Compliance Risk: The Exemplary Story of How Ralph Lauren Responded to FCPA Violations

*** The writing does not, and is not intended to, constitute legal advice by any means***

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Ralph Lauren on the Madison Avenue
(from its website)

Let's talk about compliance. The subject is often overlooked, but a compliance blunder can develop into a full-blown nightmare. As New York Law Journal perceptively noted, many compliance issues, when poorly managed, are acute sources of corporate risk. To be fair, complying with relevant laws, policies, and regulations is not an easy task when different countries have different rules, let alone different norms. What that means is that it is not okay for any company to devise a compliance system (i.e. drafting a code of conduct) and call it a day. The system has to have teeth to ensure that the firm's compliance protocols are vigorously enforced. Today, I am going to present a case study of Ralph Lauren to offer a lesson in how to turn crisis into opportunity. (Disclosure: I came to be familiar with this case thanks to the Fashion Law & Finance class I took last semester!)

In 2013, the Securities Exchange Commission ("SEC") announced that it would charge Ralph Lauren with violations of the Federal Corruption Prevention Act ("FCPA") when the agency learned that Ralph Lauren's Argentine subsidiary had bribed government officials to "improperly obtain paperwork necessary for goods to clear custom". (See the SEC non-prosecution agreement.) At times, the subsidiary even offered expensive gifts to work around or expedite the requisite paperwork process. Under § 78dd-2 of the FCPA, it is unlawful to make payments to foreign government officials to assist in obtaining or retaining business. The SEC observed that Ralph Lauren did not oversee whether its Argentine subsidiary does business in a lawful and ethical manner and failed to train its employees to that effect. Given the gravity of the allegations in the SEC letter, some would assume that Ralph Lauren was headed to a disaster. However, Ralph Lauren averted the worst outcome when the SEC dropped the charges. How did it persuade the SEC not to press charges going forward? Spoiler alert: there's no magic at all in all of this!

To start off, Ralph Lauren agreed to pay about $1.6 million as the penalty, which shows the candid acknowledgement of the wrongdoing. Ralph Lauren, however, did something much more remarkable than just paying the penalty and turned the tide eventually. Ralph Lauren actively cooperated with the SEC investigation to the alleged matters. The SEC even made a list of things Ralph Lauren did to justify its decision not to pursue the planned prosecution. It was the first time in the SEC's history to draft a non-prosecution agreement in connection with the FCPA. 

From the SEC-Ralph Lauren Non-Prosecution Agreement

The list exemplifies how seriously and sincerely Ralph Lauren took the allegations raised against it. The American designer also promised to "report periodically to [the SEC] concerning [Ralph Lauren's] compliance efforts" and "to continue to implement an enhanced compliance program and internal controls". 

So what's the lesson here? I'm not intimating, by any means, that Ralph Lauren should be saved from censure. However, what's done is done. Ralph Lauren, however, did set an, if not the, example of how a company caught up in the possibility of a SEC prosecution should handle the issue. If a government agency singles you out for an unlawful conduct, do not attempt to cover it up. Rather, be forthright about about it. Also, your compliance efforts should be proactive and forward-looking. That is, you should revisit the existing compliance program and update it on a regular basis in light of the changing landscape of the law. Most importantly, actions that are likely to constitute the FCPA violations can occur at various ranks within the company. It is thus pivotal that measures such as employee education and monitoring programs are implemented to remind your people of what is acceptable and what is not. Your corporate culture sets the tone. The time is ripe to make compliance the next vogue in fashion!