Bribery Enforcement Action in the Insurance Business……Again

December 22, 2011

 

The insurance industry looks to be a target. This would not be a surprise if you read my recent blog, Bribery and the Board in the Insurance Broker Business, here. With only days left in 2011, I won’t go so far as to use the (2011 word of the year, at least as per my list) contagion, but I have a feeling I will be using the term “systemic” industry risk a lot in 2012.

This time it is Costa Rica. The funds were intended as education and training for INS officials (see how difficult it is to avoid doing business with public officials in the international space),  but some of it went to travel to “tourist destinations” or other purposes not provided within the brokers “books and records.” In this case, and unlike the previous Willis UK Bribery Act case, the NPA (non-prosecution agreement) made note of invoice and other records that made it obvious “that the expenses were clearly not related to a legitimate business purpose.”

The NPA included “failure to devise and maintain an adequate system of internal accounting controls with respect to foreign sales activities sufficient to ensure compliance with the FCPA.”

The price tag you ask?………….$25 million ($1.76 million penalty, with was a substantial reduction thanks to “extraordinary cooperation”, “timely and complete disclosure of improper payments”, and the 5.25 million pound payment to the UK’s FSA (Financial Services Authority); plus $14.5 million in disgorgement and prejudgment interest in a related SEC settlement) not to mention their legal, investigation and communication cost.

The ultimate cost will be difficult to determine, but is potentially much greater than the above, due to potential reputational damage, the new costs to “adhere to rigorous compliance”, and the costs of possible follow-on civil liability claims.

Who you ask…………….? Sorry,………………………………………………….. AON. Here, here, here.

The bigger question……….did they buy investigation coverage under the Marsh exclusive program, or negotiate it themselves with Chartis (to save the commission)? And, will they jump on the band wagon to market this case as the perfect “loss example” to their clients?

At the risk of defending a competitor, it is very likely that the SFO, SEC, DOJ, etc, have a great scapegoat in the insurance brokerage industry: 1) we are the best direct link to business of every size and in every sector, 2) going after international accounting/auditing/consulting firms is difficult because they have a longer history of successfully defending themselves from liability; 3) many of the clients of audit/consulting firms don’t retain them for risk management advice, 4) “do as I say, not as I do” doesn’t just apply to child raising.

The loss control opportunity (the investment in time and resources should reflect the risk, which means the risk needs to be identified to determine the applicability of the following):

  1. Get the “rigorous compliance, bookkeeping and internal controls standards” in place now, not after the enforcement action,
  2. Follow the DOJ “minimum best practices compliance program” as per their common Deferred Prosecution Agreement (the research is a good start, but here is a hint) aka Plea Agreement,
  3. Establish Legal and Compliance Committee of the Board (3 members, no execs),
  4. Appoint one or more senior executives to implement of oversee anti-corruption policies, procedures and standards, and provide adequate resources and an adequate level of autonomy from management, (note that US Sentencing Guidelines suggest that this compliance officer reporting to the General Counsel who reports to the board may not qualify, see here for NY Times article, “MF Global’s Risk Officer Said to Lack Authority”),
  5. Appoint a Compliance Consultant to aid in those activities and the reporting obligations,

The insurance spin – There are two insurance vehicles that come to mind for the transfer of direct “bribery enforcement” based loss:

  1. Standalone Investigation Costs Coverage – this is a new product, rarely purchased and largely unknown product, but no matter what the purchase decision, the due diligence alone is worth your (and your broker’s) effort,
  2. Investigation Costs Coverage as built into a D&O or D&O/Professional Liability policy – there is no rhyme or reason to the contract language so tread carefully. Make sure your broker identifies “Entity” coverage vs “Personal” coverage, and if this analysis covers less than a dozen areas of the policy, ask them  to try again,
  3. Request details on “formal” vs “informal” investigations, but recognize that the “broader” the policy the more onerous there “reporting” obligations, and the greater the risk of erosion or exhaustion of limits.

For indirect loss you might only be able to look to your D&O or D&O/Professional Liability policy. The key for D&O coverage is:

  1. Don’t assume it is a D&O policy as almost every policy provide coverage to the corporate Entity,
  2. Know how your policy or program (layers of policies) is exposed to erosion or exhaustion,
  3. Follow-on or Downstream loss can come from many directions, so request information on how your policy responds to “derivative” demands, “securities claims”, and regulatory enforcement not included in the initial bribery/corruption enforcement,
  4. Since some “bribery enforcement” loss does not name individuals, then you may have skipped the “direct loss” comments above, and therefore I will repeat – the “broader” the policy the more onerous there “reporting” obligations, and the greater the risk of erosion or exhaustion of limits.

D&O, Professional Liability and Crime insurance underwriters are tightening their underwriting standards. They are raising the RED FLAG on the departure of Chief Risk Officer, Chief Compliance Officer, or General Counsel, and may no longer settle for “resigned to pursue other opportunities”.

Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at https://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.

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