A Not for Profit Christmas Story

By Debra Rade on December 24, 2011

Translation

It’s a “real life” Christmas story for members of the Board of Chicagoland Toys for Tots.   According to a Chicago Sun Times report  (12/20/11), the story began in April 2011 when the Board learned that at least $25,000 had been embezzled.  Ordinarily, the charity buys about 20,000 toys each Christmas and distributes them to Chicagoland’s poor and disadvantaged children.  Toys for Tots receives hundreds of letters from families and institutions asking for toys.  Sadly, this year it appeared so many requests would have to go unanswered, so many children would be disappointed.

Toys for Tots VP Tom Dertz was reported as saying “It’s tough, these are people that often don’t have anything.”  As in a Dr. Suess book, it appeared the Grinch had prevailed and definitely stolen Christmas.

Those of us who work with not-for-profits (NFPs) and in governance and compliance for all corporations know that NFPs have the same, if not often greater, risks of embezzlement as any for profit corporation.  Why greater for a NFP?

Good NFPs focus on their mission of receiving contributions and spending as much of them as possible in fulfilling their mission (and not growing their organization’s size).  So, they often don’t invest in appropriate safeguards for their funds, such as up to date financial reporting systems and information technology.   In smaller NFPs, there may only be one person in the organization that has access to the financial records which is not bad, in and of itself, but the system may be lacking the appropriate checks and balances.  Sometimes the chairman of the board is also the chief executive officer/president/executive director and this can make it even more uncomfortable and difficult for other board members (particularly those recruited by the CEO) to request or demand access to financial records.

NFP boards frequently are large, which can sometimes lead to a lack of direct accountability or, at least, understanding by board members of their specific responsibilities.  NFP board members may think their primary purpose is to contribute financially to the organization or to help bring in new members rather than bring their business acumen to the organization.   Even very successful business people who are well qualified to serve as financial experts on publicly traded boards sometimes put down their guard when serving on a NFP board.  After all, if everyone working for a NFP with a great mission focuses on the mission, they must all be good people, right?  Wrong…

Here’s the account from the Chicago Sun Times (and let’s not jump to any conclusions but let’s just say that this is an example of something that might go wrong in any NFP environment).  It’s reported that when Board members were alerted to the alleged theft in April, they started asking questions about one of the charity’s accounts.  At that time:

“...a board member resigned, saying that his wife was sick and needed to be cared for, they say. The former board member’s wife — who also volunteered with Toys for Tots — took an overdose of pills at the organization’s warehouse, they said.

Contacted Monday, the former board member strongly denied that he or his wife had done anything wrong. He acknowledged that his wife had been taken by ambulance to Christ Hospital from the Toys for Tots warehouse following an incident in April and said that she’d been diagnosed with bipolar disorder.

The former board member said his home was in foreclosure and that his financial troubles began when his wife “went on a spending spree.” He said he does not believe that she stole from Toys for Tots and that “nothing has been proven” but added that “anything’s possible, because she’s bipolar.”

Police have not spoken to him or his wife since April, he said.”

There are so many stories of embezzlement in NFPs.  This one is not so different than any other. Lessons learned?  Corporate governance principles applicable to the for profit corporate world are a must for all NFPs, large or small, because no NFP can afford to fail in its mission because of an internal theft or embezzlement.

Like all good Christmas stories, this one has a happy ending.  ChicagoBusiness reported today that as a result of the Chicago Sun-Times report, Toys for Tots Chicagoland received an anonymous $25,000 gift made in memory of former Chicago Bears great Sid Luckman.  This was followed by sizable donation from CouponCabin LLC, that matched the $25,000 as well as an undisclosed donation from Groupon Inc.

ChicagoBusiness attributes the anonymous donation to Fred Latzko, a real estate developer who did not comment on the donation by said in an e-mail that “Sid Luckman was an amazing person. The situation sounds fantastic for Toys for Tots with such a windfall that maybe they can look to share their fortunate situation with a smaller children’s charity that could be short of donations this Christmas.”  Seems Mr. Luckman, who passed away in 1998,  inspired Mr. Latsko by making similar donations to children’s charities over the years.   (Ironically, Mr. Latzko has his own story…)

Acts of lovingkindness inspire us all.  The day has been saved for Chicagoland’s children.  All in all, an additional $55,000 was raised to cover the losses.

Happy holidays to everyone!

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Driving business development under the influence of alcohol?

By Debra Rade on August 3, 2011

Translation

Last week, the U.S. Securities Exchange Commission (SEC) charged London-based Diageo plc with “widespread violations” of the Foreign Corrupt Practices Act (FCPA).  In settlement of these charges, Diageo agreed to “cease and desist from further violations and pay $11,306,081 in disgorgement, prejudgment interest of $2,067,739, and a financial penalty of $3 million.”

For those who don’t go to the liquor store,  Diageo is one of world’s largest producers of premium alcoholic beverages.  Times must be tough for Diageo, as it appears government officials in some countries aren’t satisfied with just a case of  Johnnie Walker or Ketel One.

The SEC claims Diageo made improper payments to government officials in India, Thailand and South Korea over a period of more than 6 years (and, one wonders, what took everyone — internally or externally — so long to figure this out?).

From 2004 to mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied other high-ranking Thai government officials extensively on Diageo’s behalf in connection with pending multi-million dollar tax and customs disputes, contributing to Diageo’s receipt of certain favorable decisions by the Thai government.

The SEC claims that Diageo, in South Korea, paid more than $86,000 to a customs official as a reward for his role in the government’s decision to grant Diageo significant tax rebates.  Further, Diageo also improperly paid travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo routinely made hundreds of gift payments to South Korean military officials in order to obtain and retain liquor business.

In India, from 2003 through mid-2009, Diageo made over $1.7 million in illicit payments to hundreds of Indian government officials responsible for purchasing or authorizing the sale of its beverages.

Further, the SEC charged that Diageo engaged in lax oversight and maintained deficient controls.  Its subsidiaries were alleged to have routinely used third parties, inflated invoices, and other deceptive devices to disguise the true nature of the payments.  Sometimes, they failed to record the payments at all.

Indicating the penalties could have been more severe, the SEC noted that Diageo cooperated with the SEC’s investigation and implemented certain remedial measures, including the termination of employees involved in the misconduct and significant enhancements to its FCPA compliance program.

Clearly there are many lessons to be learned from “Diageo.” Among them:

  • The SEC continues to target companies headquartered outside of the U.S. for FCPA enforcement;
  • There should be an active, challenging and realistic dialogue with group and subsidiary management about any obstacles to doing business in various countries;
  • South Korea, India, and Thailand should be added to the list of high risk countries, if not already on your radar;
  • Not surprisingly, many of these payments were repeating — accounting and compliance should look for the frequency of payments made to individuals as well as considering the amounts and the purpose; and,
  • It’s important to analyze payments to third parties, especially when vague services are described.  Ask the important questions, including, what services are these third parties performing that would merit the size and frequency of the checks they receive from your corporation?

Disgorgement of profits is a tough remedy (though not as tough as China’s executions for receiving the bribe).  Better to have the controls that can recognize the violations sooner, than later.

And, BTW, compliance training, compliance training, and compliance training with a lot of genuine tone from the top is a good start.

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Receive a bribe, pay with your life…

By Debra Rade on July 26, 2011

Translation

Death penalty as deterrent for corporate corruption?  The U.S. has the Foreign Corrupt Practices Act.  The UK has its Anti-Bribery Act of 2010.  Not surprisingly, China has its own ways of dealing with corruption. In China, the penalty you pay may well be your life.

The New York Times reported that a former China Mobile executive was sentenced to death with a 2-year reprieve.  Zhang Chunjiang, the former vice chairman of China Mobile, was charged with accepting briges of more than $1.15 million over a period of 1994-2009, when he worked at various state-run telecom companies.  With good behavior during the first two years, his sentence could be commuted to life in prison (and we pause here for a philosophical moment…)

If you think it is easy to commute that life sentence, consider that four years ago, the head of China’s Food and Drug Administration was, indeed, executed for corruption and failing to protect consumers.  And, Chen Tonghai, the former chairman of Sinopec, the Chinese oil company, was sentenced to death with this two-year reprieve — but it seems there is no report on the outcome yet.   The report is, however, that this week, two former vice mayors in Chine were executed for accepting substantial bribes.

This recalls the 10 year jail sentence applied to Stern Hu of Rio Tinto plc   convicted of accept just less than $1 million in bribes.

It is reported that telecommunications is the current targeted industry for Chinese investigations into corruption.

Missing from the NY Times report is information about the penalties assessed by the numerous companies that paid off these officials, whether those penalties are incurred in China, the U.S., U.K., or elsewhere.  So far, and unlike many anti-corruption laws,  it seems China’s focus is on the recipient and not the briber.

It will be interesting to watch the evolution of enforcement in China.  Will they begin to share or shift any of the penalties between the briber and and the one who accepts the bribe?  In any event, inside counsels, lawyers and compliance officers may wish to include these actual cases in training employees doing business in China.  It’s always good to know just how personal it gets.

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New Canadian Consumer Safety Law

By Debra Rade on June 22, 2011

Translation

It’s a new era for manufacturers, importers & retailers in Canada.  With Royal Assent, the Canada Consumer Product Safety Act (CCPSA) came into force on June 20, 2011. Everyone making or selling consumer products for the Canadian market should be mindful of these new laws requiring “incidents” to be reported to Health Canada upon “becoming aware” of them.

The Canadian legislation does not mirror the US Consumer Product Safety Improvement Act (CPSIA), although the new CCPSA is admittedly designed to bring Canada’s consumer product safety system into line with their key trading partners.  Consumer products, defined broadly and including children’s toys, household products and sporting goods, are regulated by the CCPSA. Motor vehicles, food, drugs and animals continue to be regulated by other Canadian laws.

Health Canada endeavors to be a “user friendly” administrator, so its website is packed with much useful information about the new law and how to comply.  In general, they note that key provisions of the CCPSA include:

  • reporting of incidents, with “early warning”
  • maintaining records/paperwork
  • reporting or obtaining information on product safety
  • packaging and labeling
  • enforcement of prohibitions related to manufacture, importation, sale or advertisement of consumer products that could pose an unreasonable danger to the health or safety of Canadians

Among the guidance currently provided, you may wish to access the Guidance on Mandatory Incident Reporting and the Guidance on Preparing and Maintaining Documents.

Yet, this is new ground for Health Canada. As it reports, Health Canada is “preparing to implement the Act and is consulting Canadians as guidance is developed that will assist industry in complying with the new requirements.” So, there will be a bit of “wait & see” as the CCPSA evolves…

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The “Maine” Toy Requirements…

By Debra Rade on June 8, 2011

Translation

Are the folks in Maine more interested in children’s safety than, let’s say, California or Texas?  On June 3, 2011, the Maine State Legislature finalized amendments to its Toxic Chemicals in Children’s Products Act of 2008, known (in Maine, that is) as the Kid Safe Products Act. We will recall that there was a flurry of legislation in 2008 for children’s products, most notably the national Consumer Product Safety Improvement Act of 2008 (CPSIA), legislation not without its own defects and need for amendments, due, in part, to the haste in drafting it.

Why did Maine need to amend this relatively new legislation?  The reformed law (LD 1129) is intended to reduce unnecessary and costly regulations that may have negatively impacted small businesses in Maine.  Included among the regulations was a requirement that toy companies doing business in Maine had to test and document that their products do not contain any of the more than 1,750 “priority chemicals” named by the Maine Department of Environmental Protection (DEP). That’s a whole lotta testing.

While the Toy Industry Association, Inc. (TIA) continues to seek a waiver for reporting Bisphenol A (BPA) in toys, the DEP has merely granted an extension for reporting of BPA and other priority chemicals in toys and other products until October 3, 2011.  BPA is found in hard plastics, like water bottles.  The extension is to allow more time for companies to comply with the submission requirements.

According to the TIA press release, other modifications to the bill include:

  • The exemption of  inaccessible product components;
  • The provision for a de minimis level of chemicals in products;
  • A clarification that the focus of the law is on “intentionally-added” ingredients; and
  • The requirement that credible science be used in the DEP’s decisions.

Those modifications say a lot, don’t they? Like…did you have any scientific basis in the first place for legislating certain requirements? Or, when you legislated these requirements, did you consider that a child will not be exposed to certain chemicals if they are in inaccessible components?

Individual states persist in setting their own standards when it would appear so much more can be achieved by working cooperatively with the federal government to determine product safety requirements for children’s products.  It becomes virtually impossible for manufacturers to comply with individual state requirements.  It’s impractical on so many levels, not the least of which is the size of the legal bill for any company to determine each state’s requirements and maintain compliance with them over time. Just consider how much time, effort and expense most likely went into reforming the Kid Safe Products Act.  This, of course, adds to the overall expense of the products we buy.

For the most part, the Consumer Product Safety Commission (CPSC) is in the best position to determine safety requirements for children’s products.  To the greatest extent, manufacturers need a single source for product safety requirements.  This should promote healthy businesses and facilitate trade without compromising safety. State legislators reacting in haste can have a negative impact on businesses while not necessarily positively impacting the quality or safety of toys and other children’s products.

Is BPA is good or safe enough to warrant a total waiver of requirements for reporting in toys, as the TIA proposes?  Online research provides lay people with conflicting information.  Yet, if the Maine DEP has enough scientific evidence to substantiate legislation, it should share the research with the CPSC and work toward a federal solution, so that all kids in the US and, ultimately, around the world have the benefit of protection…not just the kids in Maine.

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Time to safeguard your tax and business records

By Debra Rade on June 2, 2011

Translation

 

Referencing the beginning of the 2011 hurricane season,  the Internal Revenue Service encourages individuals and businesses to safeguard their tax and business records against natural disasters by taking several simple steps discussed below.

It’s ironic that the IRS is referencing hurricane season when the significant devastation from deadly tornadoes has been most prominent in the news lately.  Our hearts and, hopefully, our charity goes out to those who have lost family, friends and homes to tornadoes in 2011, making this the deadliest year for US tornadoes since 1950 according to the Christian Science Monitor.

In any event, the IRS’s suggestions for protecting records are valuable and practical.  We can all benefit from a review and an assessment of how prepared we are to access important personal and business records.  The IRS recommends:

Create a Backup Set of Records Electronically

The backup should be stored away from the original set!  Some of us forget that it doesn’t help to store the computer information on a backup disk if the whole house is destroyed.  There are services that will store them in “the cloud.”

Document Valuables

Photograph or videotape the contents of his or her home, especially items of higher value. The IRS has a disaster loss workbook, Publication 584, which can help taxpayers compile a room-by-room list of belongings.

While the IRS may recommend that photos should be stored with a friend or family member who lives outside the area, consider that most are digital today.  Store them in “the cloud.”

Update Emergency Plans

Emergency plans should be reviewed annually. Personal and business situations change over time as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.

Check on Fiduciary Bonds

Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

IRS Ready to Help (yes, that’s what they say…they are here to help us!)

If disaster strikes, an affected taxpayer can call 1-866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues.

Back copies of previously-filed tax returns and all attachments, including Forms W-2, can be requested by filing Form 4506, Request for Copy of Tax Return.

We hope you never need to put this plan into action, yet you’re encouraged to plan ahead!

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Do Consumers Really Care About SaferProducts.gov?

By Debra Rade on April 15, 2011

Translation

SaferProducts.gov went live on March 11, 2011, on time and on budget according to CPSC Chairman Inez Tenenbaum. The Consumer Product Safety Commission (CPSC), manufacturers, lawyers, legislators, and consumer organizations have been the primary actors with regard to this database, and there has been a substantial amount of disagreement among them.  Ironically, it would seem that the only people who have not taken a strong interest in SaferProducts.gov or the CPSC, for that matter, are the consumers.

The database was mandated by Congress, as part of the Consumer Product Safety Improvement Act of 2008 (CPSIA).  Since the outset, many manufacturers and trade organizations have been strongly opposed to it.  They envision their competitors filing spurious complaints to gain market share, and plaintiffs’ lawyers salivating at access to (unsubstantiated) product complaints.  As recently as a few days before the database went live, the National Association of Manufacturers filed a petition urging the CPSC to continue the “soft launch” phase (i.e., the non-public launch) of SaferProduct.gov until the CPSC can ensure that the reported information is accurate. (Do NAM members really prefer to face product liability claims with a better database in which the CPSC places its imprimatur on the accuracy of the complaints? An interesting question for litigators.)

The SaferProducts.gov database has become a divisive partisan issue, in spite of the fact that the CPSIA was supported almost unanimously by both the Republican and Democratic parties from the outset. The Subcommittee on Commerce, Manufacturing and Trade held a hearing on February 17, 2011 on “A Review of CPSIA and CPSC Resources” and on the following day, in an about face, Republicans approved legislation in the House to block the CPSC from spending any funds to operate the database.

Consumer advocates remain strongly supportive of the CPSC database believing it to be an important consumer tool that “will end the secrecy that currently prevents critical product safety information from reaching consumers” according to Rachel Weintraub, director of product safety and senior counsel at the Consumer Federation of America. Are the advocates responding to specific consumer constituent requests for the database or does their position reflect an opinion they consider best for consumers but for which there is no demand?

According to the CPSC’s Scott Wolfson, less than 330,000 consumers are currently signed up to receive “push” e-mails from the CPSC to gain instant access to product recalls issued by the CPSC. It is possible that a fair percentage of that number is comprised by manufacturers, retailers and lawyers who like to stay up to date with the CPSC.  Further, according to the CPSC, only 8,000 people follow the CPSC on Twitter.  The CPSC has the ability to notify many millions of people about recalls through e-mails and news releases and it has also undertaken major initiatives in the past few years to make good use of the social media to get the safety word out to consumers.  Yet, after all this time, not many consumers are actively engaged directly with the CPSC.  So why does the CPSC believe that SaferProducts.gov will be a “powerful source of information for consumers” when it appears consumers are not even interested in receiving recall notices directly from the Commission?

SaferProducts.gov will have to compete with more accessible, if not equally effective, online consumer use and safety data.  Consumers with product complaints are far more likely to report a complaint directly online at the retailer’s website. Online retailers tend to keep a list of all customer reviews in perpetuity and quantify them for the consumers.  Yes, it would appear that most of these sites don’t automatically notify the manufacturers to provide them with an opportunity to rebut the claim as the CPSC database does.  Nor do they filter spurious claims or ask for all contact information to ensure there is a person behind the complaint as opposed to the product’s competitor.  Check out the number of very serious product complaints concerning rashes at this website: Johnson’s Baby Gel Oil with Aloe & Vitamin E at Amazon.  Do consumers order the product after they read the reviews?  Most likely some do, some don’t.  Is it possible consumers are more inured to product safety claims than the legislature, CPSC, retailers, manufacturers or even consumer advocates realize?

Politics and principles aside, will the availability of the database make a big difference?  Will it drive consumers to the CPSC and benefit product safety?  Will it subject manufacturers to new litigation or loss of market share?  The reality is that is seems hardly worthy of the partisan politics and trade association efforts to discard it.  Mostly because it would appear that consumers haven’t asked for it in the first place which means they are not so likely to use it. Time will tell.

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100th Anniversary of the Triangle Shirtwaist Factory Fire

By Debra Rade on March 25, 2011

Translation
Today we commemorate the 100th anniversary of the Triangle Shirtwaist Factory Fire. The fire claimed the lives of 146 workers in New York, mostly young female immigrants from Europe working long hours for low wages, who died because of inadequate safety precautions and lack of fire escapes. This sad event helped to galvanize a movement for social justice, immigrant rights, industry safety and fair labor practices.
Fire safety, in the home and workplace, remains vital.  I’ve been proud to work for a safer world during most of my career along with leading standards development organizations like the National Fire Protection Association and Underwriters Laboratories Inc.  Both of these organizations were founded in the mid-1890′s and learned from this fire.  Working to develop and evolve voluntary standards with entire safety community, including manufacturers, trade associations and the local, federal and state governments, we can thank them for the very high standard of safety we enjoy in the workplace and for continuing to evolve the standards.


Those who died tragically in the Triangle Shirtwaist Factory Fire did not die in vain.


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How much lead is in the doggie in the window?

By Debra Rade on March 15, 2011

Translation

Came across an interesting consumer product issue.  Here’s a news report about a grandmother complaining that a product she wanted to purchase had the following warning on its: “Warning: Contains lead.  May be harmful if eaten or chewed.  May generate dust containing lead.”

Why did the manufacturer place that warning on a label?  Most likely, it was a decision made to ensure that the product would meet the varying lead level and labeling requirements among our 50 states.  For instance, Illinois has its own Lead Poisoning Prevention Act.  Here is it is, in part, and look for the very familiar warning at the bottom:

Children's products. Effective January 1, 2010, no person, firm, or corporation shall sell, have, offer for sale, or transfer the items listed in this Section that contain a total lead content in any component part of the item that is more than 0.004% (40 parts per million) but less than 0.06% (600 parts per million) by total weight or a lower standard for lead content as may be established by federal or State law or regulation unless that item bears a warning statement that indicates that at least one component part of the item contains lead. The warning statement for items covered under this subsection (b) shall contain at least the following: "WARNING: CONTAINS LEAD. MAY BE HARMFUL IF EATEN OR CHEWED. MAY GENERATE DUST CONTAINING LEAD."

So, it would appear the the manufacturer was attempting to navigate the straits between the federal and state testing and labeling requirements for lead in children’s toys.

The news station took the offending plush dog toy to the Consumer Product Safety Commission (CPSC) where it took samples from its ears, arms, feet and belly.  The little doggie passed all the federal tests…indeed, “if the dog’s fur contains lead, our test found it’s so minuscule it’s below reportable levels.”

And, for all of this, the news report has the retailer apologizing for selling the plush toy, and for selling others where the warning was covered up with adhesive label to correct the “mislabeling.”

Of course,  the final word goes to the grandmother.  “Things should be lead-free, period.”  And, they can be in her home, if she’d like.  The next time she picks up a toy that says “contains lead” and that meets federal but not state requirements, she can leave the little doggie on the shelf.  After all, warnings should help us make decisions, not news.

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Corporate Compliance & Ethics Institute 2011 – PLI – I’ll be there, will you?

By Debra Rade on March 15, 2011

Translation

Please consider joining me at the Practising Law Institute’s Corporate and Ethics Institute 2011 in Chicago on May 12-13, 2011.  The schedule includes:

  • Hot Topics and Global Trends in Compliance and Ethics
  • Standards and Procedures: The First Element of an Effective Program
  • Effective Communications and Training
  • Board Oversight and Program Structure: Responding to the Guidelines’ Revisions
  • Social Media (what does it mean for compliance and ethics?)
  • How to Perform an Effective Audit/Measuring the Effectiveness of Your Compliance Program
  • Compliance Risk Assessments
  • Helplines, Investigations and Responding to Misconduct
  • International Compliance Issues and Dealing with Third Parties

Additionally there will be plenty of opportunity to network with other compliance professionals and, frankly, that can be the best part of such programs.  There is so much to be learned from your peers!

As the PLI notes, no matter how large or small your company (or client), paying careful attention to corporate compliance and ethics is not optional.

  • The regulatory environment has grown riskier and more complex for every organization, and smaller companies are not exempt.
  • Economic conditions are creating a host of challenges for compliance and ethics programs. In many companies, compliance programs are facing budget and staff cuts, and are expected to do more with less.
  • As “best practices” continue to develop, the expectations of government regulators have correspondingly been raised.
  • The public and the press will accept no excuses for corporate failures to follow legal requirements and conduct business with integrity.

Yes, I am on the faculty again this year, addressing the board oversight issues. Hope to see you there!

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