COMPLIANCE & HOW IT STARTED AND WHY DO WE NEED IT?

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1 COMPLIANCE & HOW IT STARTED AND WHY DO WE NEED IT?

2 Lucia Ana Tomić Director Compliance and Management Board Support at HPB MBA University of Zagreb Faculty of Law Faculty of Economics and Business Corporate law, Banking law, Financial law, Labour law

3 Is it definitely clear what is Compliance?

4 Book written by Dan Ariely The (honest) truth about dishonesty

5 Story about All Art Enthusiasts Store J.F.Kennedy Center for performing Arts in Washington D.C 300 well-intentioned volunteers ,00 $ worth merchandise disappeared each year After discovering the theft stopped after discovering that one employee stole 60$? Moral story We are going to take things from each other if we have chance, so many people need control around them, for them to do the right thing

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7 WHAT IS IT? It is not just legal matter The term compliance describes the ability to act according to an order, set of rules or request In the context of financial services businesses compliance operates at two levels: Level 1 - compliance with the external rules that are imposed upon an organization as a whole Level 2 - compliance with internal systems of control that are imposed to achieve compliance with the externally imposed rules

8 Conflict of interest, as a starting point We assume that people know what is wright and what is wrong Rising awareness of wrongful doing Built circle of trust Sherron Watkins, Former Vice President of Enron I think it all began in 1996 when Kenneth Lay (the CEO) instructed everybody in the company to use his sister's travel agency for business trips There were many small steps in the wrong directions, and gradually we lost our way

9 Is inside trading first step?

10 WHEN IT STARTED?

11 HOW IT STARTED? In June 1906, President Theodore Roosevelt signed into law the Food and Drug Act 1972 Watergate - Jimmy Carter passed the Foreign Corrupt Practices Act (FCPA) - mandatory ethics courses in Law schools Sarbanes-Oxley Act (SOX) of 2002: SOX was enacted in response to the high-profile Enron and WorldCom financial scandals to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise Among other provisions, the law sets rules on storing and retaining business records in IT systems Dodd-Frank Act: Enacted in 2010, this act aims to reduce federal dependence on banks by subjecting them to regulations that enforce transparency and accountability in order to protect customers

12 Consequences Employing compliance officers answer to every new scandal JP Morgan Chase & CO: - London Whale scandal to cost JP Morgan 920mil$ in penalties - USA biggest bank to pay penalties to US and UK regulators for unsound practices relating 6,2 bln$ losses that year After that compliance officers were employed hours of training regarding compliance issues Resulting for compliance officers to be at top 20 best jobs Paul McNulty, Former U.S. Deputy attorney general If you think compliance is expensive, try non-compliance

13 LEGISLATION 1. Primary legislation - refers to the Law, Act or Ordinance passed by the legislative of a particular jurisdiction 2. Secondary legislation - In the context of financial services, secondary legislation is generally legislation that has been drafted by a regulatory body empowered to do so pursuant to the primary law by which it is established (EBA, ESMA ) Complay or explain rule Codes generally set out the broad principles by which a regulated business is expected to conduct its business. Rules are generally very detailed and relate to every regulated activity and function. Guidance can either be in the form of a statement of best practice or a statement of minimum best practice - Anti money laundering and terrorist financing is one area where most regulators around the World have issued guidance

14 Where is Compliance in the company? Three lines of defence The board provides direction to senior management by setting the organisation s risk appetite To ensure the effectiveness of an organization's risk management framework, the board and senior management need to be able to rely on adequate line functions including monitoring and assurance functions within the organization

15 How to build a Compliance program Effective ethics and compliance programs exist to: Promote a culture encouraging ethical conduct and commitment to compliance with law Prevent and detect wrongdoing Enable and facilitate compliance with applicable laws, standards and corporate policies Key elements and indicators of effective programs include: Clear and applicable Standards and Procedures High-level Oversight & Accountability Due care in Delegation of Authority Training & Communication Monitoring, Auditing and Reporting Consistent Enforcement & Incentives to promote Compliance Consistent Response & Remedial Measures Periodic and on-going Risk Assessment & Continuous program improvement

16 How to define a line?

17 Tone at the top, is it enough?

18 Compliance is responsibility of every employee

19 What does a Compliance Officer fulfill? Compliance officers make sure companies and governing bodies stay in line with internal policies and regulatory requirements DUTY - The Compliance Officer has a duty to his employer to work with management and staff to identify and manage regulatory risk OBJECTIVE - the overriding objectives of a compliance officer should be to ensure that an organization has systems of internal control that adequately measure and manage the risks that it faces RESPONSIBILITY - The general responsibility of the Compliance Officer is to provide an in-house compliance service that effectively supports business areas in their duty to comply with relevant laws and regulations and internal procedures

20 Key functions of a Compliance Department 1. Identification - to identify the risks that an organization faces and advise on them 2. Prevention - to design and implement controls to protect an organisation from those risks 3. Monitoring and detection - to monitor and report on the effectiveness of those controls in the management of an organisations exposure to risks 4. Resolution - to resolve compliance difficulties as they occur 5. Advisory - to advise the business on rules and controls

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22 Effective compliance programme 25 % - rules, legislation, procedure 75 % - effective communication and education

23 Whistle-blowing is the act of telling the authorities or the public that the organization you are working for is doing something immoral or illegal WHISTLE - BLOWING

24 How it all started? The False Claims Act (1863) also called the "Lincoln Law" is an American federal law that imposes liability on persons and companies who defraud governmental programs. It is the federal Government's primary litigation tool in combating fraud against the Government EU 1972 Stanley Adams versus Roche The law includes to file actions on behalf of the government informally called "whistleblowing'' Persons filing under the Act stand to receive a portion (usually about percent) of any recovered damages As of 2012, over 70 percent of all federal Government FCA actions were initiated by whistleblowers Claims under the law have typically involved health care, military, or other government spending programs, and dominate the list of largest pharmaceutical settlements The government recovered $38.9 billion under the False Claims Act between 1987 and 2013 and of this amount, $27.2 billion or 70% was from cases brought by whistleblowers

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26 CONCLUSION There is no model that one Compliance model fits all companies tailor made Easy compliance test - Every time you have to face a difficult decision, specially the one that is challenged from ethical aspect, do not choose one that you don t want to see on the cover of newspapers, because reputation matters

27 THANK YOU FOR YOUR ATTENTION