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Federal Sentencing Guidelines: a lure to organizational compliance

 

About 20 years ago, the United States Sentencing Commission (USSC) enacted the Federal Sentencing Guidelines (FSGs) for organizations with the intent to govern the sentencing of companies convicted of federal crimes. The FSGs, which have been amended several times, hold that organizations can act only through agents and, under federal criminal law, generally are vicariously liable for offenses committed by their agents.

A proactive approach to prevent, detect and report illegal and unethical activities can substantially reduce fines and punishment, in some cases up to 95% according to a commentary by the USSC. The USSC specifies that the two factors that mitigate an organization’s ultimate punishment are “the existence of an effective compliance and ethics program, and self-reporting, cooperation, or acceptance of responsibility.” In contrast, the absence of solid compliance mechanisms can increase fines and punishment, as verdict determination is based on “the organization’s involvement in or tolerance of criminal activity, its prior history, violation of an order, and obstruction of justice.”

The compliance incentives provided by the FSGs and the proliferation of new regulations mandate a cultural imperative for ethical and law-abiding conduct by all companies, large and small. High-level attention, leadership and sufficient resources must be dedicated to meet the strict requirements of a compliance program defined by the USSC as “effective.” In its manual, the USSC emphasizes the necessity of strong due diligence to prevent and detect criminal conduct. Among its guidelines, a provision in Chapter 8 notes that:

“The organization shall use reasonable efforts not to include within the substantial authority personnel of the organization any individual whom the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program.”

Comprehensive background investigations, whether for employment purposes, evaluation of prospective clients, existing relationships and third-parties, or for other business transactions, are essential for compelling due diligence which actualizes a masterful compliance strategy. Although various committees and officials are calling for a complete review of the FSGs which the 2005 landmark case U.S. vs. Booker held as discretionary rather than mandatory, well-developed compliance programs are here to stay.

Scherzer International is on the forefront of the quick-changing regulations regime with a portfolio of background investigation products designed to facilitate purposeful risk management and compliance protocols. Visit us often at www.scherzer.com as we continuously analyze and test new elements and incorporate them into our products if they have proven value. And stay tuned for a Dodd-Frank regulations product which we will introduce within the next few months.

November 29th, 2011|Categories: Compliance Corner for Employment Decisions|Tags: |

Epidemic of fake websites is real

 

Cyber crime experts report that fake websites are proliferating at the rate of 60,000+ per week or over 3,100,000 per year. And the fraudsters’ malicious exploitations are getting bold and more sophisticated, creating sites that are difficult to discern from those of legitimate businesses or organizations. From banks (which make up about 68% of fraudulent sites) to regulators and news reporting agencies, no entity is immune.

Recently, several local and national newspapers reported on a publicity campaign by a public relations company that purportedly set up a fake news site to promote one of its clients, a public entity, with positive articles and press releases “written in the image of real news” by “journalists” who allegedly do not exist. Although Web experts note that it is fairly common for celebrities and private-sector businesses to generate buzz or improve sales through news coverage, open government advocates called this stunt an egregious breach of trust and ethical standards.

The Federal Trade Commission (FTC) issued warnings a few months ago about scam artists exploiting well-known news organizations by setting up fake news sites to peddle their wares. The sites, which usually display logos of legitimate news organizations, promote everything from bogus weight loss products to work-at-home jobs, anti-aging products and debt reduction plans. The FTC cited several investigations that resulted in charges against the fraudsters, saying that many of the websites are owned by marketers and used to entice consumers to click on links to the sellers’ sites. In its case against acai berry supplement peddlers, the FTC disclosed that the sellers paid the marketers a commission based on the number of consumers they lured to their sites. There was no reporter, no studies, no dramatic weight loss, no satisfied consumers who left comments, and no affiliation with a reputable news source. As a rule, the FTC noted, legitimate news organizations do not endorse products.

The FTC itself, and other regulators have not escaped the fraudsters’ blitz. In April 2011, the FTC brought charges against an individual for multiple violations of the Federal Trade Commission Act for misrepresenting his affiliations with federal agencies, including the FTC, misrepresenting that the services advertised on his websites were government-approved, and making deceptive debt relief claims. The FTC alleged that the individual, a Texas-based “lead generator,” set up several websites through which he associated his business with a fictitious government agency – the “Department of Consumer Services Protection Commission” – that appeared to combine two real government entities, the Federal Trade Commission and the Consumer Financial Protection Bureau. Among other charges, the FTC stated that to further these scams, the websites depicted the FTC’s official seal, copied language about the fictitious agency’s consumer protection mission from the FTC’s site, and claimed that the fake agency “monitors and researches” member companies that provide financial assistance to American consumers.

The scammers and their fake websites are also busy abroad. Earlier this month, international news sources reported that Russian fraudsters set up a counterfeit site of a popular five-star hotel, complete with the real hotel’s photographs, room descriptions and services. According to published reports, they also paid a fee to Google to ensure that their bogus site was listed before the hotel’s genuine site. The fraudulent website purportedly came to an abrupt end after, among other disparities, it was discovered that the room rates were advertised in dollars.

Another story about a flagrant website invasion came in October 2011 from Belgrade, where Serbian media reported that a mock-up of the official Nobel Prize website was set up purportedly by political activists to promote their causes and views.

Fraudulent websites appear daily and no industry or organization is beyond these fraudsters’ reach. Scherzer International, a provider of specialized background investigations for business transactions and employment decisions, includes comprehensive website reviews in its reports. We know how to spot scams, exaggerated claims and other red flags.

November 29th, 2011|Categories: Commercial Transactions Due Diligence|Tags: , |

Bribing for business: Russia and China score lowest in fighting corruption

According to a survey released on November 3, 2011, by Transparency International, a non-profit, corruption watchdog, Russia and China got the lowest scores in its 2011 Bribe Payers Index, which ranked the top 28 largest economies according to the probability of companies headquartered in these countries practicing bribery. The scores were calculated from responses of 3,016 executives in 30 countries who had business dealings in those economies.

Companies based in China and Russia scored below 7 on a scale of 10, at 6.5 and 6.1, respectively. Mexico, with a 7.0 score, was third from the bottom. Companies in the Netherlands and Switzerland tied for first place with scores of 8.8, with Belgium, Germany, and Japan rounding out the top five.
The survey also ranked the business sectors in which bribery was perceived to be prevalent. Public works and construction were reported as the most pullulated along with oil and gas. Agriculture and light manufacturing were ranked as the cleanest.

The report noted that “there is no country among the 28 major economics whose companies are perceived to be wholly clean and do not engage in bribery.” And the scores, on average, have not improved significantly from the 2008 Bribe Payers Index. The average score of 22 countries increased only 0.1 points to 7.9 in the latest edition.

The survey also found that “international business leaders reported the widespread practice of companies paying bribes to public officials in order to, for example, win public tenders, avoid regulation, speed up government processes or influence policy.” However, companies are almost as likely to pay bribes to other businesses, according to the survey, which looked at business-to-business bribery for the first time. This suggests that corruption is not only a concern for the public sector, but for many businesses, and carries major reputational and financial risks.

November 3rd, 2011|Categories: Commercial Transactions Due Diligence|Tags: , , |

“Ban the box” legislation gains momentum

Across the country, municipalities and states are enacting legislation called “ban the box” which generally prohibits employers from asking job candidates about their criminal histories on applications. The legislation also makes it unlawful for a covered employer to take any adverse action against an individual on the basis of an arrest or criminal accusation that did not result in a conviction. The states of California, Connecticut, Hawaii, Massachusetts, Minnesota, and New Mexico have enacted some form of the legislation along with more than 26 cities and counties in Illinois, Maryland, Michigan, Ohio, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Wisconsin and Washington. (A complete list of municipalities that have “banned the box” is posted at
http://www.nelp.org/page/-/SCLP/2010/BantheBoxcurrent.pdf?nocdn=1).

However, except for Hawaii and Massachusetts, the legislation has been limited to public employers, or public employers and vendors and contractors serving public entities. The city of Philadelphia, which is the most recent addition to this growing list, is the first municipality to pass a law that covers private employers with 10 or more employees. Below are some jurisdictional highlights of the enacted legislation:

  • Hawaii and Massachusetts private and public employers cannot consider felony convictions that are more than 10 years old. And in Massachusetts, employers are not permitted to consider misdemeanor convictions that are more than five years old.
  • Hawaii and the cities of Chicago, Hartford, and Cincinnati allow an employer to ask about an applicant’s criminal record only after a conditional offer of employment has been extended.
  • Chicago, San Francisco, and Boston require a public employer denying employment on the basis of a conviction to justify its decision based on EEOC’s guidelines which include the nature and gravity of the crime, the time that has passed since the conviction, and the relativity of the crime to the position.

Proponents of “ban the box” are confident that the legislation will be a significant factor in lowering recidivism rates, as it will allow applicants to demonstrate their skills and qualifications prior to disclosing criminal histories. And many experts say that such laws will expand beyond the borders of the United States in the very near future.

October 17th, 2011|Categories: Compliance Corner for Employment Decisions|Tags: , , , , |

Paying for ambiguity: the myths of instant background checks and national databases

The cottage industry of data-collection agencies that provide inexpensive background information is flourishing even in this tough economy. Many prospective employers with tight budgets believe they can save money by relying on the “national” records that are spewed out within minutes of entering a credit card number. So just what do you get for $19.99? Not much. Or a lot…a lot of worthless data, that is. Unverified name-match only records come up by the hundreds if the name is fairly common. And it is nearly impossible to determine case details or duplicate filings, as the cryptic printouts often require specialized knowledge that is specific to each state, municipality or records venue.

Many subjects who are flagged as criminals in these databases have never been convicted of a crime. In fact, according to the U.S. Bureau of Justice statistics for felony defendants in large urban counties, one-third of felony arrests never lead to a conviction. And there is no standardized process for reporting arrests and dispositions or updating the records at the various court levels. Some reported offenses are not actually violations of the criminal code in the particular state, but may still show up in these databases.

There are few regulations governing the use of background information beyond the provisions of the Fair Credit Reporting Act (FCRA). The Federal Trade Commission (FTC) does not mandate that data aggregators provide guidance on how to properly interpret their records. The only possible value of these so-called national databases is to serve as an indicator that a record may exist, and use the search results to supplement a full investigation. Since the FCRA requires that all “reasonable procedures to assure maximum possible accuracy of the information are followed” and that “the information is complete and up-to-date,” searches for employment purposes must be conducted either manually or through direct access in the particular court where the record is filed.

Employment experts at a July 2011 Equal Employment Opportunity Commission (EEOC) hearing urged the Commission to consider the comprehensive recommendations put forth by the National Employment Law Project (NELP) in its report on the effect of criminal background checks in employment decisions. Among its recommendations, the NELP suggested that the EEOC revise its now 20-year-old guide on conviction records in view of the “intervening proliferation of instant computerized background information…” The EEOC should also address the “use of arrest records and third-party databases that are considered a part of the hiring process.”

October 17th, 2011|Categories: Commercial Transactions Due Diligence|Tags: , , , |

SEC charges green-product company with running a $26 million Ponzi scheme

 

The Securities and Exchange Commission (SEC) announced today that it obtained an emergency court order to halt a Ponzi scheme that promised investors high returns on water-filtering natural stone pavers but bilked them of approximately $26 million over a four-year period.

Filed in the U.S. District Court for the Southern District of New York, the SEC alleges in its complaint that between 2006 and 2010, convicted felon Eric Aronson and others defrauded about 140 individual investors in PermaPave Companies, a group of firms based on Long Island, NY, and controlled by Aronson. According to the complaint, the investors were told that PermaPave had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns of 7.8% to 33%. But in reality, the complaint states, there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales.

In their Ponzi scheme, Aronson and two other PermaPave executives, Vincent Buonauro Jr. and Robert Kondratick, used the new funds to make payments to earlier investors and then siphoned off much of the rest for themselves, buying luxury cars, gambling trips, and jewelry, according to the complaint. Aronson also allegedly used the investors’ money to make court-ordered restitution payments to victims of a previous scheme to which he pleaded guilty in 2000.

The complaint further states that when investors began demanding their money, Aronson accused them of committing a felony by lending the PermaPave Companies money at the interest rates he promised them, which he suddenly claimed were usurious. Aronson and his attorney, Fredric Aaron, then allegedly made false statements to persuade investors to convert their securities into ones that deferred payments for several years.

The SEC also charges that the defendants used some of the money raised through the Ponzi scheme to purchase a publicly traded company, Interlink-US-Network, Ltd. Several months later, the SEC said that Interlink issued a Form 8-K, signed by Kondratick, which falsely claimed that LED Capital Corp. had agreed to invest $6 million in Interlink. According to the complaint, LED Capital Corp. did not have $6 million and had no dealings with Interlink.

The U.S. Attorney’s Office for the Eastern District of New York, which conducted a parallel investigation, filed criminal charges against Aronson, Buonauro, and Kondratick.

October 10th, 2011|Categories: Commercial Transactions Due Diligence|Tags: , , |

More states are restricting credit reports for employment purposes

Connecticut has joined five other states (Hawaii, Illinois, Maryland, Oregon, and Washington) that, with some exceptions, prohibit the use of credit reports in employment decisions. Effective October 1, 2011, S.B. 361 will ban many employers from using credit information in determining whether to deny employment to an applicant, terminate an employee, decide compensation, or evaluate other terms and conditions of employment. Financial institutions, as well as employers who are required to obtain credit reports under federal or state law, are excluded from the Act’s provisions

There are certain exceptions to the S.B. 361 prohibitions. Employers may request or use credit reports when such information is related to a “bona fide purpose that is substantially job-related.” The bona fide purpose exception generally applies to positions involving money handling or other sensitive job duties. If an employer requests or uses credit information for a bona fide purpose, it must disclose its intent to do so in writing to the employee or applicant.

As in Connecticut’s S.B. 361, employers in the other states that have passed employment-related credit report restriction laws need to ensure that their hiring, retention, and promotion practices fall within the guidelines of their legislation.

September 13th, 2011|Categories: Compliance Corner for Employment Decisions|Tags: , |

Risk-based approach to employment screening rates high on value chain

In today’s world just about every company knows that an effective employment screening program is invaluable for hiring qualified individuals, reducing turnover, deterring fraud and other criminal actions, and avoiding or mitigating litigation.

Recognizing that a “bad” hire is a threat to the bottom line, many companies, from investment bankers to law firms, are taking a risk-focused approach to background investigations and deciding what is appropriate or how much should be done to ensure organizational success. For example, obtaining a credit report or checking civil records for an entry-level applicant with low risk responsibilities may be of limited use, while reviewing such record histories for someone who will handle money or have access to sensitive information may be imperative in assessing his/her suitability for a position of trust.

Best practices in both the government and in the private sector indicate that a risk designation should be determined for every position, based on its description of duties and responsibilities. The risk grade should be commensurate with the employee’s assigned trust level, financial accountability, access to sensitive and confidential information and critical data systems, autonomy, discretionary authority, and potential opportunity for misconduct.

To be effective and non-discriminatory, employment screening policies need to specify a uniform set of background investigation elements for all position/assignment levels, including new hires, temporary workers, interns, transferred and promoted employees, contractors and volunteers.

SI has a full suite of employment background investigation products. Please visit our website at https://scherzer.co/ to learn more or order an investigation.

September 13th, 2011|Categories: Compliance Corner for Employment Decisions|Tags: , , |

New FINRA rule for reporting requirements

 

FINRA’s Rule 4530, modeled after NASD Rule 3070 and NYSE Rule 351, went into effect on July 1, 2011. The rule requires all member firms to:

  • report to FINRA certain specified events and quarterly statistical and summary information regarding written customer complaints, and
  • file with FINRA documents of certain criminal actions, civil complaints and arbitration claims.

A member firm has 30 calendar days to report to FINRA violations of any securities, insurance, commodities, financial or investment laws, rules, regulations or standards of conduct committed by the firm or its associated persons.  The 30-day period begins when the firm has concluded, or reasonably should have concluded, that a violation has occurred. Below is a summary of the provision.

  • Firms are not required to report every instance of non-compliant conduct, but they must report conduct that has widespread or potential widespread impact to the firm, its customers or the markets, or conduct that arises from a material failure of the firm’s systems, policies or practices involving numerous customers, multiple errors or significant dollar amounts.
  • Violative conduct by an associated person must be reported only when it has widespread or potential widespread impact to the firm, its customers or the markets; conduct that has a significant monetary result on a member firm(s), customer(s) or market(s); or multiple instances of any violative conduct.
  • The “reasonably should have concluded” standard is applied on a good faith basis (by the firm) if a reasonable person would have concluded that a violation has occurred; if a reasonable person would not have concluded that a violation occurred, then the matter is not reportable. Firms must establish who, within the firm, is responsible for making such determinations. Stating that a violation was of a nature that did not merit consideration by the responsible person is not a defense to a failure to report such conduct.
  • The reporting obligation and internal review processes set forth under other rules – eg., FINRA Rule 3130 – are mutually exclusive.
  • While internal review processes may point to a firm’s determination that a specific violation has occurred, they do not by themselves lead to the conclusion that the matter is reportable – e.g., FINRA would not view a discussion in an internal audit report regarding the need for enhanced controls in a particular area, standing alone, as determinative of a reportable violation.  An internal audit finding would serve only as one factor, among others, that a firm should consider in determining whether a reportable violation occurred.
  • Certain disciplinary actions taken by a firm against an associated person must be reported under a separate provision, rather than under the internal conclusion provision.

In addition to the above “internal conclusions” obligations, the new rules for “other reportable events” as per NASD Rule 3070 and NYSE Rule 351, have been modified somewhat in Rule 4530. For example, more customer disputes may have to be reported, as the new rule will now include attorney’s fees and interest penalties in customer settlements or awards with damages against a broker of $15,000 or more and against a firm of $25,000 or more, thus lowering the calculations threshold for reporting requirements.

August 16th, 2011|Categories: Commercial Transactions Due Diligence|Tags: , |

Controversy abounds in employment decisions based on social media searches

In May 2011, the Federal Trade Commission (FTC) ruled that companies providing social media information to employers – and employers who use the reports – must follow the same Fair Credit Reporting Act (FCRA) regulations that apply to more traditional sources. The FTC also stated that postings on any social media site can be saved by on-line background screening companies for up to seven years.

According to the FTC’s letter dated May 9, 2011 to a company that sells information from social networking sites for employment purposes, such a company is considered a Consumer Reporting Agency (CRA) and thus must take reasonable steps to ensure the accuracy of the information obtained from online social networks (as well as other sources) and positively identify it with the subject. It also must comply with other FCRA provisions, such as providing a copy of the report to the subject and maintaining an established protocol if the subject disputes the reported information. As with “traditional” background investigations, employers who use a report prepared by a CRA must certify to the CRA that the report will not be used in violations of federal or state equal employment opportunity laws or regulations. Additionally, both the CRA and the employer have a legal obligation to keep and dispose of the reports securely and properly. (For more information, see the FTC blog, “The Fair Credit Reporting Act & Social Media: What Businesses Should Know.”)

Social media legal experts and various literature point to a multitude of issues and risks faced by both the CRA and the employer who uses social media checks, which include, but are not limited to:

  • Problems under FCRA section 607(b) in exercising “reasonable procedures to assure maximum possible accuracy” of the information.
    Since the information on social media sites is self-reported and can be changed at any time, it is often difficult if not impossible to ascertain that the information is accurate, authentic and belongs to the subject. Online identity theft is not uncommon, as are postings under another person’s name for the purpose of “cyber–slamming” (which refers to online defamation, slander, bullying, harassment, etc.)
  • Information may be discriminatory to job candidates or employees, or in violation of anti-retaliation laws.
    Social sites and postings may reveal protected concerted activity under the National Labor Relations Act (NLRA,) and protected class information under Title VII of the Civil Rights Act and other federal laws, such as race, age, creed, nationality, ancestry, medical condition, disability, marital status, gender, sexual preference, labor union affiliations, certain social interests, or political associations. And while the information may have no impact on the employment decision, the fact that the information was accessed may support claims for discrimination, retaliation or harassment.
  • Accessing the information may be in violation of the federal Stored Communications Act (SCA).
    To the extent that an employer requests or requires an employee’s login or password information, searches of social networking sites may implicate the SCA (18 U.S.C. § 2701) and comparable state laws which prohibit access to stored electronic communications without valid authorization. A California court recently ruled that the SCA also may protect an employee’s private information on social networking sites from discovery in civil litigation.
  • Assessing the information may violate terms of use agreements and privacy rights.
    While certain social media sites have stricter privacy controls than others, most if not all limit the use of their content. The terms of use agreements typically state that the information is for “personal use only” and not for “commercial” purposes. Although the definition of “commercial” in connection with employment purposes is interpretive, most legal experts indicate that employment screening fits that scope.
  • Information may be subjective and irrelevant to the employment decision.
    Blogs, photos and similar postings often do not provide an objective depiction of the subject or predict job performance. The California Labor Code, for example, specifically provides that an employer is prevented from making employment-related decisions based on an employee’s legal off-duty conduct. Employers may use such information only if the off-duty conduct is illegal, if it presents a conflict of interest to the business or if it adversely affects the employee’s ability to do his/her job. And the evidence of such activities must be clear.

The popularity of employment-related background checks that include social media searches is growing rapidly. But the unreliable and unverifiable information from these sources is a potential landmine of legal liabilities.

August 8th, 2011|Categories: Compliance Corner for Employment Decisions|Tags: , , |
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