The Company You Buy: Professional Ethics Means Sharing Transgressions 21:40, November 2, 2016

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The Company You Buy: Professional Ethics Means Sharing Transgressions

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Implementing strong professional ethics in today’s global business arena means taking responsibility for past misconduct, then engaging in present action to mitigate potential adverse outcomes. Global leaders need to maintain appropriate circumspection about ethical conduct while simultaneously negotiating a complex web of local and national laws and customs. Although ethical standards, laws, and business practices differ by geography, organizations and individuals doing business in the US are subject to the US Foreign Corrupt Practices Act (FCPA). The FCPA prohibits bribing foreign officials or falsifying books, and requires businesses to implement a system of internal accounting controls.

A combined $22.2 million Department of Justice (DOJ) and Securities Exchange Commission (SEC) settlement with LATAM Airlines for FCPA violations illustrates the consequences of poor ethical decision-making: 1) even if the company is not incorporated in the US; and 2) based primarily on evidence of a predecessor organization’s accounting irregularities. The settlement arose from criminal and civil charges against LATAM Airline Group for the legal transgressions of its predecessor, LAN Airlines, dating back more than 10 years. In other words, today LATAM is on the hook for yesterday’s book-cooking by the company it bought.

LAN was not a US corporation. It was incorporated in Chile, headquartered in Miami, Florida, and provided air transportation to the United States, among other countries. It was also traded on the New York Stock Exchange. These connections with the US were enough to make the airline subject to the FCPA. The allegations in the SEC press release and the DOJ criminal charges follow, in section 1 below.

1. Misconduct Allegations & Consequences

LAN Airlines wanted to enter the commercial airline market in Argentina. But there was a problem: Argentine law prohibited foreign-owned airlines from operating in the country. So LAN sought and received the Argentine government’s permission to acquire a local airline. LAN then convinced Argentina to change the law to allow LAN to own a majority share of that airline, grant additional airline routes, and raise the maximum ticket prices it was allowed to charge.

Having achieved most of its goals, LAN’s remaining obstacle to expanding its business in Argentina involved the labor unions it had inherited as part of the acquisition. The union demanded higher pay on threat of organized action that would significantly increase LAN’s labor expenses.

To thwart the union’s threat, LAN hired a “consultant” for $1.15 million under a fictitious agreement to study Argentine air routes. The consultant did not study air routes, but instead funneled bribes to union officials, who agreed to accept lower wages – saving LAN more than $6.7 million. However, despite the largesse of the consulting sum (much of which LAN remitted to the consultant and his wife’s personal bank account), the sham consulting agreement was never signed. Not only did these moves demonstrate poor ethical decision-making: they violated the FCPA.

The SEC and the DOJ brought parallel civil and criminal charges, respectively, for failure to keep accurate books or maintain adequate internal accounting controls.

The DOJ noted that the “$22.2 million in combined penalty, disgorgement and prejudgment interest far exceeds the $6.7 million in savings the company had received from its improper payments.”

LAN’s CEO, Ignacio Cueto Plaza, who signed off on the sham consulting agreement, was also on the hook for the illegal and unethical conduct. Plaza must pay a $75,000 penalty and attend anti-corruption training, among other things, to settle the criminal charges against him.

In addition to the monetary payout, LATAM must also beef up its compliance efforts and hire an independent compliance monitor for at least 27 months.

LATAM did not voluntarily disclose the FCPA violations, it let responsible employees off scot-free, and it failed to cooperate with the DOJ investigation until four years after the unlawful conduct occurred, when it was uncovered by the Argentine press. LATAM’s lack of professional ethics in response to LAN’S transgressions compromised “the ability of the compliance program to be effective in practice,” wrote the DOJ. The DOJ consequently imposed a stiffer penalty than it would have if LATAM had cooperated from the beginning.

This isn’t just an idle promise. Companies that make the ethical decision to self-report through their own initiative can avoid prosecution and avoid harsh monetary penalties.

2. Disclosure is Due Diligence

According to A Resource Guide to the U.S. Foreign Corrupt Practices Act (FCPA Guide) compiled by the DOJ and SEC, companies engaging in mergers and acquisitions are encouraged to:

(1) conduct thorough risk-based FCPA and anti-corruption due diligence on potential new business acquisitions;

(2) ensure that the acquiring company’s code of conduct and compliance policies and procedures regarding the FCPA and other anti-corruption laws apply as quickly as is practicable to newly acquired businesses or merged entities;

(3) train the directors, officers, and employees of newly acquired businesses or merged entities, and when appropriate, train agents and business partners, on the FCPA and other relevant anti-corruption laws and the company’s code of conduct and compliance policies and procedures;

(4) conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable; and

(5) disclose any corrupt payments discovered as part of its due diligence of newly acquired entities or merged entities

The FCPA Guide assures companies contemplating mergers and acquisitions that the “DOJ and SEC will give meaningful credit to companies who undertake these actions, and, in appropriate circumstances, DOJ and SEC may consequently decline to bring enforcement actions.”

3. Other Outcomes of Bad Behavior

LATAM could have done better, but it could have fared worse. For example, debt collectors who harassed debtors were shuttered, subjected to intrusive monitoring, and forced to pay over $5 million total. The SEC has also hit financial high-flyers who flaunt ethical standards with imprisonment and more than $50 million in settlements and final judgments for securities law violations. US companies with a global reach may even find themselves facing criminal charges for racketeering abroad.

4. Outcomes of Good Behavior

In addition to the positive outcomes of self-reporting under the FCPA, such ethical conduct has other long-term benefits. It should not be lost that a compliance culture with a strong sense of professional ethics fosters good decision-making and business success. The alternatives (ruined reputations and careers, prison and painful payouts) are numerous as they are untenable.

Compliance training is one way employers can incorporate professional ethics into the fabric of their organization. If you’re unsure about how to do it, this case study on Namely, an HR-compliance startup that combined growth and culture with training, provides an inside look.

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Steve Treagus
Stephen Treagus, JD's, previous practice as an attorney specializing in employment litigation exposed him to the rough-and-tumble world of employment relationships gone awry. Today, this experience informs his articles and courses, helping employers avoid costly litigation and get employment law right. Stephen earned his JD from John F. Kennedy University School of Law and his BA from Sonoma State University.

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