Fiat Chrysler troubles highlight need for more holistic approach to compliance

March 10, 2016 Noelle Manahan

Fiat Chrysler Automobiles (FCA) opened 2016 on a sour note, having to vigorously deny accusations of fraud and racketeering by a car dealer in the United States. Napleton Automotive Group is suing FCA, alleging that the Italian-American automaker encouraged dealerships in the United States to lie about their monthly sales in order to inflate their numbers. Napleton has further accused FCA of offering its president US$20,000 in exchange for false sales reports on 40 new vehicles, and of avoiding the start of warranties by reporting sales at the end of the month and then reneging on them the very next day.

Napleton stated that the alleged misconduct harmed its dealerships in Florida and Illinois. Upon news of the lawsuit being made public, FCA’s stock price fell by seven percent in Milan and by five percent in New York.

In a statement, FCA said that its investigations had found Napleton’s allegations to be baseless. ‘This lawsuit is nothing more than the product of two disgruntled dealers who have failed to perform their obligations under the dealer agreements they signed with FCA US,’ said the statement. ‘They have consistently failed to perform since at least 2012, and have also used the threats of litigation over the last several months in a wrongful attempt to compel FCA US to reserve special treatment for them, including the allocation of additional open points in the US FCA network.’

The automaker also said that it will continue to safeguard trust in its relationships with its dealers and continue to resist pressures such as the legal move by Napleton.

FCA did not spare the media in its criticism, saying that it ‘finds it unfortunate and disappointing that reputable media would be willing to be used in questionable litigation practices without a full understanding of the facts’.

The Napleton allegations follow a rocky regulatory year for FCA, during which it encountered several compliance and integrity issues, including two settlements with regulators from the United States and a recall of 1.4 million vehicles due to cybersecurity threats.

In December 2015, FCA reached a US$70 million settlement with the United States National Highway Traffic Safety Administration (NHTSA) over its failure to submit data on vehicle crashes, deaths, warranty claims and other information related to car safety. It was FCA’s second fine from the NHTSA following July’s US$105 million civil penalty over the automaker’s handling of vehicle recalls.

The same month, FCA initiated a recall of 1.4 million vehicles due to their perceived vulnerability to a cyberattack. The affected vehicles contained radios that were susceptible to hacking. Fiat subsequently fixed the software problem and gave each owner a USB device that enabled them to upgrade their vehicle’s internal software safety features. In a statement, FCA said that it was unaware of any hacks and that the recall had been initiated out of extreme caution.

The importance of involving other departments

The FCA’s response to its compliance and integrity issues over the last 12 months has been a bit ‘hit and miss’. While the automaker’s proactive response to the perceived threat of hacking to its vehicles is to be praised, its organisation of vehicle recalls and its acerbic statements on allegations of fraud and racketeering show there are still areas for improvement.

While it is perfectly understandable for a company to defend its brand and reputation in the face of a media onslaught, the ability to send the right message at the right time is a challenge that requires great PR skills.

Statements issued through press releases can be admissible in legal proceedings and affect any subsequent court decisions. Companies must therefore ensure that their compliance functions interact with departments such as PR, marketing and legal, to give themselves the best chance to achieve the desired outcome.

Other departments should be involved in the following ways.

Finance

  • Developing returns in gaining commitment
  • Implementing programmes (e.g. funding for due diligence)
  • Measuring the financial returns, value and margin analysis
  • Conducting audits

Legal

  • Advising on legal obligations (e.g. Sarbanes-Oxley Act requirements, generally-accepted accounting principles, Foreign Corrupt Practices Act responsibilities and contractual obligations of third parties)
  • Assessing potential liability to the company, such as breaches by third parties
  • Notifying the authorities and other stakeholders of breaches
  • Advising on investigation procedures and privilege issues

HR

  • Implementing initial and ongoing training programmes
  • Building HR controls and management
  • Developing a behaviour change in employees and management
  • Implementing ‘carrot-and-stick’ compensation changes to drive certain behaviour to support compliance
  • Dealing with failures, employee management, discipline and termination

Procurement

  • Ensuring proper conduct when procuring resources
  • Alerting company authorities to any suspicious activity

Marketing

  • Including elements of the compliance programme in the marketing plan
  • Assessing how the programme can aid in promoting the brand
  • Ensuring that third party compliance programmes are in line with company objectives

Middle management

  • Creating tone from the middle that is in line with the compliance programme
  • Ensuring strict enforcement of appropriate conduct by those reporting to it
  • Ensuring the provision of adequate training for lower levels of the organisation

IT

  • Reporting any suspicious transactions
  • Assisting with initial investigations and audits
  • Helping to ensure the integrity of company data and software

Companies should also consider external resources when developing effective and robust compliance programmes. It is essential that boards of directors understand the need for such resources and allocate sufficient budget. Such resources can aid in the following ways.

Compliance advisory firms

  • Developing programmes
  • Giving advice
  • Sending messaging to external audiences e.g. third parties
  • Creating internal communications
  • Handling communications for crisis breaches

Due diligence firms

  • Conducting background checks
  • Conducting integrity profiling

IT suppliers

  • Providing solutions to manage third-party engagement, completion of questionnaires, management of due diligence reports
  • Implementing reporting mechanisms e.g. hotlines

 

FCA’s approach to its compliance and integrity issues was not sufficiently cohesive, partly because its issues originated from different units, such as sales, the management of recalls, the procurement of parts and supplies, software development and, to an extent, communications.

Multinational corporations that have hundreds of employees operating across multiple territories would benefit from having more centralised compliance programmes that are tailored to the needs of each relevant jurisdiction. Such a programme should incorporate universal elements such as anti-bribery, implementation of codes of conduct, and regular audits. But it should also have more bespoke elements that are handled by each jurisdiction, such as conflicts of interest.

Brands that successfully develop and nurture good reputations will ultimately thrive, but this needs commitment and investment. As has recently been witnessed in the Volkswagen case, a strong brand can be easily and severely damaged by a single widespread integrity and compliance crisis.

The automotive sector is currently undergoing an industry sweep for misconduct. Being able to demonstrate to consumers, investors and regulators that your company’s compliance programme is functioning effectively can help immensely in limiting reputational and financial risk, especially during periods of intense scrutiny.

 

 

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