Playing by the rule of law

0
340

By Robert Clark – Manager, Legal Research at TRACE

 

 

 

One fine day, Bear, Fox and Rabbit were roaming the fields when they happened upon the home of Farmer MacGregor.

Glancing at the farmer’s garden, Rabbit said: “I sure would love to nibble on those delicious carrots – but that would be stealing, and stealing is wrong.” Eyeing the farmer’s chicken coop, Fox said: “Those fowl look mighty tasty – but I’m worried about getting caught by that mean old farmer.” Bear said nothing but straightaway made a run for the farmer’s front door, knocked it down and proceeded to devour the entire MacGregor clan. Witnessing this horrific scene, Rabbit nervously chuckled to Fox: “I guess you can have those chickens now.” Fox replied: “Suddenly, I’m in the mood for something a little more gamey…”

The rationales for compliance

‘Culture of integrity’ has a nice ring to it. Whether driven by enlightened self-interest or by a principled sense of justice, the adoption and sustained reinforcement of high ethical norms within an organisation is rightly understood as a critical defence against corruption. It serves as a complement to the array of due diligence protocols, training programmes and oversight mechanisms that constitute a well-built compliance programme. It also helps ensure that we are not just going through the motions – that we understand the rules as more than just an impediment to our entrepreneurial resolve.

But what is that something ‘more’? What principle undergirds our commitment to integrity? We have a range of possibilities. Penalties for noncompliance can be severe, making rigorous adherence to applicable laws a matter of direct financial interest. Developing a reputation for honest conduct can attract more reliable business partners and thwart the advances of would-be rent seekers. Popular sentiment and public relations provide their own substantial motives for upright corporate behaviour. Finally, we cannot ignore the reality and significance of individual conscience in the process of collective decision-making.

These are all good reasons to comply. Any one of them would be enough to support the conclusion that, given the choice between cheating and not cheating, it is better to not cheat. We should consider ourselves lucky to have that choice; corruption is not always so permissive.

The constraints of systemic corruption

In isolation, a bribe can appear as a simple exchange of money for advantage, a misuse of authority for personal gain – an essentially limited transaction. Even a large-scale scheme, involving enormous payments and detailed planning, can be reflexively construed as a matter of ‘going astray’ in the misguided pursuit of profit.

We recognise, of course, the collateral damage that bribery wreaks upon government: the degradation of services, the misallocation of resources, the progressive loss of legitimacy. It is not difficult to see the dire effects of this dysfunction on the governed populace, whether economically, civically or personally. We do not excuse bribery – it is a crime, and those who engage in it are sanctioned as criminals. But consider what makes that outcome possible: a functioning state with the political will to proscribe such acts and enforcement agencies with the muscle to prosecute them.

This is hardly a novel observation. We know corruption thrives under weak governance, and we know doing business in such an environment carries a heightened compliance risk. At least, that is how we usually think of it: as a compliance risk. We understand ourselves to be operating under a functioning state with the power to punish our misfeasance, and we guard ourselves against defying that power.

But what if the state were not there? Or, more plausibly, what if the state had itself become utterly corrupted and unable or unwilling to carry out legitimate enforcement of the law? Power, like nature, abhors a vacuum; we can be sure that some manner of enforcement will step in to fill the void.

The state offers protection. When it functions as it should, turning down corrupt solicitations endangers only the prospect of illicit gain. When it does not, refusing to ‘play ball’ with crooked forces may invite more extreme consequences. Such demands can be a matter of physical safety, not just ethics.

Legitimacy and complicity

Discussing compliance as a matter of existential self-preservation may sound a bit hyperbolic, particularly for large enterprises with the resources to defend themselves even in lawless environments. For these organisations, perhaps the danger is not that they will be destroyed, but that they will be co-opted.

Ordinary crime operates alongside the legitimate order of economy and governance. It seeks to evade detection and exploit weakness within that order, positioning itself in a fundamental antagonism. However, at a certain point, profit is better served by a more collaborative engagement. Criminal syndicates turn to the private sector to establish fronts and channels for money laundering, while nominally legitimate entities can be used to gain privileged access to public coffers, securing lucrative government contracts by means of a well-placed bribe or infiltration of a key agency.

This is not a new story. Throughout the industrial and post-industrial ages, organised criminal enterprises have been active throughout the world, exercising overt control over street-level activities while establishing regional dominance over entire industries. What is relatively new is the degree to which these organisations and networks have broadened their reach across national borders, making full use of global developments in trade, finance and telecommunications. This prompted the US government to conclude in 2011 that transnational organised crime ‘poses a significant and growing threat to national and international security, with dire implications for public safety, public health, democratic institutions and economic stability across the globe’.[1]

There is no reason to assume that multinational companies are immune from this sort of criminal exploitation. To be sure, the large-scale bribery schemes underlying the seemingly endless series of record-breaking Foreign Corrupt Practices Act (FCPA) enforcement actions are scandalous enough without further elaboration. But when we see a pattern of bribery used to secure predominance within or control over an industrial sector within a country or continent, we may wish – with all due caution – to look for signs of other involvements.

Breaking the rules, or breaking the game

At stake is how we understand the nature of grand corruption. Our attention in these cases is naturally focussed by the specific terms of a criminal indictment. And a criminal indictment charges the defendant with violation of a specific law based on specific legally admissible facts. It tells the story of how the rule was broken, and its narrative is limited to what is needed to establish the case.

“The farmer will watch over the farm as long as he can, protecting his hard-won investment in the domestication of crop and beast. It is in our interest to keep an eye out for him”

If that were the end of the story, we would rightly concern ourselves above all with maintaining our own integrity – resisting any temptation to cheat, cut corners and break the rules to secure the commercial upper hand. This outlook holds a particular attraction when the systemic corruption takes place across borders, away from the well-functioning jurisdictions under which we are governed.

We do ourselves a disservice if we imagine our own systems of governance to be immune from systemic criminal corrosion. Not that the possibility and the reality of such infection has ever really been in doubt, but our discourse about corruption needs to acknowledge how, if unchecked, the usurpation of our institutions of government and vehicles of commerce can lead not only to widespread rule-breaking, but to a basic fracturing of the rules themselves. As long as the centre holds, we can feel safe in confronting the problem under the rubric of law enforcement. But past a certain point, things begin to fall apart, and the proverbial ‘mere anarchy’ is loosed upon the world.

Maintaining fiduciary legitimacy

How might this perspective affect our understanding of corporate integrity? When the law and its authority are not in doubt, the usual rationales may be sufficient: fear of punishment, desire for good relations, concern for public opinion and simply wanting to do the right thing.

But if the law is undermined, these ethics may fall short. When the rule of law gives way to the unprincipled exercise of power, our fear may become more visceral, our relations contaminated, the public sphere stifled, and our conscience reduced to a liability.

If these are the stakes in the dialectic between the ‘legitimate’ world and the ‘underworld’, our notion of integrity needs to account for it. We must view the law neither as an impediment nor as an ideal, but as a contested space requiring our protection as much as we require its.

The directors of a company have a fiduciary obligation to safeguard the interests of the company’s stakeholders. Share price is one way to measure that interest. We might also propose that there is a foundational interest in preserving the conditions of legitimacy under which the company is able to operate and thrive – a responsibility to defend the corporate entity against exploitation by criminal forces. Integrity, in this view, requires a keen awareness of the surrounding threats and a firm commitment to avoiding any complicity or intrusion.

The singular logic of the compliance function

A shift in outlook does not necessarily involve a radical change in practice. The ideal of a ‘culture of integrity’ can affect the spirit with which a compliance programme is executed, but the day-to-day legwork proceeds apace: policies are set forth, risks are assessed, oversight mechanisms are established and due diligence is undertaken.

There is value, though, to bringing the variety of compliance concerns under a unified concept. Consider the range of regulated issues: bribery, money laundering, accounting and reporting, conflicts of interest, human trafficking, forced labour, political contributions, conflict minerals, product standards and outright fraud. Each of these can be understood as matters of both law and ethics. But, taken together, they can also be seen as a charting of the tools used to conduct global criminal activity.

In its present-day coordination, this illicit activity does not just cause harm and suffering; it aims and threatens to seize control of the very mechanisms of governance that might otherwise constrain it. Within an organisation that would maintain its legitimacy, the compliance function carries the charge of rebuffing any such advances. It is a collective endeavour that crosses the global economy, and it requires our full, clear-eyed attention.

The farmer will watch over the farm as long as he can, protecting his hard-won investment in the domestication of crop and beast. It is in our interest to keep an eye out for him.

 

About the Author:

Robert Clark is the Manager of Legal Research at TRACE, where he oversees a team of lawyers responsible for the production of analytical content. He has served as a staff attorney for the Seventh Circuit Court of Appeals in Chicago and as law clerk to the Hon. Terence T. Evans in Milwaukee. He has also worked as a commercial and appellate lawyer specializing in business-bankruptcy litigation, first with the boutique firm of Friedman Dumas & Springwater LLP in San Francisco, then as a founding partner of Dumas & Clark LLP.

Footnotes

1.United States National Security Council, Strategy to Combat Transnational Organised Crime: Addressing Converging Threats to National Security (July 2011)  https://obamawhitehouse.archives.gov/administration/eop/nsc/transnational-crime