Thomas C Baxter, Jr: Reflections on the new compliance landscape
Remarks by Mr Thomas C Baxter, Jr, Executive Vice President and General Counsel of the
Federal Reserve Bank of New York, at "The New Compliance Landscape: Increasing Roles
- Increasing Risks" Conference, New York City, 23 July 2014.
* * *
The views expressed are the views of the author and do not necessarily reflect the views of the Federal Reserve
Bank of New York, or any component of the Federal Reserve System.
Let me begin by thanking the Risk Management Association, PWC, Debevoise & Plimpton,
and my friend Paul Lee for inviting me to participate in this conference. Of course, I need to
give what sometimes sounds like a Miranda warning - my remarks are personal, and do not
represent an official position of the Federal Reserve Bank of New York, or any part of the
Federal Reserve System. There is nothing I will say that can be used against them.
I am going to address three specific compliance problems: economic sanctions, tax evasion,
and foreign corrupt practices. I will use these three compliance problems to illustrate a larger
point about organizational culture. If organizational values do not support the rules that
organizations use to guide the behavior of employees, and worse, if organizational values
actually conflict with those rules, the organization is headed for troubled territory. In my
remaining time, I will elaborate on this fundamental point.
Let me start with economic sanctions. We have the recent case against BNPP for its conduct
in evading U.S. sanctions related to Iran, Sudan and Cuba. The case is noteworthy because
the disposition involved pleas to Federal and state criminal violations, and a record fine of
nearly $9 billion. The BNPP case is not the only case against a financial institution for
economic sanctions violations. There have been a series of others. Every one of this series
of cases concerns a foreign bank. Observers ask, "why are all of these economic sanctions
cases against foreign banks?"
Before offering my answer, let me start with some "not's". In my view, it is not that U.S.
financial institutions are so much more compliant than foreign institutions. I will avoid an ugly
name-and-shame ritual, where I would identify the U.S. financial institutions that violated U.S.
law. It is not that U.S. prosecutors are xenophobic individuals who are bound and determined
to target only foreign institutions. I know from personal knowledge that prosecutors have
followed the evidence and it has led them to the doors of foreign banks only.
What explains this phenomenon? Some foreign institutions, unlike their American
counterparts, did not see the values that motivate and support U.S. economic sanctions
rules. At most U.S. financial institutions, and I may be myopic in seeing too much nobility in
them, there is a widely accepted understanding that our U.S. sanctions are tailored to
accomplish a laudable public purpose. The Sudanese sanctions are designed to coerce a
regime to cease certain horrific practices, like genocide. The Iranian sanctions are designed
to stifle the Iranian regime's nuclear ambitions. The Cuban sanctions are intended to hinder
the advancement of communism in the Americas and to change an oppressive regime
through a trade embargo. For U.S. financial institutions, which operate on the basis of a
public charter issued in the United States, the public purposes supporting economic
sanctions and the detailed sanctions regulations are in harmony. With respect to rule
compliance, the staff will follow those rules not simply because they are required to but also
because they want to.
While I am not here to speak for foreign institutions that have committed sanctions evasion,
including BNPP, my sense from the evidence is that these institutions looked at economic
sanctions very differently. They looked at economic sanctions as technical "American" rules
that were not seen as consistent with the organization's and the home country's larger value
system. In Europe, they found no similar sanctions, and there it was perfectly legal at the
time to do business with these sanctioned jurisdictions. Some European bankers almost
naturally adopted the view that there was no value system underlying the technical American
legal rule. The foreign institutions saw the situation as providing financial services to just
another country; not to a country committing genocide; not to a country building a nuclear
weapon; and not to a country fostering a dehumanizing ideology.
This failure to correlate the rule with the value is the root of real mischief. It erodes what
some commentators call the "culture of compliance", and it tends to foster an employee
population that will be inclined to look for loopholes, to place toes on the edge of the
permissible, or even to turn a blind eye to a black letter compliance rule. And, the
organization's compliance staff will also suffer from a stifled motivation and the absence of
any meaningful authority - it relegates that staff to a bunch of box checkers, rather than
people working toward a safer and better world. Is it a surprise then that foreign institutions
have problems with sanctions compliance and U.S. institutions do not? I do not excuse this in
any way, but I do understand it.
Let us now turn to tax evasion. On May 19, Credit Suisse pled guilty to conspiring to help
certain Americans evade their tax obligations to the Federal government. Credit Suisse
agreed to pay a fine of $1.8 billion. Like the criminal disposition concerning BNPP, this was
headline news. Credit Suisse had well developed compliance rules addressing what
relationship managers could and could not do when travelling into, and through, the United
States. But those compliance rules, while cogent, were largely ignored by certain Credit
Suisse personnel. Why is that? Here, again, I believe that the answer lies in the
organizational value system.
Credit Suisse was not alone in aiding customers to evade taxes. UBS had similar problems
although it escaped without a plea to a Federal felony. Would it come as a surprise to
anyone in this room that some of the Swiss cantonal banks may also have "issues" with
respect to U.S. tax compliance? Switzerland, the home country to the two big Swiss banks
and the jurisdiction that charters them, does not have a law that criminalizes tax evasion,
meaning the willful failure to report income and to pay the tax due on that income. This may
be one of the reasons why Switzerland has earned a reputation as a tax haven, although that
reputation may be changing as Switzerland faces external pressure from the international
community.
So, is it surprising that personnel from Switzerland, working for an organization that for many
years had a business strategy of taking funds from high net worth customers without many
questions about taxation at the source, did not turn square corners when visiting New York?
Does it shock you that they would meet with U.S. customers and discuss their accounts,
even though that was prohibited by the rules imposed by compliance? Once again, when the
rules are in conflict with an organizational value system, watch out! People will find a way
around them, either by closing their eyes or by whispering in the darkness.
Finally, let me turn to foreign corrupt practices. I have selected this topic because official
corruption is a problem that some U.S. financial institutions have found challenging during
the last year. And, in my view, there are certain features of U.S. law that might give rise to
conflict between organizational values and FCPA compliance.
The Foreign Corrupt Practices Act was enacted in 1977, and it represents a Congressional
response to revelations of widespread bribery of foreign officials by U.S. companies. One
purpose of this legislation is stopping official corruption. Then, and continuing to the present
time, the United States led the world in enacting laws designed to stop official corruption, and
perhaps more importantly, in enforcing these laws. Let me say that, as an American lawyer
who spends significant time outside the United States, this is a part of our legal infrastructure
that I take pride in.
With all of that said, there is one part of the FCPA that makes me uncomfortable. The
FCPA's bribery prohibition, and the compliance officers in the audience will know this well,
contains a narrow exception for "facilitating or expediting payments" made in furtherance of
routine governmental action. Some of the cynical among you might know this provision as
permitting so-called "grease" payments for non-discretionary acts, like processing visas or
providing phone service. But, let us face it, this statutory exception permits a certain limited
form of governmental corruption. While I understand that the exception is grounded in a
practical reality, I feel that zero tolerance for official corruption would have been a better
choice. To any public servant with an extended hand, I would say in a loud and clear voice,
"pull it back and do your job." And, let me note the OECD Working Group on Bribery
recommends that all countries encourage companies to prohibit or discourage facilitating
payments.
The real mischief is what this exception might do to an organizational value system. When an
organizational policy allows some types of official corruption (and we have come up with
candy coated names for this, like facilitation or expediting payments), this diminishes the
efficacy of compliance rules that are directed toward stopping official corruption. Again, the
best compliance cultures are formed when the rules and the organizational value system are
in perfect harmony. So, for U.S. chartered institutions, perhaps this is a place where your
organizational value system should go beyond black-letter U.S. law. If you tolerate a little
corruption, watch out!
So, I have used three compliance topics - economic sanctions, tax evasion, and foreign
corrupt practices - to make the case for harmonizing organizational value systems and
compliance rules. At an absolute minimum, do whatever is practicable to assure that your
value systems and compliance rules do not conflict or send irreconcilable messages. In the
"New Compliance Landscape", a failure to do this is a recipe for disaster.
I also would like to make a concluding remark. I do not subscribe to the view that compliance
officers or legal counsel should take on the mantle of the missionary. I am of the "old school"
- the duties of the management and the board are owed to the company and to the
shareholders. I do believe that the best among chief legal officers will see the job as more
than just dispensing legal advice, and, as being the "guardian of the corporation's integrity".1
But being the guardian of the corporation's integrity cannot mean that integrity is defined by
the chief legal officer's personal value system and not the organization's value system. We
are not priests or rabbis.
In a world where the consequence of rule breaking can lead to fines in the multiple of billions
of dollars, lawyers and compliance officers can accurately claim that, in guarding the
corporation's integrity, they are enhancing shareholder value. When the BNPP case was
announced, FBI Director James Comey said: "Until shareholders demand from their boards
that those boards choose leaders who understand what it means to create a healthy culture
of compliance, the money will keep walking out the door . . . ."2
My remarks today have focused on the organizational value system as distinct from its rule
set. Organizations should adopt and nurture organizational value systems because they are
healthy for the company and its shareholders. The personnel in the organization will feel
better about the work that they do, and they will do better work and more of it. It is good
business to refuse to finance a jurisdiction that is sponsoring genocide. It is good business to
say "no" to the customer who wants help in evading taxes. And it is good business not to
corrupt government officials.
Companies with a reputation for a sound culture of compliance tend to do well at
harmonizing their organizational value system and their compliance rules. If you look at those
companies, you see success. Thanks for listening.