With the proliferation of official investigations into international bribery allegations in recent years, as well as the huge fines imposed as a consequence of such investigations, much of the attention of the compliance community has lately been focused on anti-bribery efforts. However, equally important and potentially damaging for an employer is possible corporate misconduct by its employees, perpetrated within the scope of the activities of the company. In fact, recent years have witnessed as many internal investigations into corporate misconduct as internal investigations into corrupt behavior. Most commonly, corporate misconduct may manifest itself in the shape of criminal acts, such as misappropriation of assets, forgery of documents, and fraud, or sometimes in the guise of ordinarily non-criminal acts, such as conflicts of interest. Not only may companies be the victims of such employee behavior; in cases of fraud committed by an employee within the scope of the company's activities and to the benefit of the company, Turkish law also imposes an administrative fine against the company itself. Furthermore, in some cases, the existence of such irregular behavior may signal or presage further irregularities in employee behavior, such as bribery or bid-rigging.
However, this article will delve not into issues of corruption, but corporate misconduct and how to tackle it. In the face of such significant (potential) damage through fraud, companies are advised to establish and enforce compliance programs that are ready to deter and capable of detecting any possible corporate misconduct and fraudulent acts.
Internal fraud can manifest in different and often unexpected forms. Nevertheless, most schemes can be classified under particular categories. For example, when an employee uses an asset that was provided to him/her for a particular purpose but uses such an asset in order to benefit himself/herself or others, such a scheme may be categorized as a "misuse of assets," and it may be punishable by imprisonment from 6 months to 2 years and a judiciary fine (Article 155 of the Turkish Criminal Code No. 5237, "TCC"). This could occur, for example, when an employee is provided and entrusted with money to be deposited in a creditor's bank account, fails to deposit the money as instructed, but instead uses the money to purchase goods for himself/herself or others.
Forgery of documents may occur in two ways: (i) forgery of official documents, or (ii) forgery of ordinary documents. According to the TCC, those who draw up an official document falsely or who change a valid official document and those who use the forged official document are to be punished with imprisonment from 2 to 5 years (Article 204, TCC). Moreover, those who draw up an ordinary document falsely or alter an ordinary document and use it, are to be punished with imprisonment from 1 to 3 years (Article 207, TCC). This could occur, for example, when fake signatures are used on official or ordinary documentation, when fake government permits are drafted, or when fake invoices are issued, among other circumstances.
Fraud occurs when one party deceives others through fraudulent conduct and secures a benefit for themselves or for others to the detriment of the deceived parties or others. Perpetrators of fraud face imprisonment from 1 to 5 years and judicial fines for up to five thousand days (Article 157, TCC). Fraud could occur, for example, when an employee deceives the company (i.e., his/her employer) by claiming that he/she has achieved a higher amount of sales than he/she actually has, in order to receive a higher performance bonus from the company. False expense claims can also be an example of fraud—depending on the type of the forged expense documentation, this behavior could also fall under "forgery of documents."
Conflicts of interest are usually of a non-criminal nature and can occur when an employee creates the potential to compromise the best interests of the company by prioritizing the employee's own best interests. This could happen, for example, when an employee persuades the company to work with a third party whose owner is a close family member of the employee. Hiring or working with friends or relatives often results in a conflict of interest scenario, where the decisions may be based on or influenced by personal feelings or loyalties. Conflicts of interest may lead to questions regarding the qualifications of the business partner at best, and may even lead to more destructive forms of fraud (such as incidents of fraudulent supplier invoices, as mentioned above) at worst.
- How to protect businesses from corporate misconduct?
Effectively combating issues such as fraudulent or corrupt behavior essentially comes down to creating a culture of compliance within the company. Employees should be educated on what constitutes internal fraud or corporate misconduct, and be clearly informed that there are ground rules that they must abide by and that the company employs a zero-tolerance policy when it comes to issues of corporate misconduct (such as not tolerating fake expense invoices) Furthermore, it should be made crystal clear to employees that their actions will have consequences and that the company will impose disciplinary action for fraudulent behavior. By implementing these steps and having clear guidelines in place, a company can deter and prevent fraudulent behavior. For detection of potential wrongdoing, the company should regularly engage in internal audits and establish a whistleblower hotline. All these elements, as explained in detail below, constitute the key elements of a compliance program that is ready to detect and capable of deterring employee wrongdoings, and can therefore mitigate internal fraud and corporate misconduct risks for businesses.
- Code of Conduct: A company's Code of Conduct should clearly lay the ground rules of what is acceptable and expected behavior in that company and what is not. The Code of Conduct constitutes the fundamental document and the cornerstone of the compliance program, and also sets out what happens when employees do not act in accordance with it. The Code of Conduct also addresses issues such as what the employees can (or are expected to) do when they encounter improper behavior. As this is a document that the employees will turn to when they are confused or uncertain about their behavior or responsibilities, it should be highly explanatory and include practical, real-life examples as much as possible. The Code of Conduct should be written in the local language of the jurisdiction.
- Continuous Risk Assessment: The compliance program and all of its components should be based on the particular risks faced by each company. These risks may change with sectors, with company size or with time. A continuous risk-based approach to compliance will ensure that resources will always be provided and spent on the areas where they are needed the most.
- Commitment from Senior Management: Senior leadership's support for and implementation of the anti-fraud policies is crucial to set an example for the employees and for the employees to take the policies seriously. Senior management should be supplemented and fully supported by middle management in this role. In order to prevent valuable and proprietary company information from spreading, the company may ask its high-level employees to sign a confidentiality agreement.
- Effective Supervision: A compliance program which is not adequately monitored could become ineffectual with time, regardless of how good it looks on paper. Thus, supervisors need to have sufficient autonomy (e.g., having direct access to the board of directors) and enough resources to do their jobs properly. The supervisors (e.g., the legal head or compliance head of the company) should be given sufficient resources and the necessary authority to carry out his/her duties.
- Employee Training: Employee training is an essential tool to cultivate a culture of compliance throughout the company. Training sessions are where the employees learn that the compliance program is not just a paper fiction or a legal fig leaf, and that the company actually spends its resources on training because it takes issues of compliance very seriously. Training sessions should focus on the key issues and behaviors that the employees may think of as common acceptable practice even though they constitute fraudulent misconduct (such as issuing fake invoices to cover other expenses) and aim to change the employees' perspective. Conducting training sessions in the local language and including real-life examples is a must.
- Third-Party Due Diligence: Using third parties to conceal the misuse of assets and other types of fraud is a common phenomenon. Therefore, companies should conduct due diligence before engaging in business with third parties in order to find out whether they are qualified and trustworthy. Furthermore, when necessary, companies may provide compliance training to these third parties as well. A thorough due diligence could also be useful in uncovering potential conflicts of interest.
- Enforcement: One of the most effective ways of deterring fraud is enforcement of existing disciplinary measures against perpetrators. The enforcement patterns and the penalties imposed for fraudulent behavior should not differ between managers and regular employees in order to foster a culture of compliance.
- Whistleblower Hotline: In order for a company to discover potential wrongdoing (and to deter such behavior, due to the possibility of being caught), it is important that all employees are encouraged to report potential wrongdoing, without the fear of retaliation. A whistleblower hotline, especially an anonymous one, would encourage potential witnesses to speak up and share their knowledge of corporate malfeasance. The company could then conduct an internal investigation to uncover the merit of the allegations, if it chooses to do so.
A compliance program should not be enacted just to fight corruption. It can also be designed to detect and deter all unethical employee behavior within the company. Therefore, companies should be mindful of the fact that they can make use of compliance programs to fight internal fraud and corporate misconduct as well, in addition to rooting out and penalizing corrupt behavior.
This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in June 2017. A link to the full Legal Insight Quarterly may be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.