Mechanisms: For Continuous Risk Monitoring...

One of the systemic problems at large institutions including organizations like your own Fortune 500 Global company is keeping your finger on the pulse of "Risk Indicators".

Unfortunately for SVP's and other executives in the corporate hierarchy, your middle managers are creating the layer that impedes the best "Early Warning System" you may have at your disposal.

When problems surface on the front line or over in the "Cube City" in some Telephone Call or Information center on the other side of the globe, or across your new "Work-From-Home" (WFH) team, the normal agenda is for the employee to go to their direct supervisor to raise the "Red Flag" or disclose the incident. Perhaps the first behavioral response by the Middle Manager is to keep it quiet. Fix it before anyone else finds out. Keep it under wraps until damage control can be implemented.

When you are the Head of Enterprise Risk Management, you need mechanisms to bypass and eradicate the barrier holding your intelligence, incidents and overall hunches for ransom. There is no magic system or process that will solve it all. Yet, the only way to attempt at breaking through this layer of social and organizational dysfunction is to circumvent it.

A continuous risk monitoring system has to be implemented and operating anonymously 24/7 in concert with the Security Operations Center (SOC) if the upper echelons of executive management are ever going to "Feel the Pulse" of risk hotspots in the company.

These hotspots translate into true "Risk Indicators" from the sources themselves, people who know what's going wrong and know the ground truth. An internal Continuous Risk Monitoring System (CRMS) is an automated human feedback and problem identification mechanism for detecting insider risks. It allows leaders of large organizations to quickly identify problems and incidents of all kinds in their company. Call it a sophisticated whistle-blower system or even suggestion box but that is exactly what it is, on steroids.

The ideal CRMS system would emulate communication patterns in small groups which is often a major ingredient in successful teams. It would also run on the existing computers and networks of the organization or from home by logging in via an internal VPN. The soldiers on the front line know what is going on far sooner than the commanders in the Joint Operations Center just as the employee or supplier does and they need a way to communicate the issue, concern or threat in a rapid and efficient manner.

"The system provides the executives with instant or trend based intel that is actionable. It provides the "Insight" as well as the pertinent facts that you need to make more quick effective decisions."

Think about how long it takes for data and information to percolate and bubble up from the places in your organization that are considered "Current Risk Hot Spots". The point is that for far too long we have been playing the old telephone game.

You know, the one that you played as a kid sitting around the kitchen table or on the floor in a circle. One person starts and whispers into the ear of the person to there right. Just a sentence or two. By the time the message gets around to the 3rd or 4th person, now the data is dramatically different than the original. It's been interpreted, edited and sanitized.

Walk down and visit the person who is in charge of the anonymous 800# or “electronic suggestion box” or perhaps the official whistle-blower program at your organization.

Ask them for an activity log. Ask yourself how you could get this mechanism to perform better and then work with your front line to develop something that middle management can't filter, change or delete. That is when you will be well on your way to getting TrustDecisions in real time…

CIU: Corporate Intelligence Unit...

Over six years later approaching 2017, Operational Risk Management (ORM) professionals are experiencing the "New Normal."   In a 2010 CSO Magazine sponsored eCrime Digital Watch Report and survey of 535 companies there are some observations on Operational Risk Management worth examination.

This CERT report the same year was focused on the "Insider Threat" and the area of concern is still on "Digital Incidents by Insiders."  Seven years later, these numbers have only increased:

• Past 12 months the number of incidents reported increased 16%
• The per incident monetary loss (mean) was $394,700.00

Yet these two items are just the trend these days as our global work place becomes more mobile and stratified using more partners, offshore suppliers and other 3rd parties to accomplish the daily tasks and workloads. What is even more alarming are the following stats from the survey:

• 72% of the incidents were handled internally without any legal action or law enforcement.
• 29% of these incidents could not identify a subject responsible for committing a crime.
• 35% of these incidents could not proceed due to a lack of evidence.

Interpreting these numbers prompts several questions worth discovering. First, why were 28% of the incidents handled with some form of legal action or law enforcement? One of two reasons that we can surmise. The incident was exposed to the public as a result of the magnitude or harm that was caused by the incident. The organization was prepared to capture evidence, properly investigate the incident and pursue a recovery of the loss either in a civil or criminal process of law.

Second, why were 35% of the incidents unable to proceed due to a lack of evidence? The organization may be lazy or apathetic to these loss events or may have an insurance policy that covers these types of losses and was able to successfully recover the almost $400,000.00 incident average through this process.

Or, the organization is not capable of leveraging a sound "Digital Governance" and "Legal Policy" framework in order to properly investigate incidents that come from their own internal work place ecosystem of employees, partners, suppliers and other 3rd parties.

In order to gain "Strategic Insight" into these vital Operational Risk matters within the enterprise the organization must establish an intelligence-led investigation. Once the proper evidence collection and analysis is completed on the incident then members of a corporate crisis team or threat management council can make more informed decisions. That brings us to the final question. Why in 71% of the incidents was a subject not identified as being responsible?

The answer to this question has much to do with the previous one where there was a lack of evidence. However, our hunch is that many of these insider incidents were the result of an employee error, mistake or unintended consequences. The lost or stolen laptop from the unlocked car may fill some of this category.

Why would it be in the best legal interest of an organization to have a robust evidence collection capability supported by a sound "Policy Governance and "Legal Framework"?

• Duty of Care
• Duty to Warn
• Duty to Act
• Duty to Supervise

This blog has touched upon these four vital areas of vulnerability to adversarial litigation in the past because we know that whether you ask these questions internally or the state's Attorney General and the FBI ask these questions the answers must be discovered:

1. What did you know?
2. When did you know it?
3. What are you doing about it?

While the number of loss events due to errors or omissions and many times due to a lack of proper training and awareness programs is growing, so are the incidents as a result of the insider threat from:

• Fraud
• Sabotage
• Espionage
• Trade Secrets Theft

The modern day enterprise with preemptive, robust and collaborative law enforcement mechanisms in place has accepted the reality of the threat perspectives in their workplace ecosystem:

• Some individuals who make threats ultimately pose threats.
• Many individuals who make threats do not pose threats.
• Some individuals who pose threats never make threats.

Make sure you read those a few times. As a result of the reality that the workplace ecosystem is an evolving, dynamic and rapidly changing set of human elements, behaviors and motivations the justification for creating more "Strategic Insight" is a necessary mitigation strategy. There is a growing trend today for these enlightened organizations to create and effectively provide the resources for a corporate threat management team. This team is comprised of a spectrum of members that span the digital to physical domains within the company. This includes the Chief Risk Officer, General Counsel, Internal Audit, Public Relations, Human Resources, Corporate Security and Information Technology.

In another less formal survey by Dr. Larry Barton of 630 employers the question was raised on the employee communication channel that caused the company to act on a risk. 38% were through a digital messaging medium such as e-mail, text messages and blogs or social networking sites. The ability to monitor over one third of employee communication channels remains a daunting task to this day.

Beyond the utilization of threat assessment or management teams, enterprises are going to the next level in creating a "Corporate Intelligence Unit" (CIU). The CIU is providing the "Strategic Insight" framework and assisting the organization in "Achieving a Defensible Standard of Care."

The framework elements that encompass policy, legal, privacy, governance, litigation, security, incidents and safety surround the CIU with effective processes and procedures that provides a push / pull of information flow. Application of the correct tools, software systems and controls adds to the overall milestone of what many corporate risk managers already understand.

The best way in most cases to defend against an insider attack and prevent an insider incident is to continuously help identify the source of the incident, the person(s) responsible and to correlate information on other peers that may have been impacted by the same incident or modus operandi of the subject. "Connecting The Dots" with others in the same company or with industry sector partners increases the overall resilience factor and hardens the vulnerabilities that are all too often being exploited for months if not years.

In retrospect, you can be more effective investigating and collecting evidence in your company to gain a "DecisionAdvantage". To pursue civil or criminal recovery of losses from these insider incidents, you may not go to law enforcement, but it's likely they will come to you once they get a whistle blower report, catch the attacker and/or they have the evidence that you were a victim.

What side of the incident spectrum you are on, either proactive or reactive could mean the difference on whether the attackers continue their schemes and attacks while continuously targeting those with the greatest vulnerabilities. In some cases, those attackers include the plaintiff bar and your evidence of "Duty of Care" is the bulls eye.

Unintentional Insider Threat (UIT): Human Factors Risk...

Operational Risk Management (ORM) is a discipline that encompasses several facets of science and art. The human factors will continue to challenge the people who are tasked with mitigating risks in the face of a Republic with constitutional rights.  The United States is one of the many countries in the world, where employees of governments and private sector institutions, must comply with a myriad of laws pertaining to the privacy of the work force.

The behavioral aspect of humans operating day-to-day in the workplace, whether inside the R & D department at Google or the 7th Floor at DARPA have many of the same set of risks.  When you put an information storage and computing device in their hands, the likelihood of encountering a potential operational loss or failure increases dramatically.

For the past several years, there has been a significant amount of attention devoted to the topic of "Insider Threat."  In light of the Edward Snowden and "The Fifth Estate" events, many government and private sector organizations have been revisiting their employees security clearances and backgrounds.  A reaction-based effort that would not be out of the ordinary, for most organizations who are protecting national secrets or substantial intellectual property.

This however, is a small percentage of the overall risk that the organization is being exposed to every day, when that digitally enabled-human goes to work.  The reason is that the lense that is currently being focused on "Insider Threat," is looking for the next Edward Snowden.  This kind of insider will forever continue to amaze and surprise you, just like the people who may now be in legal proceedings, for collaborating with Bernie Madoff.  You see, not every human will show the behaviors, that all of a sudden look out of the ordinary.  The person stealing information or manipulating the books, will continue to operate within your organization without disclosure.

There is a foundational study completed by the CERT Insider Threat team at Carnegie Mellon University that highlights even a greater potential loss or failure.  "A significant proportion of computer and organizational security professionals believe insider threat is the greatest risk to their enterprise, and more than 40% report that their greatest security concern is employees accidentally jeopardizing security through data leaks or similar errors."

Unintentional Insider Threat Definition 

We recommend the following working definition of UIT:  An unintentional insider threat is: 

(1) a current or former employee, contractor, or business partner 

(2) who has or had authorized access to an organization’s network, system, or data and who, 

(3) through action or inaction without malicious intent, 

(4) causes harm or substantially increases the probability of future serious harm to the confidentiality, integrity, or availability of the organization’s information or information systems.  

       SEI  Insider Threat Team, CERT; Unintentional Insider Threats: A Foundational Study (CMU/SEI-2013-TN-022). Software Engineering Institute, Carnegie Mellon University, 2013.

Abstract

This report examines the problem of unintentional insider threat (UIT) by developing an operational definition of UIT, reviewing relevant research to gain a better understanding of its causes and contributing factors, providing examples of UIT cases and the frequencies of UIT occurrences across several categories, and presenting initial thinking on potential mitigation strategies and countermeasures. Because this research topic has largely been unrecognized, a major goal of this study is to inform government and industry stakeholders about the problem and its potential causes and to guide research and development (R&D) investments toward the highest priority R&D requirements for countering UIT.

Operational Risk Management is a 24 x 7 x 365 day process, that is focused on all humans operating in the ecosystem of the enterprise.  The Edward Snowden's are coming to work today along with their friend Bernie Madoff.  Hiding in plain sight.  Operational Risk Management professionals understand this and operate with the focus on the unintentional consequences of their behavior.

The enterprise that is solely focused on finding the one or two people in several decades of operations will overlook the dozens or hundreds who contribute to a loss of Intellectual Property or a breach. Believe us when we say that indeed the "Spy" and "Fraudster" will have a much harder time, operating each day in an organizational environment that is focused on the UIT.

Countering UIT, may seem like it is something that is already being accomplished, in the new hire orientation class or the remedial training that is mandated each year on information security for example.  Those who perceive it this way are again, only human.  The behaviors that we bring to work each day about how we treat and handle information, is not learned in a single session or a single annual workshop. Learning to behave consistently with sensitive or classified information on a daily basis, requires a discipline that few really understand right now.  This is especially true in the Defense and Intelligence Community supply chain.

Your goal is to get that UIT awareness inside every one of your employees, partners and suppliers.  To instill inside them the same diligence in their work processes to Deter, Detect, Defend and Document.  UIT is a major percentage of the answer to mitigating the risk of another Edward Snowden or Bernie Madoff incident in your organization.  More importantly, it is the answer to the other 98% of the losses you will incur this next calendar year.  Think about "Achieving a Defensible Standard of Care."

Unauthorized Access: Civil CFAA Legal Risk Strategy...

A tutorial on the definition of a "loss event" is appropriate for those who seek greater understanding of "Operational Risk Management" (ORM).   Specifically when it comes to the civil litigation strategy utilizing the "Computer Fraud and Abuse Act" (CFAA) 18 U.S.C. 1030.

What is a loss?  Easy:  Loss = cost.  "Any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment and restoring the data, program, system or information to its condition prior to the offense and any revenue lost, cost incurred or other consequential damages incurred because of interruption of service."

So the remedies available are economic damages, loss damage and injunctive relief.  Not exemplary damages or attorneys fees.  Don't let that last one scare you from using CFAA, as an effective deterrent in your arsenal as a General Counsel.  The basic threshold is that the victim incurred a loss during any one year period, of at least $5,000.00.

For the focus of this blog post, we will talk about "Insiders" who exceed authorized access, that is access in a way not entitled.  Typically employees or others in the business supply chain, who may have the use of a password or key to gain access to information only known or available by another employee, such as a supervisor or system administrator.

It is imperative here to state the importance of finding an attorney that truly understands this law, from a civil, not a criminal perspective.  The complaint must provide factual content that the Plaintiff has suffered the type of damage to "data, a program, a system or information."  Think more about business interruption and the expenses related to investigation, remediation and integrity of operations.  An employee who leaves the company and has e-mailed proprietary information of clients or proposals to their personal account, is not what we are talking about here.

What about the employee who decides to damage or destroy organizational records or of their primary area of responsibility, (database of client contacts, meeting notes, reports and proposals) or even those of the entire company.

The term “damage” means any impairment to the integrity or availability of data, a program, a system, or information and the term “loss” means any reasonable cost to any victim, including the cost of responding to an offense, conducting a damage assessment, and restoring the data, program, system, or information to its condition prior to the offense, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.  Here is just one example:

Tech Systems, Inc. v. Pyles, 2013 WL 4033650 (ED VA Aug. 6, 2013) (4th Cir)
After being terminated, former employee forwarded company emails and deleted company emails from mobile device before returning it to employer because they contained incriminating evidence. Court granted spoliation finding and jury returned verdict for violating Computer Fraud and Abuse Act, among other claims.

This is just a single case of how a single disgruntled employee, decided to proactively get revenge with a former employer, Tech Systems, Inc. of Alexandria, VA, a U.S. defense contractor.  Why organizations do not utilize the tools such as CFAA to find civil remedy, on a more regular basis is the question at hand.

CFAA is designed to be legally effective on a broad scale and for good reason.  It does however, require that someone uses it with the right intent and legal purpose.  We predict that more civil cases will be filed, as General Counsels and attorneys better understand how to effectively utilize it, in combination with other laws associated with Intellectual Property Theft.  As judges and more cases are tried, the momentum will pick up.  So what?

Booz Allen Hamilton v. Snowden.  Not yet?  Just a Violation of a "Code of Ethics" and fired?  Not likely.

The revelation that Snowden got access to some of the material he leaked by using colleagues' passwords surfaced as the U.S. Senate Intelligence Committee approved a bill intended in part to tighten security over U.S. intelligence data. 

One provision of the bill would earmark a classified sum of money - estimated as less than $100 million - to help fund efforts by intelligence agencies to install new software designed to spot and track attempts to access or download secret materials without proper authorization. 

The bill also requires that the Director of National Intelligence set up a system requiring intelligence contractors to quickly report to spy agencies on incidents in which data networks have been penetrated by unauthorized persons.

 United States of America v. Edward J. Snowden.  Filed under seal June 14th, 2013. Offenses include 18 U.S.C. 641, Theft of Government Property.  18 U.S.C. 793(d), Unauthorized Communication of National Defense Information.  18 U.S.C. 7989a)(3), Willful Communication of Classified Communications Intelligence to an Unauthorized Person.

Civil CFAA Legal Risk Strategy can be utilized in many cases where the magnitude of the loss and the economic exposure to a U.S. government contractor, is not on the radar of the U.S. Attorney.  Keep it in mind...

Legal Risk: Over-The-Horizon Digital Radar...

Operational Risk Management is a primary responsibility with an organizations General Counsel. Why?

"The definition includes Legal risk, which is the risk of loss resulting from failure to comply with laws as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of an institution’s activities."

So if you are a General Counsel or the Chief Legal Officer, your radar is consistently tuned to the "Over -The-Horizon" (OTH) risks that may impact your company, right?  The fact is that managing risk from the General Counsels office may be significantly different than what managing risk means from the CIOs office.

Loss events associated with peoples workplace behavior are many times treated differently than those events associated with a computer "intrusion" or a data breach, that was also caused by human behavior.  The law is a battleground that continues to keep an entire industry busy with offensive and defensive activities and the transfer of risks from one party to another.

What is the legal risk difference between the diversion of company funds to pay bribes in a foreign country and the theft of company trade secrets?  You see, the laws associated with these loss events have different statutes, penalties and legal risk:

On December 17, 2012, Germany-based insurance and asset management company Allianz SE paid more than $12.4 million to settle with the SEC over violations of the books and records and internal control provisions of the FCPA. The activity in question concerned improper payments to government officials in Indonesia. Following common FCPA procedure, Allianz did not deny or admit the SEC’s inquiry. The company disgorged $5.3 million in profits, paid a penalty of $5.3 million, with $1.8 million in prejudgment interest. 

The SEC stated that it uncovered 295 insurance contracts on government projects that were obtained or kept by improper payments totaling $650,626. The payments were made by Allianz’s Indonesian subsidiary. 

The conduct occurred from 2001 to 2008, at which time Allianz was considered an “issuer” under the FCPA because of its activity on the New York Stock Exchange. Even though it was not listed on the exchange, the presence of its bonds and shares on the market made it an issuer and subjecting it to the jurisdiction of the FCPA. The investigation was initiated internally using outside counsel after a whistleblower complaint in 2009.

On December 28, 2012, President Obama signed the Theft of Trade Secrets Clarification Act. S. 3642 (112th). The Clarification Act is a direct response to the Second Circuit’s decision in U.S. v. Aleynikov, 676 F.3d 71 (2nd Cir. 2012). (See details below.) In Aleynikov, the Second Circuit overturned a criminal conviction under the Economic Espionage Act 18 U.S.C. § 1831, et seq., after the court determined that the stolen source code was only used internally for a high-frequency trading system and was not “related to or included in a product that is produced for or placed in interstate or foreign commerce.” The Clarification Act expands Section 1832(a) to cover internal trade secrets “related to a product or service used in or intended for use in” commerce. In addition to the source code at issue in Aleynikov, this expansion could include internal processes of doing business or gathering information that may not qualify for traditional patent protection. More broadly, the quick reaction shows the importance that Congress attaches to this area of the law and puts individuals and companies on notice that increased indictments may occur down the line.

The ethics, compliance and legal components of Operational Risk Management comes down to "Achieving a Defensible Standard of Care" in your organization.  The risk exposures that face your organization will also occur from a more immediate impact, due to a loss of reputation and potential loss of market value.  On all fronts, the stakes remain high.

The modern day legal enterprise is still reactive and slow to respond to the changing environment around it.  The daily battle with legal risk is slow, compared with other risk management fronts within the institution.  The speed of response and the focus on preventive, preemptive or proactive actions is what sets apart the mental states of all of your security risk professionals.  Some people have seconds or minutes to decide and act, others have the luxury of days, months and years.

Unfortunately, for most the costs associated with legal risk are high, no matter who prevails in an incident or case. This fact alone, is why the introduction of a new generation of automated tools and the memory of computer-based evidence is so important.  Decision Advantage.  The law and the law industry is quickly playing catch up.  Practitioners from the technology and legal industry are now even more integrated, while the courts interpret the implications of their rulings on an accelerating mobile digital global society.

You and your team have a tremendous amount of new knowledge to gain, or your enterprise will be consumed by the volume of new Operational Risks unfolding before it.  How complex could this be?

From 'WarGames' to Aaron Swartz: How U.S. anti-hacking law went astray

The 1983 movie "WarGames" led to an anti-hacking law with felony penalties aimed at deterring intrusions into NORAD. Over time, it became broad and vague enough to ensnare the late Aaron Swartz.

Workplace Trust: Integrity, Ethics & Legal Risk...

Operational Risk Management professionals wonder about the "Tone at the Top" and decisions at the latest Board of Directors meetings to ignore or investigate a whistleblowers claims of ethics or governance violations in the workplace.

The financial services companies have for years been the target of scrutiny for claims of fraud, mistreatment of consumers and violations of several U.S. federal regulations many under further examination by the SEC.  As time goes on in the evolution of maleficence you will find examples of wrong doing in other private sector areas, such as the Defense Industrial Base (DIB), Retail and Information Technology (IT).  Think about your own company and ask yourself how you treat and respond to the 800 number Ethics Line and those who staff the Internal Audit, Risk Management or Information Security departments.  Are these enablers or impediments to your future success?  Your answer may be a clue to the issue at hand.

The professionals in the Inspector Generals office, the Operational Risk Management department and the General Counsels office are also there for a good reason.  Think about them as the last "Thin Blue Line" between your company becoming a success or falling into a cultural abyss that will plague the institution for decades.  Steven Pearlstein explains from the Washington Post:

Steven Pearlstein: How could SAIC miss this? By Steven Pearlstein, 

Last week in these pages, The Post ran a profile of John Jumper, the straight arrow former Air Force general who was brought in as chief executive of local contracting giant SAIC in the wake of an embarrassing overbilling scandal involving bribery, kickbacks, foreign shell corporations and a safe deposit box stuffed with $850,000 in cash. 

A year ago company officials were publicly denying that there were any problems at all with its contract to build a new timecard system for New York City, which by then was so late and so over budget that “CityTime” had become a frequent target for the New York tabloids and political embarrassment for Mayor Michael Bloomberg. 

It was just last June that SAIC executives and directors first informed shareholders that there might be a little $2.5 million overbilling problem with the contract and that federal prosecutors had brought criminal charges against six employees of an SAIC subcontractor. Shareholders had to read deep into Note 9 of that quarterly report to learn that there might be “a reasonable possibility of additional exposure to loss that is not currently estimable” that “could have a material adverse impact” on the company’s finances.

This episode by one DIB contractor, was not the first nor will it be the last.  One has to ask whether the advice these companies are getting from their outside counsel is always the right course of action.  The government and the internal risk management departments are going to be continuously deluged with new whistleblower claims.  Not just because new laws are in place to protect them and to provide them with the incentives to come forward.  It is because good people are sick and tired of having their organizations reputation tarnished and their respective ethical practices being jeopardized by a few bad cowboys or rogue actors.  Yet now, the Retail sector is being taught a serious lesson regarding a potential FCPA violation by Wal-Mart.  David Barstow at the NYT has this to report:

By DAVID BARSTOW 

Published: April 21, 2012  MEXICO CITY — 

In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country. 

The former executive gave names, dates and bribe amounts. He knew so much, he explained, because for years he had been the lawyer in charge of obtaining construction permits for Wal-Mart de Mexico. 

Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: “There is reasonable suspicion to believe that Mexican and USA laws have been violated.”

Mitigation of Operational Risks in the workplace, such as fraud and corruption is different than it is outside the enterprise.  The difference is, that corporate executives do not always believe that their own employees would behave this way.  They could be naive to the reasons why fraud finds its way into the psyche of some of the organizations must trusted officers.  Corruption and the signs that an organization has lost its way from a place of cultural integrity and one that condones others to look the other way or for many to help perpetuate schemes of wrong doing, requires a massive organizational transformation.  A transformation that is lead by focused and talented Operational Risk professionals.

But most of all, even if you have these professionals on your team already, there are still some important ingredients to achieving your own "Defensible Standard of Care":

1.  If you think you have funded the risk management department in your enterprise adequately, you haven't.  Do not confuse your outside audit function with your internal risk management function. 

2.  If you don't understand how your 800 number ethics line works and the outsourced organization that runs this, then you need to do so immediately. 

3.  If you have a favorite outside counsel to help you with investigations, it might be time for a check up.  Even more importantly, it might be time to get your outside counsel firms and your outside audit firms invited to a meeting of the minds on corporate integrity. 

4.  If you find any indications that 1 through 3 have been ignored, pushed aside or been giving you a false sense of security, then you might consider making a career change.

Tech Inc., a rapidly growing software company operating in 45 countries, learns that the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are investigating payments made by its subsidiaries in Brazil and China for possible violation of the Foreign Corrupt Practices Act (FCPA). Bob, the general counsel for Tech Inc., suspects that the source of the investigation is an employee who anonymously lodged a hotline complaint alleging that the company was 1) paying independent sales agents excessive commissions and 2) providing generous discounts and rebates to some of its channel customers and distributors. The complainant also said he believed the problem extended beyond Brazil and China based on discussions he had with other employees.

Integrity & Ethics: Whistleblower Risk...

Operational Risk Management in your organization may be in need of a more robust awareness campaign.  Malfeasance and ethical wrongdoing is continuously perpetuated in the workplace when those who are victims or witnesses refuse to speak up. Many fear the retaliation by supervisors or other co-workers. This study emphasizes the issue at hand:

Labaton Sucharow LLP yesterday announced the results of its nationwide Ethics & Action Survey. Conducted by ORC International between November 17-20, the survey questioned 1,000 Americans on their knowledge of wrongdoing in the workplace and willingness to come forward and report it. With significant financial rewards and strengthened anti-retaliation and anonymity protections offered under Dodd-Frank, an overwhelming 78% of respondents indicated they would report wrongdoing in the workplace if it could be done anonymously, without retaliation and result in a monetary award. In fact, more than one-third (34%) of respondents knew about wrongdoing in the workplace. However, 68% were unaware that the Securities and Exchange Commission (SEC) has a new Whistleblower Program designed to protect and reward individuals who report violations of the federal securities laws.

This kind of Operational Risk doesn't have to involve insider trading or the SEC to be an issue.  Do you have a controlling boss or a bully in the organization who uses their position of power to get what they want at any cost or to force you to look the other direction?  What kind of facts point to their behaviors and the actions by others that contribute to a caustic and toxic work place setting or to further perpetuate the situation?  Whether it is your Fortune 500 public company or your tiny 501(c)3 non-profit does not matter.  When over one-third of the respondents of the ORC Ethics and Action Survey knowingly ignore or are afraid to report incidents of wrongdoing or ethics violations the culture is broken and in need of repair.  The people who have the fiduciary duty to see that this kind of behavior is deterred also have the responsibility to provide the tools and the mechanism for those being victimized and those who are observing the malfeasance to anonymously defend themselves.

So what should you do as an Operational Risk professional to make sure this doesn't happen to the people in your respective organization?  Here is a good start:

Many corporations have internal compliance programs for corporate misconduct. These programs are, in theory, designed to provide an audience for workers who want to report unethical or illegal corporate conduct. Whether to utilize internal compliance reporting procedures is not an easy question to answer. As a general proposition, some believe that where the wrongdoing is pervasive—as in the case of securities fraud—an internal compliance program will not provide an adequate means of redress. Some believe that where the issue involves massive overbilling to the Government, or an allegation that a corporation is receiving significant dollars in unlawful revenue through fraudulent conduct, the internal compliance system will not work.

It's imperative that you also become aware of and communicate to employees and volunteers what their rights are outside the formal processes that are in place within the organization. Sometimes the nature of the ethics violations will not easily fall into the category for the internal compliance department.

So even "A Decade After the Fall of Enron" the laws and the rules provide us with a false sense of security from the corporate and workplace malfeasance that so many U.S. citizens are being subjected to on a daily basis.  And based upon the current-state-of-play around the beltway in Washington, DC you can expect that the coordination and cooperation is increasing by the minute.

The increased collaboration among the alphabet soup of enforcement and regulatory agencies is also due to a collateral effect of the current financial crisis: declining agency budgets. In the current downward budget cycle, agencies are working in concert more than ever before. This trend is exacerbated by a change in the mission of the FBI in the post-Sept. 11, 2001, world, shifting resources to counterterrorism and creating a need for other agencies to play an increased role. The overarching lesson from this increased collaboration is clear: Gone are the days that inside or in-house counsel can assume that the state or federal agency with whom they are dealing is acting alone; it is increasingly likely there are additional state or federal agencies involved, resulting in overlapping criminal, civil or regulatory exposure.

If you are charged with the position of the Senior Operational Risk professional in your organization, this topic of wrongdoing in the workplace can not be overlooked any longer.  It is not too late to create a "Defensible Standard of Care" and to turn the word "Integrity" into a cultural pursuit for all to aspire to, before it is too late.

FCPA Alert: Dodd-Frank vs. Powerball...

Board Directors are ever more tuned into the recent 2011 case settlements in Foreign Corrupt Practices Act (FCPA) violations. This is because Operational Risk Professionals are being much more proactive than years past on uncovering malfeasance in the supply chain operations of major global conglomerates:

• Notable 2011 FCPA Settlements. 2010 was a record year for FCPA enforcement, and thus far 2011 has been no different. In the first half of 2011, 10 notable FCPA enforcement actions have settled, resulting in a total of about $490 million in penalties, disgorgement and prejudgment interest:

1. Tenaris agreed to pay a $3.5 million criminal penalty and $5.4 million in disgorgement and prejudgment interest.

2. Rockwell Automation agreed to pay disgorgement of $1.7 million, prejudgment interest of $590,000 and a civil penalty of $400,000.

3. Johnson & Johnson agreed to pay a $21.4 million criminal fine and $48.6 million in disgorgement and prejudgment interest, as well as about $7.9 million in related United Kingdom Serious Fraud Office recovery.

4. Comverse agreed to pay a $1.2 million criminal fine and $1.6 million in disgorgement and prejudgment interest.

5. Ball Corporation agreed to pay a $300,000 civil penalty.

6. Jeffrey Tesler, a key member of the TSKJ-Bonny Island joint venture accused of being part of a scheme to bribe Nigerian officials in exchange for contracts related to the construction of liquefied natural gas facilities, forfeited nearly $149 million, the largest FCPA-related forfeiture imposed on an individual to date.

7. JGC Corporation of Japan agreed to pay $218.8 million in criminal fines.

8. IBM agreed to pay a $2 million civil penalty, disgorgement of $5.3 million and $2.7 million in prejudgment interest.

9. Tyson Foods, Inc. agreed to pay a $4 million criminal penalty and $1.2 million in disgorgement and prejudgment interest.

10. Maxwell Technologies agreed to pay $8 million in criminal penalties, as well as $6.4 million to settle SEC civil charges.

Are any Board Directors out there amazed that companies such as IBM are still being impacted by the FCPA risk to the enterprise? Maybe more importantly, why is a Japanese company paying a criminal fine of over two hundred million dollars?

JGC CORPORATION is a Japan-based company mainly engaged in the engineering business. The Company operates in two business segments. The Integrated Engineering segment is engaged in the planning, design, procurement, construction and testing of equipment, appliances and facilities for petroleum, petroleum processing, petrochemistry, gas, liquefied natural gas (LNG), general chemistry, nuclear energy, metal smelting, biotechnology, food, pharmaceutical, logistics, information technology, environment protection and pollution prevention industries. This segment is also engaged in the provision of related inspection, maintenance and information processing services, as well as water and power generation business, among others. The Catalyst and Chemical segment is involved in the manufacture and sale of catalyst agents, functional materials, deodorants and enzymatic filters, electronic materials and high-performance ceramic products, as well as next-generation energy related products.

The Board of Directors of any transnational organization should be doing their homework on the reasons why JGC Corporation has employed an independent compliance consultant for the next two years and paid the $200M. fine. Remember, your supply chain and your business partners may be the reason why you are sitting around the Board Room table negotiating with the U.S. Department of Justice.

The larger question is, could this have been prevented? Is this a risk that can be mitigated within the corporate enterprise? Has the company done everything in it's capacity to put the right controls in place and the tools to keep the possibility of FCPA ever finding its way back to the Board Room Agenda? Do you know all of your joint venture partners are from the U.S. and all of the projects that they are working on together?

JGC’s agreement to pay the fine brings to $1.5 billion the total penalties in a case against a joint venture known as TSKJ that included Houston-based Kellogg Brown & Root LLC, Paris- basedTechnip SA (TEC) and Dutch engineering firm Snamprogetti Netherlands BV, according to a Justice Department statement.

The joint venture’s prosecution represents one of the biggest foreign bribery cases undertaken by the Justice Department since it stepped up pursuit of such cases starting in 2008 when Munich-based Siemens, Germany’s largest engineering company, paid $1.6 billion to settle U.S. and German probes.

“Each of the four companies in the TSKJ joint venture, the former chairman of the U.S. joint venture partner, and several other individuals have now been held accountable for a massive conspiracy to bribe Nigerian government officials to obtain lucrative construction contracts,” Deputy Assistant Attorney General Mythili Raman said in the statement.

What is the cost of a FCPA investigation beyond the fine? Imagine for a moment the number of e-mail messages that have to be acquired, preserved and examined. Add up the billable hours for subject matter experts to review the remaining mountain of data to determine the final relevancy of a communication with the matter and the people associated with the project. As an example, what was the magnitude of the Siemens case?

According to court records, it was a vast undertaking spanning 34 countries, with private investigators conducting more than 1,750 interviews and gathering more than 100 million documents. They reviewed approximately 14 million of those documents and gave the Justice Department and the SEC a small subset, about 24,000, according to a Siemens tally.

So what is one of the answers or solutions to finding the "Red Flags" and to self-disclose the issue to the proper authorities early and often? First off, you need to develop your corporate "Human Intelligence" (HUMINT) capability, around your Corporate Intelligence Unit (CIU). Developing and building an awareness factor in a pervasive manner is one way to do this. In order to get your HUMINT working for you, the people on the front lines and in the middle of the corporate hierarchy need to understand and internalize these "Red Flags". If the monthly or quarterly bulletin from the CEO, discussing the integrity factor of the company supply chain partners raises the issue of ethical behavior around a particular scenario, this will educate and increase awareness with those people in the enterprise who comprise this HUMINT network.

Sticks and carrots or other methods for awarding compliance is so 1980's and 1990's. Wake up! In order to bring your global enterprise into the next decade of the 2000's, you have to start using the methods, processes and tools your deal makers use to run their business (SAP, Siebel CRM, Oracle). When was the last time the CEO visited the deal makers pipeline meeting to review and discuss the joint ventures or pending projects that the business developers are forecasting to close in the next quarter? This is the perfect time for the CEO to ask them to fire any partner, agent, consultant, contractor or vendor that does not meet the foundation for the companies "Corporate Integrity Standards." Does your CEO even know what Social CRM is all about?

And how quickly the lessons that should have been learned, are soon forgotten. Not any more. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, employees, partners and other persons who provide original information on an FCPA violation by a public company can receive between 10% and 30% of the resulting fines as a "Whistleblower" bounty.

We wonder whether the odds of winning the next "Powerball" Lottery in the U.S. might be more difficult than getting 20% of a $200 million dollar fine. Global corporations should be preparing their internal processes for Ethics and Integrity Management now. This Operational Risk will soon be more apparent as employees understand the odds of "Winning".

Employee Misconduct: Mitigating Insider Risks...

The new Verizon Cyber Report is a valuable read for OPS Risk professionals that focus on data breach and incident response. The full breach report can be found at this link at Verizon Business.

We have to agree with the observations made by Brian Krebs on the following topic in the report:

A key finding in this year’s report is that most companies suffering breaches missed obvious signs of employee misconduct – breaches that were either initiated or aided by employees. Sartin said in almost every case where a breach investigation zeroed in on an employee as the culprit, investigators found ample evidence that the employee had long been flouting the company’s computer security and acceptable use policies that prohibit certain behaviors, such as surfing porn or gambling Web sites on company time and/or on corporate-issued laptops.

The study found a strong correlation between ‘minor’ policy violations and more serious abuse. From the report: “Based on case data, the presence of illegal content, such as pornography, on user systems (or other inappropriate behavior) is a reasonable indicator of a future breach. Actively searching for such violations rather than just handling them as they pop up may prove even more effective.”

The "Insider Threat" continues to be under estimated and all of the monitoring tools will not be able to stop it completely. Ever. So what are some of the solutions to address the issues at hand? Here are a few ideas worth exploring if not for the Fortune 500 Enterprise but the small-to-medium enterprise (SME) who doesn't have the budget or the internal staff to engineer a robust and resilient infrastructure. They have their unique place in a layered approach to cyber defense:

Idea #1: ScanSafe

Cisco recently acquired the pioneering SWG SecaaS company ScanSafe. ScanSafe continues to execute well and has the largest market share in the SecaaS market including several organizations with well more than 100,000 seats. ScanSafe is expected to form the basis of an increasing array of Cisco SecaaS offerings, starting with the addition of e-mail. Cisco's credibility with the network operations team, the progressive development and market growth of the S-Series and the acquisition of the leading SecaaS provider moved Cisco into the Leaders quadrant this year.

Idea #2: IronKey

IronKey was chosen by the Reader Trust Voting Panel, comprised of security and technology experts from large, medium and small enterprises from all major vertical markets, representing the wide distribution of SC Magazine readers. With an unprecedented number of entries submitted the 2010 SC Magazine readers selected IronKey over competing solutions from Check Point, CREDANT, PGP and Symantec.

IronKey brings unprecedented mobile data security to enterprise and government organizations by combining the IronKey multifunction security devices with the ability to remotely manage the devices and strictly enforce security policies from a centralized administrative console. IronKey enables organizations to securely deliver complete desktop environments on ultra-secure, remotely managed devices with integrated two-factor authentication and fraud protection capabilities.

Idea #3: OpenDNS

OpenDNS has solutions that are perfect for organizations of all sizes, from small businesses to Fortune 500 enterprises. With no equipment to install, no upgrades and no maintenance, OpenDNS will reduce your costs, give you more control and make navigating the Internet on your network a safer, more secure experience.

OpenDNS provides comprehensive security for your organization's network through botnet and malware site protection. OpenDNS delivers network security services through the DNS layer, blocking known malicious or infected sites from resolving on your network. Since infected sites are prevented from resolving, malicious content is blocked from reaching your network, and thereby OpenDNS provides the most efficient protection available.

Built-in botnet protection stops trojans, key loggers and other persistent malware and viruses on machines in your network from sending out confidential data and personal information to hackers outside the firewall.

These are just three examples that we have found to be reliable, cost effective and easy for the small-to-medium size company to hedge against some of the infrastructure risks and bad behavior by employees. So what else could the savvy VP of Operational Risk inject into the organization to address some of the other types of "Insider Threat"?

Provided as a resource by the Association of Certified Fraud Examiners (ACFE), EthicsLine serves as an internal control tool through which companies can detect and deter fraud. Powered by Global Compliance, EthicsLine includes hotline, case management and analytics to empower organizations to prevent, detect and investigate instances of organizational fraud and abuse.

EthicsLine provides expertise and experience. As the power behind EthicsLine, Global Compliance introduced the original ethics and compliance hotline and is the largest provider of hotline, case management, and analytic solutions worldwide – supporting over 25 million client employees in almost 200 countries. Global Compliance also provides additional products and services that integrate with EthicsLine and protect an organization from fraud and abuse.

The employee who knows how to circumvent the "Rule Sets" as it pertains to the Acceptable Use Policy for the corporate digital assets may also be the same person who is stealing from the company. Whether they are stealing actual cash from the register, using vendor billing schemes or other occupational fraud tactics they understand how to get around the control objectives. Operational Risk Managers need to look at the employee population as an ecosystem of risk and that a certain percentage of those employees will be trying to surf Internet gambling sites and simultaneously misappropriating assets.

As you spend more time in OPS Risk, the more you understand the intersections with human behavior. The tools will assist you along the way yet it is the day to day interaction with people that will help you predict where and how someone may be increasing the risk to your enterprise.

OPS Risk: Tsunami of Fraud...

Just when you think you have avoided the major risk of the credit crisis, HSBC may have been one of many banks exposed to the Bernard Madoff "tsunami of fraud".

Banks and investment funds across the world lined up on Monday to admit investing billions of dollars in the companies of Bernard Madoff, whom U.S. authorities accused of masterminding a massive fraud.

HSBC Holdings was the latest bank to join the growing list, saying it had exposure of around $1 billion (663 million pounds), making it one of the biggest victims of the alleged $50 billion fraud.

Royal Bank of Scotland and Man Group, Japan's Nomura and France's Natixis also said they were hit by the worldwide scandal.

Financial companies, reeling after a year of enormous writedowns on bad credit assets, have so far tallied up more than $10 billion in direct and indirect exposure to the possible fraud by Madoff, the 70-year old trader who was arrested on Thursday.

Last year, HSBC sold it's 42 story headquarters tower for $1.1B. to Metrovacesa in a smart strategy that has now been extinguished by the likes of a simple and yet enourmous ponzi scheme. A Ponzi is an investment fraud in which profits are promised to investors from fictitious sources. Sounds like a hedge fund. Early investors are paid off with funds raised from later ones. Is there any conservative institution that will be spared from the corporate malfeasance and corruption that has permeated our global systems of finance?

The SEC has issued the temporary restraining order for Madoff and his companies while this is drowning out the recent fraud allegations against Marc Dreier:

Dreier was arrested in Canada this month and charged with impersonating a lawyer for the Ontario Teachers Pension Plan. He was released on bail and arrested by U.S. authorities on his return to New York.

Dreier on Dec. 11 was ordered held in custody pending his trial after prosecutors told a federal magistrate that victims of a fraud that started in 2006 have lost $380 million.

If convicted of the securities fraud and wire fraud charges against him, Dreier faces as many as 20 years in prison on each count.

The U.S. Securities and Exchange Commission filed a civil suit against Dreier claiming he stole $38 million from an escrow account set up to hold money for the unsecured creditors of 360networks (USA) Inc., which the firm represented in bankruptcy court.

The movie moguls in Hollywood must be looking at these latest cases to determine if a screenplay might be a worth while endeavor. The hundreds of lawyers and other workers impacted by these two incidents alone, will no doubt bring out a few who were close enough to the two crooks to be able to provide technical consulting on the projects. The setting in the Hampton's or the Palm Beach Country club could even bring some real well known people into the movie picture itself.

Back in May 2008 this blog touched upon the legal ecosystem and the survival of the fittest. Fraud, like other crimes of opportunity, have three common attributes:

1. A growing supply of motivated offenders
2. The availability of prospective or ideal targets
3. The lack of consistent oversight mechanisms—control systems or someone to monitor the business

Beyond the typical motivations for initiating deceptive practices and fraud are the underlying mind sets. "Neutralization" creates the road map for nullifying internal moral objections. The type of fraud is not the issue here as much as that offenders seek to justify or rationalize their actions and methods. The next trend line we will see is the up tick in court filings and the litigation wars for the next few years to come. One fact remains obvious. Organizations large and small will be drawn into these Operational Risk Management challenges without the proper policies, practices and behavior to prevail. In any "legal ecosystem" we know about the phrase "Survival of the Fittest" comes to mind and this one, will be no different.

Corporate Governance: Testing for Organizational Disease...

In our continuing series on Security Governance we now turn to Corporate Governance: Testing for Organizational Disease.

It's been three years since a 25 year sentence was handed down in the Worldcom corporate governance and fraud case, it's obvious that prosecuting white collar crime cases is a real challenge.

In the HealthSouth Corp. fraud trial, the jury made a different decision and the CEO was acquited.

Some lawyers suggested white-collar cases are inevitably difficult to present to jurors, whether they live in Birmingham or New York. "It's different from a drug deal or a bank robbery," said Donald Stern, a Boston attorney who was formerly that city's top federal prosecutor. "It's not obvious that a crime has been committed."

What the Board of Director's and Executive Management do know is that it's time to make some more changes in Corporate Governance initiatives. The relationships with the shareholders is bound to continue to be a challenge for any management team and they realize that they must be creating a culture full of ethics and risk management principles.

At the end of the day it comes down to the evidence presented to the jury. And the evidence is typically a presentation of information utilizing forensic methods of discovery. Dr. Thomas R. O'Connor at NCWC has some interesting background on the subject of "Investigative Methods of Forensic Accounting."

Signs of financial crime can be initially detected in a variety of ways -- by accident, by whistle-blowing, by auditors, by data mining, by controls and testing, or by the organization's top management requesting an inspection on the basis of mere suspicion. Ideally, fraud detection ought to be recognized as an important responsibility throughout every organization, and every employee in an organization ought to be familiar with the disciplinary consequences for breach of trust as well as failure to report criminal misdeeds against the organization. On a practical level, however, there are steps to the investigative method used in an organizational context that are far from these ideals, and reaching the "breakthrough" point is more an art than science. It is the purpose of this lecture note to outline the investigative methods and procedures used in most cases.

Red Flags of Organizational Behavior:

1. Unrealistic performance compensation packages -- the organization will rely almost exclusively, and to the detriment of employee retention, on executive pay systems linked to the organization's profit margins or share price.

2. Inadequate Board oversight -- there is no real involvement by the Board of Directors, Board appointments are honorariums for the most part, and conflicts of interest as well as nepotism (the second cousin to corruption) are overlooked.

3. Unprofitable offshore operations -- foreign operation facilities that should be closed down are kept barely functioning because this may be where top management fraudsters have used bribes to secure a "safe haven" in the event of need for swift exit.

4. Poor segregation of duties -- the organization does not have sufficient controls on who has budget authority, who can place requisitions, or who can take customer orders, and who settles or reconciles these things when the expenses, invoices, or receipts come in.

5. Poor computer security -- the organization doesn't seem to care about computer security, has slack password controls, hasn't invested in antivirus, firewalls, IDS, logfiles, data warehousing, data mining, or the budget and personnel assigned to IS. Simultaneously, the organization seems over-concerned with minor matters, like whether employees are downloading music, chatting, playing games, or viewing porn.

6. Low morale, high staff turnover, and whistleblowers -- Low morale and staff shortages go hand-in-hand, employees feel overworked and underpaid, frequent turnover seems to occur in key positions, and complaints take the form of whistleblowing.

As we move forward on strategies for improving ethics and protecting corporate assets it's clear that educating board members and employees to the symptoms of corporate disease can be a key initiative. That education and awareness program could be the beginning of a whole new era of high performing companies. And for that matter, the programs effectiveness may be the first test of any organizations health.

Lessons Learned: The Impact of Executive Decisions...

In times of economic downturn the Operational Risks within your institution will begin to rise. Enron, Worldcom and HealthSouth are the few names people recognize as the major casualties of the last significant dip in our economy. When times get tough, people get desperate and try to keep the schemes and any red flags from being discovered.

So what are some of the areas that encompass Operational Risk:

• Internal Fraud - bribery, misappropriation of assets, tax evasion, intentional mismarking of positions
  
• External Fraud - theft of information, hacking damage, third-party theft and forgery
• Employment Practices and Workplace Safety - discrimination, workers compensation, employee health and safety
• Clients, Products, & Business Practice - market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churning
• Damage to Physical Assets - natural disasters, terrorism, vandalism
• Business Disruption & Systems Failures - utility disruptions, software failures, hardware failures
• Execution, Delivery, & Process Management - data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets

Cynthia Cooper has written a new book "Extraordinary Circumstances: The Journey of a Corporate Whistleblower" about her honorable quest to find the truth at Worldcom. Her quote in the March/April issue of Fraud Magazine says it all:

"Listen to your instinct. If people are acting out of character or appear to be working to head you in another direction, step back and ask yourself why. Continue to ask for support and dig until you're satisfied that you've gotten it right."

Beyond Cynthia's first person account to give the reader her emotional perspectives, Operational Risk Management professionals realize that their role and the job they have been trained to do is not always a "Pleasant" experience. This is why all of the training and education is so important and the rehearsals are absolutely imperative. Testing, evaluating and testing some more is the norm. Understanding what "Normal" looks like, takes time and persistence. Yet without it, our horizon for positive change could be in jeopardy.

With many of the "Lessons Learned" books now published from the last economic dip, who will be next to blow the whistle or expose the real risks that some companies are hiding from the Board of Directors and the shareholders. The class action lawyers are even gathering their evidence on the possibility of cashing in on predatory lending practices:

A federal appeals court is nearing a decision on a battle between Chevy Chase Bank and a Wisconsin couple that could for the first time enable homeowners across the country to band together in class-action lawsuits against mortgage firms and get their loans canceled.

The case is alarming Wall Street 's biggest banks, which could bear the hefty cost of reimbursing all mortgage interest, closing costs and broker fees to groups of homeowners who uncover even minor mistakes in their loan documents. After a federal judge in Milwaukee ruled last year that the Wisconsin couple had been deceived and other borrowers could join their suit, Chevy Chase Bank appealed to the circuit court in Chicago.

So what we have are markets that are volatile. Bankers who are raising the stakes for borrowers. And naive consumers who are facing higher prices across the board. The time for increased vigilance is in front of us all. From the Board Room to the Court Room it's time that we spend more time looking at the interdependencies and realize that risk is more than a prediction.

During these times, it's worth revisiting this post on Fear: The Elements of Prediction.

The GC: The Truth Can Be Adjusted...

If you are a General Counsel (GC) today for an organization doing business on a global basis, your Blackberry must be "buzzing" every few minutes. The legal risk being encountered will always be a factor of the number of deals, the number of employees and the growing number of countries you do business in.

As a corporate GC of a global enterprise, you have a fiduciary responsibility to protect the enterprise from adversaries such as the rogue employee, the government regulator, competitors and plaintiff class actions. The Rule of Law in your organization is in your hands. How you transfer the "Talking Points" on ethics and legal messages to your employees, partners, suppliers and adversaries is critical. The effectiveness of your relationship with internal CSO, CISO and Internal Audit leadership could mean the survival of the company and your job.

In the latest hollywood movie Michael Clayton with George Clooney, he plays the role of a prominent law firm's "Fixer." He finds himself taking care of the messes corporate clients put themselves into and even the internal firm problems with senior litigators who have decided to do secret battle with a prominent clients General Counsel. The GC in this film takes every precaution to ensure the settlement of a pending class action suit that has achieved over +30,000 billable hours by Michael Clayton's law firm.

While this fictitious story displays the extremes of the world many GC's live in with their outside counsel, it sets the stage for gaining insight into the legal ethics and corporate challenges global institutions face on a continuous basis. The Yin / Yang of corporate compliance and governance is consistently wrestling with the pressure to save people from losing their reputations and the longing to do the right thing. The goal is to achieve a defensible standard of care and to have peace of mind. To be able to stand behind the fiduciary duty to uphold the law and enforce the rule of law in corporate business.

When was the last time a GC took the "Ethics" and "Rule of Law" program directly to the employees in face to face sessions? To give the employees, partners or suppliers first hand opportunity to meet, greet and engage with the General Counsel of the enterprise. By doing this you are directly engaging with the people on the front line to be the "eyes and ears" for the company. To be that early warning system of potential conflicts of interest, fraud and corruption. As an example, Scott Chaplin at Stanley Associates says this:

"I deal with a wide range of issues on any given day. I support not only our business operations but also corporate support. Our recurring issues include corporate governance and securities, and we're active in the mergers and acquisitions area -- we've done several deals recently. I handle labor and employment issues on a daily basis, along with government contracts issues, litigation, IP and compliance work. I'm also the ethics officer for the company, responsible for our ethics compliance program, as well as secretary of our board of directors, where I act as legal adviser to the board."

"I recently completed our annual ethics training at a number of our offices. After each training session, I would have a line of employees waiting to speak with me about various issues. That got me thinking that a lot of employees don't feel they have a direct line of communication to me at corporate. They might not feel that the issue is important enough to bring up with the GC. It made me realize that in-house lawyers need to get out of headquarters more often and go to the employees, instead of waiting for the employees to come to us. We have to get out to the field and foster the client relationship a little bit more."

Scott is absolutely correct and what a better time than to emphasize SOX Section 806. Protecting the rights of corporate whistle-blower's is the GC's responsibility in combination with an external ethics hot line for employees. While there have been plenty of other people calling for reform on other burdensome and expensive components of SOX, no one is going to touch Section 806. Employees don't understand the implications of the law and corporate management can't under estimate the impact of this in terms of potential litigation it may face.

Achieving a Defensible Standard of Care requires a General Counsel with the vision to address a spectrum of legal and ethical risks in the modern enterprise. When this is finally accomplished, the Michael Clayton's in law firms around the globe, will be looking for a new career.

operational risk

Red Flags: The Oracle of Omaha...

What do you do when you see a "Red Flag"? This was the question posed to Directors in a recent poll by Corporate Board Member Magazine in the November/December 2007 issue. C. Warren Neel the Executive Director of the Corporate Governance Center, at the University of Tennessee could not have answered this any better:

I don't want to see it; I want to "hear" the red flag before I see it. I want to hear about it before it happens. And I don't want to just know it happened, I want a diagnostic as to why it happened. I want a postmortem. What led us down that track? How did it start? Was it personnel-based? Process-based? Because of a malfunctioning system? Did we have the wrong strategy? Or what?

Welcome to the world of Operational Risk Management Mr. Neel. These are the scenarios that are played out on a continuous basis in the midst of the daily humming of business throughout the organization. These Ops Risk professionals are testing, exercising, stressing, and "Thinking of the Unthinkable" everyday so you do hear it before it happens. It may not be weeks, or even days. It could be hours or minutes. And then what will the Board of Directors do next?

This is perhaps one of the largest worries these professionals have. They don't know you, the Board or the steps you might or may not take once you get the warning, the news or the prediction. As the Board of Directors it's imperative that you learn all you can about who the Operational Risk experts are in the enterprise and to know them personally. Otherwise, how are you ever going to have an early warning system that you can trust and gets you the answers sooner than later?

What you need is an extension to the "Whistleblower" mechanism that tracks potential ethics violations and other wrong doing of corporate policy. It's a risk management method integrated with your current fraud management systems and combined with the ongoing behavioral analysis of "High" risk employees. Without this early warning process and supporting system in place the Board is forever doomed to be on the "reactive" end of the spectrum, continuously wondering how to respond to an incident that has already occurred.

How did Warren Buffet get the "Red Flag" on Freddie Mac even years before their implosion with senior management?

The charges against Brendsel were filed three years ago by the Office of Federal Housing Enterprise Oversight, which regulates Freddie Mac and its larger government-sponsored sibling Fannie Mae. OFHEO, which blames the accounting scandal on management misconduct is seeking damages and penalties against Brendsel totaling nearly $1 billion, including $24 million in severance benefits and stock awards.

Buffett said he was uncomfortable, among other things, about an investment by Freddie Mac that was unrelated to its business as the nation's second-largest financer of home mortgages.

"I follow the old dictum: There's never just one cockroach in the kitchen," Buffett said.

Details of his testimony were reported in Wednesday's editions of The Washington Post. They were confirmed by people familiar with the proceeding, speaking on condition of anonymity because they weren't authorized to speak about the case publicly.

Regardless of the outcome of this proceeding, the point could be made that the board had a huge "Red Flag" that Warren was selling his stake in the company. Predictions are based upon a number of factors and there must have been many pieces of information that added up to "somethings not right" at Freddie Mac. Today, there are ten positions open at Freddie Mac for operational risk related jobs and here is what they are seeking:

Position is part of a team supporting Operations as an operational risk management partner. Significant time will be spent as the face of the Audit Liaison function. Engages with the business areas to fully understand the operational process in order to coach and support the group in identifying and assessing operational risk and designing appropriate controls to mitigate the risk. Provides subject matter expertise on operational risk management systems and Freddie Mac operational processes.

Ensures all operational risk deliverables are completed within established timeframes with a high level of quality especially the mitigation of outstanding major/critical issues and monitoring of status on all outstanding issues. Deliverables include Operational Breakdown and Loss Event Reporting, Risk and Control Self-Assessments, SOX Assessments, Internal and External Audit Responses. Also supports Quality Assurance testing of SOX Key Controls and Root Cause Analysis.

• Skills/Knowledge needed:
• Indepth knowledge of operational risk management and controls with minimum 2 years experience.
• Knowledge of key principals of auditing.
• Knowledge of key principals of mortgage operations.
• Knowledge of financial industry operations and/or accounting is preferred.
• Ability to work independently with strong organizational skills to meet frequent deadlines.
• Strong interpersonal skills with ability to build working relationships.
• Flexibility and ability to multitask.
• Strong analytical skills.

One might wonder why they are looking for someone with in depth knowledge of operational risk management (ORM) with only two years of experience. Sadly, this is because the organization relied for too many years on their financial auditors and their armies of freshly minted MBA's from some of the best business schools in the nation. However, the main reason is that the science of ORM is new compared to other disciplines in the accounting profession.

As organizations evolve their ORM departments and combine the attributes of fraud management, systems testing, continuity of operations, records management and employee behavioral analysis the Board of Directors will have a better opportunity to predict "Red Flags". They will ultimately become more preemptive in their actions and follow through to protect the shareholders assets. Until that happens, keep your eyes and ears on the "Oracle of Omaha"...