Ethical Culture Evidence in a Lawsuit
Some company leaders consider creating an ethical culture a best practice, but not a critical priority. However, at least one court invoked a company’s culture as evidence in a lawsuit. Knowing what stoked the court’s ire shows the cost of allowing unethical actions to continue.
In New York, cigarettes sold on reservations to tribal members for personal use are exempt from tax. This created a business opportunity for some shippers to smuggle unstamped cigarettes through Native American reservations using United Parcel Service, Inc. (“UPS”), the popular logistics carrier, to avoid the tax and sell to the general public. A federal jury and judge found in New York v. UPS (S.D.N.Y. Mar. 24, 2017) that UPS knew about this smuggling ring and let it happen, violating state and federal laws as well as its contract with the state of New York.
- Institutional Failures
Institutional failures can be a sign of a noncompliant culture. For example, despite receiving lists of suspected smugglers from regulators, UPS “failed to distribute them broadly” to key employees who had the ability to investigate. Some knew; some didn’t. Further, UPS received inquiries from customers about lost or damaged packages involving cigarettes, yet the information remained “compartmentalized,” with UPS arguing that it didn’t know about the information. Not so. The Court believed UPS bore “responsibility for a serious failure of process and procedures” that did not adequately prepare employees to identify and address suspicious activity across the board.
Institutional failures are directly related to culture, as implementing effective codes of conduct and ethics and compliance programs (both set out enterprise-wide processes and procedures) require an ethical culture fostered by leadership, communication, ethics, and training that connects every department and employee to a central set of values.
- Impact of Culture on Decisions
It is not difficult for a large company to implicate individual employees as the source of compliance failures, as a VW executive did when VW blamed software engineers for sidestepping regulatory emissions requirements.
In the UPS case, the Director of Dangerous Goods and Director of Package Solutions had primary responsibility, along with legal counsel, for overseeing issues relating to UPS’s shipment of tobacco products and compliance with the state contract that required UPS to take affirmative steps to stamp out potentially illegal activity. The Director knew, along with other employees, that shippers located close to Native American reservations were more likely to smuggle cigarettes. He also knew that he could audit damaged or broken packages that contained illegal cigarettes, but he did not.
This would lead some to think the Director to be a bad apple, but the Court didn’t. The Court found the Director was just following the company’s culture of “business as usual,” “ignoring red flags,” and “relying on self-serving statements by shippers.” When UPS finally gave the Director the lists of suspected smugglers, he dedicated himself to “righting the ship with regards to UPS’s compliance efforts.” The Director did not have all the necessary resources. The Court did not sing UPS’s praises, however, as UPS instituted company-wide policies and practices to address smuggling only after New York sued it.
- Legal Liability
Most of New York’s legal claims against UPS could succeed only if UPS had legal knowledge of the cigarette smuggling. The Court used UPS’s culture as evidence that the knowledge of a few employees could be imputed to UPS as a whole. Particularly, the Court found UPS’s “corporate culture . . . broadly accepted non-compliance. Accordingly, while the record does not indicate affirmatively that every fact was shared widely, the evidence reasonably supports an inference that material facts were not withheld.” Thus, the Court found that the jury was correct to impute knowledge and responsibility to UPS.
Fears of legal liability have driven some compliance programs. While the Court zeroed in on UPS’s culture, this should not suggest that culture is just a box to check when ensuring a compliant atmosphere. That is the main problem with ineffective compliance programs. Instead, a company should develop a culture of compliance that instills in employees correct behavior, naturally. For information on how to accomplish this, check out EverFi’s white paper Six Elements of a Compliance Culture.
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