully auditable trails for all aspects of the business?Will any state which taxes cannabis sales be required to remit this money under a theory of profit disgorgement from funds generated by illegal activity.For more from Matt Kelly:See his blog post  Compliance, Careers and Cannabis Industry;Hear Matt Kelly’s interview with Amy McDougal (yes Matt has his own podcast as well-the Radical Compliance podcast) by clicking  here. Learn more about your ad choices. Visit megaphone.fm/adchoices

On June 16, 2017, the Department of Justice (DOJ) issued a Declination to Linde North American Inc. and Linde Gas North America LLC (collectively “Linde”). This is the first Declination issued by the DOJ in the era of the Trump Administration. For that reason alone, it was instructive and should be studied by the compliance profession. However, the case presented several interesting factors which merit consideration so we are discussing in depth to present lessons to be learned for the Chief Compliance Officer (CCO) or compliance practitioner. Lessons Learned This was yet another Foreign Corrupt Practices Act (FCPA) action where a company performed insufficient due diligence in the acquisition phase. The timing of the Linde purchase of Spectra Gases and Spectra Gases’ purchase of the income producing assets is too close in time to be a coincidence. It would certainly appear that Linde purchased Spectra Gases to facilitate its acquisition of the boron column and other assets. If your company is going to make such a multi-step acquisition, you must perform due diligence on all the actors and the assets involved. The Byzantine corporate structure created for the ownership of the boron column, its operation and management contract are clear red flags that any CCO should sniff out immediately. While I am sure the internal corporate excuse for this clear ruse was the ubiquitous ‘tax considerations’; every such transaction should be reviewed by compliance as well. Anytime there is more than one entity to accomplish one task, there is the possibility of fraud present. Further, it is not clear how Linde could not have been aware of the ownership interests of a company which it ultimately controlled. It would seem that the company did not even make any inquiry. Even in 2006, the Republic of Georgia’s reputation for bribery and corruption was quite high. The 2006 Transparency International-Corrupt Perceptions Index (TI-CPI) listed Georgia at 99 out of 176 countries listed so that alone warranted red flag scrutiny. If you are purchasing an entity in a country with such well known affinity for corruption, extra care is warranted. Perhaps back in 2006, Linde did not view the FCPA as something which it would deal with in such a situation. Yet even with all the apparent miss-steps and non-steps of compliance, the company was able to secure a declination from the DOJ. While there may be some additional penalties or sanctions by the Securities and Exchange Commission (SEC) for the failures of internal controls, the result obtained by Linde was certainly a superior result. The company would seem to have met the four pillars under the FCPA Pilot Program through (a) self-disclosure, (b) extraordinary cooperation, (3) full remediation, and (d) profit disgorgement. Interestingly, the profit disgorgement in this case would appear to have been beyond the five year of limitations for profit disgorgement under the recent Supreme Court decision in Kokesh. If there is a FCPA enforcement action brought by the SEC perhaps additional facts will be recited in any resolution documents. Nevertheless, kudos are due to Linde and its counsel for obtaining this declination. Every CCO should study it for both the superior result received and underlying facts to see if you face anything similar in the Republic of Georgia or elsewhere.For a full copy of the Linde Declination, click here.  Learn more about your ad choices. Visit megaphone.fm/adchoices

In this episode, Matt Kelly and I take a deep dive into the corporate governance fiasco which is Uber. We consider the revelations in the failures of corporate governance, culture and internal controls at the organization. The company provides a fascinating study of what happens when a tech start up raised in the fraternity culture is successful and how changes are required for it to act like a multi-billion organization. Both Matt and I have written on Uber. Our podcast comes out the same day the Holder Report to the Uber Board was released so we weave in the recommendations from Covington & Burling as well. For more on Uber see the following: Matt Kelly’s piece  Car Crash Governance at UberTom Fox’s pieces on Uber Will Culture Change at Uber Before its Too Late CEOs and Win at All Costs-Where Does it Lead Uber and Corporate Culture For a copy of the Holder Report on corporate governance, cultural and internal controls failures at Uber and recommendations, click  here. Learn more about your ad choices. Visit megaphone.fm/adchoices

In this episode Matt Kelly and I take a deep dive into the revisions to the COSO ERM Framework, which were based on comments by practitioners. We consider the role of culture and risk, the integration of the COSO ERM Framework into functional business units moving to operationalize ERM in organizations and we consider how the ERM Framework differs yet is complimentary to the COSO Internal Controls Framework.  For additional information, see Matt's Blogs posts on the COSO ERM Framework: More Details on COSO ERM Framework Update to COSO ERM Framework Update ERM Framework: Govt. Calls for Unity More Clues on Draft ERM Framework Draft ERM Framework is Here: How to Get Started Learn more about your ad choices. Visit megaphone.fm/adchoices

In this episode Matt Kelly and I take a deep dive into the question of whether a company has a duty to disclose ransomware attacks. We consider it from the regulatory, legal, ethical, law enforcement, business, PR and some other angles. What may seem to be a straight-forward answer to a regulatory obligations turns out to be anything but. For additional research, see Matt Kelly's blogpost, "Ransomware: To Disclose or Not". Learn more about your ad choices. Visit megaphone.fm/adchoices

In this episode Matt Kelly and I take a deep dive into the cutting edge topic of artificial intelligence in many areas, including compliance. We discuss the uses of Artificial Intelligence in compliance. We consider how AI has progressed and what it means now for the compliance practitioner and what it will mean in the future.For Matt's blog post on the topic go to  Don't Outsmart Yourself: AI and ComplianceFor Tom's blog post on the topic go to AI for Risk Management: A New Business Advantage  Learn more about your ad choices. Visit megaphone.fm/adchoices

In this episode, Matt Kelly and I take a deep dive into the weeds of the soon-to-be-released the House Financial Services Committee, the Financial Choice 2.0 Act. We consider some of the ideas in the legislation which Matt thinks are bad including:1. Repeal of the Chevron deference repealed. 2. Attempts to clip the SEC rule making authority.3. Exempting more companies which desire to go public from SOX 404(b) requirements and reporting. 4. (Matt's most particular bad idea) The exemption of more filers exempted from XBRL reporting.We also discuss some of the potential benefits from the legislation and where it may all go in the Senate.For more see Matt's blog post House GOP Regulatory Reform Axe, on his site Radical Compliance.    Learn more about your ad choices. Visit megaphone.fm/adchoices

In this episode, Matt Kelly and I take a very deep dive into two recent speeches by Department of Justice (DOJ) Acting Principal Assistant Attorney General Trevor McFadden in which he addressed multiple topics and issues around the Foreign Corrupt Practices Act (FCPA). The  first set of remarks were made in Washington DC at the Anti-Corruption, Export Controls & Sanctions (ACES) 10th Compliance Summit (the “DC speech”). The  second set of remarks were made at the American Conference Institute (ACI) 19th Conference on the FCPA in New York City (the “NYC speech”). We consider the evolving rationale for FCPA enforcement which has changed in the 40 years since it was enacted, the mandatory corporate response to FCPA compliance requirements, and how McFadden sees Justice Department enforcement of the FCPA going forward in the Trump administration. For Matt Kelly blog post on McFadden's remarks, click  here. For Tom Fox's segments of a three part series, click here for  Part I, Part II and Part III.  Learn more about your ad choices. Visit megaphone.fm/adchoices

In this episode Matt Kelly and I take a deep dive into the recently released, Public Company Accounting Oversight Board (PCAOB) semi-annual  white paper. The white paper providing general information about certain characteristics of emerging growth companies (EGCs). Matt and I discuss some of the PCAOB's key findings:There were 1,951 companies that identified themselves as EGCs in at least one SEC filing since 2012 and have filed audited financial statements with the SEC in the 18 months preceding the measurement date (“EGC filers”). The PCAOB staff observe that the number of EGC filers has grown since the enactment of the Jumpstart Our Business Startups (JOBS) Act, but has stabilized recently.There were 742 EGC filers (or 38 percent) that have common equity securities listed on a U.S. national securities exchange (“exchange-listed”). The five most common industries for EGC filers as of November 16, 2016, are pharmaceutical preparations, blank check companies, real estate investment trusts, prepackaged software, and surgical/medical instruments and apparatus.Many EGC filers that were not exchange-listed had limited operations. Approximately 50 percent of the non-listed EGC filers reported zero revenue in their most recent filing with audited financial statements and 23 percent of non-listed EGCs that filed periodic reports disclosed that they were shell companies.Approximately 51 percent of EGC filers, including 74 percent of those that were not exchange-listed, received an explanatory paragraph in their most recent auditor’s report expressing substantial doubt about the company’s ability to continue as a going concern.Among the 1,951 EGC filers, 1,262 provided a management report on internal control over financial reporting in their most recent annual filing. Of those 1,262 companies, approximately 47 percent reported material weaknesses.Approximately 96 percent of EGC filers were audited by accounting firms that also audited issuers that are not EGC filers, including 39 percent of EGC filers that were audited by firms that provided audit reports for more than 100 issuers and were required to be inspected on an annual basis by the PCAOB. Learn more about your ad choices. Visit megaphone.fm/adchoices

In this episode Matt Kelly and I take a deep dive into the recent kerfuffle involving United Airlines and its policy which prevented to teenaged girls from boarding a flight wearing leggings. Was United within its rights to exclude the passengers for inappropriate dress? Is the policy valid? Did the gate agent receive appropriate training to make their decision? In the world of today, social media accelerates the ability to judge, without improving the ability to judge. For ethics & compliance officers, that means every compliance risk is now magnified into a reputation risk. Finally, we consider Matt's closing sentence, "Training, values, culture, judgment. Funny how those four things keep cropping up, isn’t it?" and what it means for compliance. For more insight, read Matt's blog post, "United's Policy Management Lessons" Learn more about your ad choices. Visit megaphone.fm/adchoices