Regulators support a ‘culture of compliance’ through various enforcements

Regulators are striving towards a ‘culture of compliance’ built from the top down. As a result, the focus is shifted to the top of the food chain with senior executives, CCOs and CEOs.

Recently, we’ve discussed the growing regulatory spotlight on individual accountability and its link to financial institutions’ struggle to keep up with rising regulations. As tech innovation grows at an extraordinary rate, more and more regulations will emerge to protect customers against the downfalls of technology. When corporations can’t keep up with these changes or cut corners, it leads to non-compliance, fines and even senior individuals being penalised for oversights and wrongdoings.

Ideagen defines a ‘culture of compliance’ as “an organisation that is true to its mission and core values, where senior managers lead the way by expressing their commitment to compliance policies and encourage open communication and honest feedback.” Regulators are looking for exactly this – companies to value transparent communication and act in a way that demonstrates that consumer and client protection are forefront. The responsibility doesn’t just fall on compliance officers, every single individual working at the firm is responsible for their behaviour to create a thriving ‘culture of compliance’ across the board.

With stricter personal enforcement regulation comes an increasing number of charges against individuals at all levels, not just compliance teams. In the last week alone, we’ve seen two cases that establish the consequences of corporate greed and personal gain, rather than putting customers and clients first.  

Ambassador Executives fined for corporate greed

On 7 September 2022, the US District Court for Eastern District of Pennsylvania came to a final judgement against three executives including a Chief Compliance Officer (CCO) at Ambassador. They were fined more than $2 million for failing to disclose conflicts of interest.

Bernard Bostwick, Robert Kauffman and Adrian Young (CCO) who are part owners, executives and investment advisers of Pennsylvania-based Ambassador, decreased returns for clients and generated additional revenue for themselves. Instead of being accountable for one’s actions and protecting their clients, the executives acted selfishly to boost their own profits.

The SEC suspected that between August 2014 and December 2018, the three advisors gained more than $1 million in fees. Bostwick, Kaufmann and Young could have reduced client expenses by 20% without affecting the quality of their investments, however, the executives failed to do so.

The Christian devout company still denied wrongdoing and “deflected blame” and “contradicted the jury’s verdict.” Instead, they conveyed that they had followed all SEC rules and had not overcharged clients. Ambassador said, “Although we are extremely disappointed with the judge’s ruling and still vehemently disagree with the decision, we trust God’s continued provision and His eternal plan…We seek to glorify Him alone through our integrity.”

Not only did the firm deny their wrongdoings, but they also had ample opportunities to fix their mistakes. The SEC has produced a voluntary reporting program which provides advisers with a chance to self-report failure to disclose receipt of fees – they did not do this. Instead, the company even tried to prevent the SEC from discovering information related to their violations. According to the original complaint, Ambassador failed to implement written procedures that were in place to prevent the violations.  

The court ruled that their “failure to be transparent with their clients when they had a clear duty to be transparent constitutes deceit.” Regulators believe that transparency is crucial for the financial industry to grow at a fair pace whilst protecting consumers and clients alike. Having a ‘culture of compliance’ refers to every single employee embracing the rules in place – Ambassador’s employees have not demonstrated this. The advisers broke the rules and did not have their client’s best interest at heart, maintaining instead a ‘culture of non-compliance.’

Coach Executive imprisoned for 18 months for rigging bids

A former executive at Contech Engineered Solutions, Brent Brewbaker, was sentenced to 18 months in prison for bid rigging, mail fraud and wire fraud.

In an October 2020 complaint, it was suspected that Contech and Brewbaker actually conspired with each other to influence numerous bids – Brewbaker submitted the company’s bids. What would happen is, Brewbaker would advise an unnamed company on its total bid and Contech would intentionally submit a higher bid, thus, the unnamed firm would win. Then Contech supplied the lower bidder with Contech-manufactured aluminium structures required to fulfil the total bid.

In June 2021, Contech agreed to pay $8.5 million to the Department of Justice and the State of North Carolina for its part in the scheme. Brewbaker was also fined $111,600 for bid rigging and defrauding the North Carolina Department of Transportation by submitting false certifications of non-collusion for over 300 aluminium structure projects funded by the state between 2009-2018.

It’s not just compliance officers being punished for oversight, regulators are investigating and digging much deeper into firms’ ins and outs to filter out employees who are acting in a non-compliant way. As Special Agent, Craig Miles, Department of Transportation’s Office of the Inspector General says, “the message is clear: we will pursue and investigate individuals who compromise the integrity of the procurement process for corporate greed and personal gain.”

No more “cheaters and schemers,” regulators will “hold accountable executives who target state and local governments with their bid-rigging and fraud schemes,” said Assistant Attorney General Jonathan Kanter of the Justice Department’s Antitrust Division.

Big rigging, fraud and other activities related to collusion “do not promote an environment conducive to open competition, which harms the consumer.”

CUBE comment

The moral of the story is to operate within your regulations and savour the trust in relationships with consumers, clients, and investors – after all, they are trusting firms with their money and it’s only right to be transparent about where it is going, and the associated fees.

The foundation of any investment advising relationship is built on trust. Clients should be able to trust that an adviser will put their interests first and will provide any information required to make educated investment decisions. A ‘culture of compliance’ is fostered through an environment where individual employees are adopting the regulations and upholding their responsibilities in a morally sound and proper manner.

Failing to meet these expectations through the violation of laws, bid-rigging schemes, fraud, dishonesty, and deceit for personal gain can often result in fines or even imprisonment. As exemplified above, regulators are becoming much stricter on those who have acted wrongly on behalf of a company – hopefully, deterring other individuals from doing the same.

As Executive Special Agent in Charge Ken Cleevely of the U.S. Postal Service (USPS) Office of Inspector General said, “along with the Department of Justice and our federal law enforcement partners, the USPS Office of Inspector General will aggressively investigate those who would engage in this type of harmful conduct.”

A key component of ‘a culture of compliance’ is transparency so that regulators, staff, clients and investors understand what’s going on behind closed doors, where investor money is being spent and if senior managers are being held to account. There’s no running away from the law anymore, regulators are cracking down on all criminal and non-compliant behaviour.

The enhanced scrutiny around personal accountability is for a very good cause – to achieve a stable financial industry that operates to the highest standards.