US agencies want 1,000-plus contractors barred - Boston.com

US agencies want 1,000-plus contractors barred - Boston.com

The linked article from the Boston Globe reports that the Administration, under pressure from Congress to "weed out" government contractors for ethical violations, has proposed to ban almost as many contractors in 2011 as President George W. Bush did in his entire second term. During 2011, federal agencies have proposed suspending or debarring over 1,000 companies and individuals from contracting with the federal government. According to Stan Soloway, president of the Professional Services Council (a trade association representing hundreds of government contractors), "the use of suspensions and debarments is getting increasingly hostile."

Contractors can be proposed for debarment for a variety of reasons, including poor performance, ethical issues such as over billing or false claims, or even a violation of one of hundreds of regulations contained in the Federal Acquisition Regulations (FAR), the complex manual guiding the bidding, selection, and execution of federal contracts. Increasingly, the government has been using the debarment process as a way to address what they believe are deficiencies in the ethical culture of a company, even if only evidenced by a single minor FAR violation.

With this substantially increased risk environment for federal contractors, what can companies do to protect themselves? The answer is surpisingly simple. Companies need to do everything they can to shore up their ethical culture and demonstrate their ethical due diligence in advance of the inevitable contracting violation. I use the term "inevitable" because with the hundreds of complex regulations and requirements, mistakes WILL be made. When an erroneous claim is submitted; an employee does not accurately fill out his timecard on a time and materials contract; a competitor's bid information is mistakenly emailed to a competitor; or a supplier provides an item from a foreign country (in violation of the Buy America Act, the first thing the government will attempt to determine is whether the violation is an "aberration" or an isolated event by a "bad actor", or whether it is part of a pattern emerging from a weak ethical culture. To determine this, the government will look at the company's ethics program, including the authority, responsibility, and organizational placement of its Ethics and Compliance Officer; the adequacy of its code of conduct; the sufficiency of its ethics training; and the corporate leadership commitment and "tone at the top" when it comes to ethics.

Companies need to proactively ensure that their ethical house is in order BEFORE the crisis occurs. An independent external assessment by a business ethics professional knowledgeable of the government requirements is essential. If the government is already involved in a matter, companies can proactively suggest the use of an independent monitor as an alternative to more punitive actions (such as suspension or debarment) to assess the company's ethical culture, help them strengthen their ethics and compliance program, and monitor their progress for a period of time. All of these actions are designed to demonstrate that the company is a "responsible party" that can safeguard the taxpayer's interests WITHOUT the potentially business-ending suspension and debarment action that now seems to be the government's preferred method of dealing with corporate ethics issues.

COMMENTARY: Sorry, Joe, You Have to Go

INTEGRITY IS WHAT YOU DO WHEN NO ONE IS WATCHING

I was happy to see Michael Josephson's commentary today, where he reconsidered his previous support of Penn State's Joe Paterno. Yes, Paterno is a legend, and built a reputation of honesty, integrity, and character by molding young football players into men for decades. However, when no one was looking, Paterno failed the ultimate test. When faced with the choice of doing the right thing or taking a "half-measure" that he knew posed the lowest risk to himself and his beloved football program, he chose the most convenient (and despicable) path. Paterno had to know that reporting a child molestation in the Penn State locker room to the Athletic Director would not result in full transparency, an investigation, police involvement, or justice for the molester. Rather, Paterno knew that the matter would be handled "quietly", if at all, protecting the reputation of the team (and the coaches). The NCAA has been struggling with the weak, often non-existent ethical cultures of college athletic departments for years. Violation after violation has revealed that the nation's colleges and universities don't want to "kill the golden calf" , the money machine generated by their football programs. Colleges and their athletic departments have frequently turned a blind eye to even the most egregious NCAA recruiting violations until a fed-up whistleblower goes to the press.

What this entire Penn State mess illustrates is that ignoring the ethical culture of an organization has consequences for everyone involved. Colleges and universities need to establish strong ethics and compliance programs, reporting directly to the Board of Trustees that oversee every aspect of university life. Yes, even the Athletic Department. If there had been an anonymous hotline; a meaningful, and enforced code of conduct that required reporting of violations; regular ethics training sessions as a reminder of the obligations of every employee, faculty member, and coach; and a tone at the top of each department, from the Chairman of the Board of Trustees, to the University President, to the Director of Athletics, perhaps the despicable behavior of this one man that destroyed the lives of these children could have been stopped sooner.

Paterno should have confronted his former Assistant coach, stopped this crime, and called the police. That's what a person of character would have done. Integrity is what you do and how you act when no one is watching. Paterno failed the test. Decades of football championships and college kids overturning cars in defense of their "Joe-Pa" won't change this basic fact. This is Paterno's new legacy. Perhaps it will serve as a teaching moment for colleges and universities throughout the country.

COMMENTARY: Sorry, Joe, You Have to Go

" Occupy Wall Street:" A Protest Against Fraud?

" Occupy Wall Street:" A Protest Against Fraud?

There has been much discussion about the reasons behind the growing movement originally labeled "Occupy Wall Street". Is this merely a situational reaction to the current economic crisis and its resulting high employment, or does it go much deeper into the ever widening class divisions in this country? The author of the attached article correctly presents another view: that the 'Occupy" movements, now spreading around the world might be motivated, in part, by the seemingly endless string of unethical corporate behavior that has contributed greatly to our economic problems. From the accounting scandals of Enron, Tyco, Worldcom, and Adelphia that happened almost a decade ago, to the stunningly bad decisions made by companies like AIG, Standard and Poors, Merill Lynch, Countrywide and others that led to our economic meltdown in 2008, the absence of ethical behavior in corporate America is finally stimulating a reaction across the country. While it is still unclear exactly what the movement is asking for, the common thread of terms used by hundreds of protestors interviewed involves words like "accountability", "transparency", "equity", "ethics", and "morality". Finally, it seems that Americans are viewing corporate ethics and compliance as more than some arcane requirement contained in the Federal Sentencing Guidelines. Hopefully, as the movement's leadership, goals, objectives, and strategies are better defined, the principles of corporate ethics, compliance, and accountability will emerge as concrete areas in which our government, and our society, can better focus its attention.

Mistakes Companies Make

Check out my article, "The Seven Biggest Mistakes Companies Make that Erode Ethical Culture and Destroy Reputation", published in the October 2011 Compliance and Ethics Professional, the journal of the Society of Corporate Compliance and Ethics (SCCE).

https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B3TNvz45emS5NTdlM2ZkZjYtNmVmZC00YTJlLWJjNjEtOTRlZDI5NmY0Nzkz&hl=en_US

Los Angeles Area Schools, Teachers Accused Of Cheating

Los Angeles Area Schools, Teachers Accused Of Cheating

I knew it wouldn't be long before the Atlanta school cheating scandal made its way across the country. What we have here is a classic case of teachers and school administrators "rationalizing" their ethical lapses as some kind of legitimate protest against standardized testing. These educators, who serve as models and mentors to the nation's youth, provided answers to standardized tests to the students in advance; changed test answers after the test; and falsified test results in order to make their schools appear to be more successful in educating the children. Although there are certainly legitimate arguments to be made questioning the value of these tests as an indicator of learning, cheating is obviously not the answer. The example these teachers have set for an already ethically-challenged generation of youth has done far more damage than anything the testing process could have accomplished. As the kids see it, this "ends justify the means" approach to life is merely an extension of what they have been seeing in the business world every day. Horrible ethical decisionmaking by dozens of companies in the finance, banking and mortgage industries brought the economy to its knees in 2008, and we have yet to recover. The consequences for many of these companies: record level profits and executive compensation.

There have been tremendous strides within many industries in improving ethical culture and decisionmaking, strengthening ethics and compliance programs, and focusing on integrity as an integral part of doing business. Increased attention by government regulators and law enforcement in areas such as the Foreign Corrupt Practices Act, the Dodd-Frank Wall Street Financial Reform, and Ethics and Compliance provisions of the federal acquisition regulations are beginning to set the right tone and example. Its time we place greater attention on the ethical values of our future employees -- the students.

FBI: Mortgage fraud still prevalent, hard to catch - USATODAY.com

FBI: Mortgage fraud still prevalent, hard to catch - USATODAY.com

With all of the public attention paid to the complex web of failures that led to the mortgage crisis and resulting economic meltdown, you would think that the mortgage biz would now be squeeky clean. If you've tried to get a home loan or refinanced your house lately, you've probably seen a tightening in the eligibility rules; stricter documentation requirements; and a significant "raising of the bar" in underwriting standards. Gone are the days of "no-doc" loans, 125% financing, and mortgages handed out like candy without regard to ability to pay them back, right?

According to the news article above from USA Today, fraud is still running rampant in the mortgage industry. How can this be? The FBI's annual report on mortgage fraud said such schemes are particularly resilient and hard to discover, and their total cost is unknown. Real estate firm CoreLogic says more than $10 billion in loans were made with fraudulent application data in 2010, the report noted. In spite of all of the additional public attention and oversight, fraud last year stayed at levels seen in 2009 as the housing market remained in distress, providing ample opportunity for schemes, the FBI report said. It predicted that perpetrators would "continue to seek new methods to circumvent loopholes and gaps in the mortgage lending market."

The most prevalent schemes involve falsifying financial information to qualify buyers who otherwise would be ineligible for a loan. Other crimes involve inflated appraisals, including schemes that use dishonest appraisals to sell homes at elevated prices. Some get-rich-quick schemes persuade investors to buy rental property or land believing the price will appreciate quickly. The FBI report indicates that the crimes are committed by licensed and unlicensed brokers, loan officers, real estate agents, appraisers and other industry insiders who use their expertise to exploit vulnerabilities in the system. Organized crime groups are also behind some of the fraud, the report said.

Perhaps the most disturbing conclusion from the FBI is that "mortgage fraud enables perpetrators to earn high profits through illicit activity that poses a relative low risk for discovery." A low risk of discovery? Haven't we learned anything from the bedlem over the last few years?

The perpetual problem with virtually every area of government regulation is that there are, and never will be, enough examiners, inspectors, auditors, and investigators to enforce all of the regulations. Regulated industries such as the mortgage industry know this, which drives the game of "playing the odds", calculating the enormous gains of skirting the rules with the low probability of getting caught. As government budgets at the federal, state, and municipal level continue to decline during this period of austerity (which will likely last for decades to come), traditional methods of government oversight and enforcement need to be augmented by new and more creative approaches.

First and foremost, government regulators need to focus their attention on the credibility and effectiveness of the regulated industries' own Ethics and Business Conduct programs. Such programs need to be a comprehensive, real, and recognized method for companies to conduct their own self-policing. They must have a values-based emphasis on promoting ethical culture and behavior, as well as contain mechanisms to ensure compliance with the myriad of government regulations and requirements. Key elements include a user-friendly code of thics and business conduct; ethics training that includes a combination of both live and computer-based methods; constant corporate communication on ethics and integrity matters and an unequivocal "tone at the top" of the organization (which includes board of directors involvement); a credible, anonymous employee reporting hotline; and a professional, internal investigative capability. There are many more elements involved, but the basic message is that industry needs to develop its own internal self-policing capability, and government agencies need to focus on evaluating these programs.

Another way to expand the breadth and depth of government oversight is through independent compliance monitoring. The independent compliance monitoring model has been typically used as a reactive alternative to punitive government actions, such as suspension, debarment, or prosecution. In this model, a company, contractor, or regulated entity is found to have violated rules, but the government entity agrees to forgo more punitive action in favor of something akin to "corporate probation". The wayward company or regulated entity pays the monitoring bill, but the private monitor takes direction from, and reports to, the government regulator on whether the company is meeting its responsibilities by fixing the problems that have been identified. This model can be highly remedial and productive by helping regulated entities improve their internal processes and capabilities, thereby preventing future infractions.

Recently, some federal, state, and municipal government regulators have found that independent corporate compliance monitoring can offer more proactive benefits by engaging monitors, as a matter of course, in all high risk contracts in a particular initiative or industry. Monitors, for example, are used frequently in government construction programs (the Port Authority of New York/New Jersey is a great example). Given the high risk of fraud in the mortgage industry, coupled with massive decentralization and a tangled web of requirements and regulations at every level, the placement of independent monitors (at industry expense) could provide the government with just the kind of insight, and oversight, that is badly needed in order to prevent yet another mortgage crisis.

A Year After Dodd-Frank, Too Big To Fail Remains Bigger Problem Than Ever

A Year After Dodd-Frank, Too Big To Fail Remains Bigger Problem Than Ever

Terrific article by Shahien Nasiripour, senior business reporter from the Huffington Post. He writes frequently about Wall Street/corporate fraud issues and attempts at government regulation. In this piece, Shahien takes a critical look at the Dodd-Frank Wall Street Reform Act a year after its passage. He writes that, in spite of all of the hoopla surrounding the enactment of the legislation, little has really changed. The nation's largest banks and brokerage firms are getting bigger; the structural deficiencies and incredible financial incentives that motivated unethical decisions still remain; and the ability of regulators to "mind the store" continues to erode to the point of absurdity. He concludes that, in spite of the new regulations, the economy simply cannot afford to let these banks fail, and they know it. The knowledge that any behavior will ultimately be tolerated creates a kind of institutional arrogance that perverts even the most conservative of free market economy theory, which hold that in a true capitalist system, those institutions which violate the rules of order will pay the ultimate price and will not survive.

One of the problems with the way we have approached banking and finance regulation is that it is almost predominantly reactive in its focus. Legislation creates a set of rules; a whistle blower reveals a violation of the rules; and the regulators must take some kind of punitive action. Unfortunately, those actions often fail to have any deterrent effect, because economic interests are seen to outweigh ethical and legal considerations. In my view, regulators need to focus on proactive, preventive measures by (1) requiring companies to establish genuine business ethics and compliance programs, and have them regularly assessed by an independent third party, (2) leveraging the use of independent corporate compliance monitors, at company expense, to regularly evaluate corporate internal controls and compliance with the most critical regulations that can negatively impact consumers and the economy, and (3) integrating integrity agreements into every administrative, deferred prosecution, and non-prosecution agreement that call for even more intrusive monitoring of company practices on a regular basis, before violations occur.