Plugging Holes in the System: How Companies Can Fill In Dodd-Frank’s Stalled Initiatives

July 2012

IN THIS ISSUE

— Running in Place: The Impact of Delayed Dodd-Frank Implementation on Fighting Fraud
— Prevention is the Best Medicine: Why it Doesn’t Pay to Wait For Regulators

GREETINGS!

Welcome to the July 2012 edition of our newsletter! In this issue, we’ll examine how companies seeking to prevent fraud can fill in the as-yet unimplemented pieces of the Dodd-Frank financial reform bill, which remains largely unenforced two years after its passage.

RUNNING IN PLACE: THE IMPACT OF DELAYED DODD-FRANK IMPLEMENTATION ON FIGHTING FRAUD

Since the passage of the Dodd-Frank financial reform bill in mid-2010, lobbyists have been working furiously to influence, or totally mitigate, the impact of its proposed reforms on the regulatory level, where the “nitty gritty” of the rules, versus the broader principles actually drafted into the bill itself, will be written. One estimate said that after nearly two years, as much as two-thirds of the bill’s provisions remains stalled, awaiting final regulatory approval. While many of these provisions concern how to buffer financial institutions from the effects of traumatic events — by requiring larger capital cushions, for instance — some of the measures relate to fraud-fighting efforts.

Some of those measures are already in place, like a whistle-blower program put in place by the Securities and Exchange Commission that mirrors the False Claims Act system in federal courts, where a whistle-blower can receive up to 30 percent of a fine or penalty as a reward for their tip leading to successful enforcement of a fraud matter. The office, which is actually called the Office of the Whistleblower, opened in May 2011 and fielded 900 calls from the public during the rest of its fiscal year, through September 2011, receiving 334 actual tips to investigate.

Yet the regulation of fraud concerning one of the industries that led to the financial collapse of 2007-2008 — derivatives and swaps — remains mired in regulatory limbo, with the SEC and Commodities futures Trading Commission exchanging proposals concerning how to regulate this vital, and potentially still toxic, area of finance as late as last month.

PREVENTION IS THE BEST MEDICINE: WHY IT DOESN’T PAY TO WAIT FOR REGULATORS

As the financial reform bill churns its way through a regulatory and enforcement process that can border on tedium, companies and their clients should be proactive in ensuring that their internal controls and fraud prevention efforts will make government enforcement efforts a moot point. Financial services firms — which have contributed more than $450 million to the SEC’s restitution fund created by the Dodd-Frank bill to compensate victims of financial fraud — have a vested interest in being a firewall between fraudsters and government enforcement agencies. Regularly scheduled internal audits and proactive use of fraud examiners in both internal and external capacities can help to lessen the impact of these regulations, however (and whenever) they finally take shape.

The liability to companies via the civil court system, in many instances, can dwarf even the largest penalties the government can conceive. By maintaining a watchful eye on a company’s directors and senior management, as well as maintaining an effective hotline and culture where potential fraudsters feel as though they’ll be caught, companies both large and small can assert their ability to police themselves more vigorously — and in a less costly manner — than even the most far-reaching regulatory measures could possibly accomplish.