Compliance Risks Arising from the Coronavirus – Lessons from Prior Crises
In responding to the coronavirus, companies will naturally focus most immediately on the health and safety of employees, adapting to new modes of working, and addressing disruptions to their business. Prior crises, however, indicate that companies would also be well advised to remain particularly vigilant about compliance. Financial pressures from a crisis can lead to risky behavior and, historically, enforcement authorities, investors, and counterparties have all eventually scrutinized corporate conduct during such downturns. Companies should be alert to the risks arising from the coronavirus pandemic and take steps to guard against misconduct.
Companies experiencing significant business and financial pressures from the current crisis face a number of risks, including the following:
- Disclosure risk: Many enforcement actions and private lawsuits against companies begin with bad news, followed by a decision to conceal the nature or extent of the problem. Disclosures to investors, creditors, and counterparties that downplay actual or potential problems could result in allegations of fraud or violations of disclosure or accounting obligations.
- Bribery risk: In response to falling demand, employees may feel pressure to meet sales targets, including through bribery of either government or private sector customers. Disruptions to supply chains may cause companies to seek new suppliers, which can expose companies to bribery and corruption risk if the new suppliers are not properly vetted. Similarly, in the transactional context, due diligence may become more difficult in a time of crisis, leading to bribery and corruption risk.
- Market manipulation risk: Traders at financial institutions faced with steep losses resulting from the market downturn may feel pressure to resort to market manipulation to generate returns. They might also make efforts to overstate performance, even for internal purposes.
- Insider trading risk: In connection with public financial reports that are either better or worse than anticipated, employees stressed by falling markets may be tempted to trade on inside information before it is made public.
- Antitrust risk: Disruptions in supply and demand, and the resulting price volatility, could lead to discussions among competitors regarding allocating customers, ensuring particular levels of supply, or stabilizing prices, leading to significant antitrust risk.
Although enforcement activity and civil litigation may not seem to be priorities during a crisis itself, enforcement agencies and civil litigants often scrutinize corporate conduct after a crisis has subsided. The 2008 financial crisis, for example, led to numerous government investigations and extensive civil litigation involving many of the risks identified above. Particularly where the government has undertaken stimulus efforts, there is often pressure to hold accountable companies that have engaged in misconduct. Such scrutiny can begin after the most dire phase of a crisis has passed and can continue for years afterwards.
To mitigate the risk of misconduct in the current environment and the possibility of investigations and civil litigation down the road, companies should keep compliance risk in focus:
- Executives and managers at all levels should emphasize that the company’s commitment to compliance remains strong and has not been overtaken by business pressures, ensuring that the right “tone from the top” is effectively communicated throughout the organization.
- Compliance and legal personnel should identify for employees the risks arising from the current crisis and provide reminders of best practices and existing compliance policies. Such communications should target gatekeepers and employees who pose the greatest risk for each type of misconduct.
- Companies should ensure that critical compliance teams can function effectively in the new remote working environment. Relatedly, companies should ensure that they have identified and prioritized risks arising from the current crisis, including by updating guidance as necessary.
Companies should of course prioritize the health and well-being of their employees and managing the many disruptions to their business. They should also, however, focus on the compliance risks presented by the coronavirus pandemic. By taking steps to mitigate those risks now, companies can help ensure that the disruption caused by the coronavirus itself is not exacerbated by investigations or civil litigation once the current crisis has passed.