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Should compliance be separate from legal?

|Written By Jennifer Brown
Should compliance be separate from legal?
David Allgood says he’s never had compliance under his umbrella at RBC.

NEW ORLEANS — Should the legal and compliance functions in an organization be divided? As compliance and regulatory matters become more complex it is a question more general counsel are mulling over.

The debate is whether chief compliance officers should report to CEOs and boards of directors, rather than to general counsel, in an effort to create a stronger culture of compliance.

At the Royal Bank of Canada the roles are split and it’s something David Allgood, the bank’s executive vice president and general counsel, believes is critical, especially in such a highly regulated industry. Allgood was speaking on a panel at the Association of Corporate Counsel annual general meeting in New Orleans called: “What’s not legal about compliance?”

“I’ve never had compliance since the time I started with the bank,” says Allgood, who heads up a legal group of 240 lawyers. “My original thinking was that there was the potential for conflict of interest if something went wrong. I have generally maintained that position but have vacillated when collaboration has not been ideal.”

At RBC the chief compliance officer reports to the chief risk officer, and compliance at the bank includes about 650 employees.

Allgood said by keeping legal and compliance separate, he believes the issue of privilege can be clearer in situations where an investigation may arise.

“Whether they are together or separate it is important to have a strong compliance culture,” he said, adding the compliance department plays a large role in employee training at RBC.

The panel, which included Allgood, Amar Sawal of the ACC, Michael Julian of AEG Power Solutions, and James Koukios, senior deputy chief of the United States Department of Justice fraud section. Koukios said the question should be addressed on a “case-by-case, individual basis.”

“Compliance should be tailored to the specific needs of the business and address the specific risks of the business,” he said. “I’ve never seen [a Foreign Corrupt Practices Act] resolution where we have prescribed or criticized that it should be one way or the other.”

What should be considered, said Koukios, is threefold: is the compliance program well designed, is it being applied in good faith, and does it work?

“I certainly have seen, in many of the cases we have done, a separation of the compliance function from the legal department. A lot of the companies we see that with are large multinationals and I think that makes sense,” he said.

However, for many GCs like Michael Julian from AEG Power Solutions, they don’t have the luxury of debate when resources dictate they must juggle compliance responsibilities as part of their job.

Julian said from “day one” when he started with AEG in 2005, he has handled the company’s compliance activities.

“From the beginning I had the compliance role without the title,” he said. “I saw my role as GC as largely for protecting the company; I was clear on who I was protecting.”

Allgood called on BMO Financial Group executive vice president and general counsel Simon Fish, who was in the audience, to share his view on the issue. Both the legal and compliance departments report to Fish at the bank.

“I think it’s perfectly natural for compliance and law to co-exist under one function,” he said. “The issue is really independence and the propensity for any conflict of interest to arise.”

Fish said he always starts the conversation about the issue by saying: “We’re talking about compliance with law and its statutes and regulations. So I say to my colleagues, ‘Where does the conflict of interest arise?’”

In his time at the bank, Fish said he has not experienced any conflicts of interest.

“Quite frankly, I think it’s inherent to what we do as lawyers to explain to our business line what the law requires and what to do to make sure they comply with the law and come back and make sure they are doing so,” he said.

BMO has a chief compliance officer who reports to Fish “for practical reasons” and if the CCO feels somehow they have a difference of opinion they are free to report it to the CEO, the audit committee, or chairman of the board.

“I continue to be mystified, somewhat, about the relatively recent thrust to separate these two activities and see them as distinct,” said Fish. “I do think it’s driven perhaps by individuals in organizations who see it as a way of furthering their own careers.”

One audience member asked the panel if they felt lawyers today are trained to handle the complexity of the compliance function.

Fish said there is a mix of talent in the BMO compliance group, which includes a number of lawyers, some accountants, and bankers.

“You’re looking for the people with the right skill sets to perform particular tasks. At the end of the day, if they don’t know what it is you’re complying with I think you’re lost from the get go,” he said.

Koukios said sometimes the lawyer for the company is involved in advocacy for the company, whereas the audit committee should be looking more at compliance and making sure the bottom line is correct and less on advocacy.


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