Gurbir Grewal: Keeping Corporations on the Straight and Narrow

Gurbir Grewal jokes that he has never been in the public eye as much as he has since he started  as the Securities and Exchange Commission’s director of the division of enforcement in July last year.

“Now when I go to speak as SEC enforcement director, it is almost a cottage industry, whether it is accounting firms or law firms, it generates all sorts of press and media coverage,” said Grewal, noting his comments are his own.

Indeed, the former New Jersey attorney general has a lot on his plate as he tackles everything from crypto fraud to the unregistered sale of securities to changing the tone at the top among corporations that are still very vulnerable to fraud.

“When I came into the door here, I didn’t fully realize how vast and deep the waterfront is that we cover,” he said Tuesday at the 33rd Annual ACFE Global Fraud Conference in an interview with President and CEO Bruce Dorris, J.D., CFE, CPA.

“There has been a steep learning curve for me on a lot of the subject matter issues.”

Rebuilding Trust

Grewal has vowed to approach his job with a prosecutor’s mindset and work with the SEC to rebuild public trust in the nation’s institutions and markets. “It has become apparent to me that there is this erosion of trust, not just in our government institutions, but in our financial institutions as well.”

Scandals, the perception that insiders have access to information outside the public domain and delayed accountability for crimes, have contributed to this phenomenon. And that is bad for everyone, he said.

Grewal has a three-part solution to restoring this diminishing trust:

1) Robust enforcement.

2) Robust remedies — penalties that really deter misconduct and are not priced in as the cost of doing business.

3) Shared effort with professionals, such as CFEs, to create a culture of active and robust compliance.

“The tone at the top matters. That is the first thing that is required for robust compliance,” he said. “People just have to make it part of their brand, that they are going to work ethically and play within the rules.”

Compliance also requires corporations to go beyond check-the-box policies by truly addressing the risks in particular businesses, encouraging reporting and cooperating with the SEC, he said.

“If we do all of those things, we can restore confidence in our markets and protect investors better, but it is a shared effort with folks in this room, gatekeepers, lawyers and other compliance professionals,” he reminded attendees. “But it starts at the top.”

Failures in Compliance

The SEC has already clamped down on poor compliance among some big-name companies as it seeks to send a message to others in the market. This includes one of the largest advertising firms WPP, which has been expanding its footprint in different parts of the world but has failed to address the risks of corruption in certain countries.

The company agreed in September to pay more than $19 million to resolve charges that it violated the anti-bribery, books and records, and internal accounting controls provisions of the Foreign Corrupt Practices Act (FCPA). “Hopefully that sends a message to folks in this space who are growing by acquisition that you really need to have systems in place,” he remarked.

The regulators also hit JP Morgan Securities in December with a $125 million penalty for a books and records violation, the highest fine the SEC has imposed for this type of infraction.

“You might say this is just books and records, but you’re all fraud examiners and where do we go to see what happens when something goes wrong?” he asked. “As a broker dealer they need to maintain these records, so if there is an allegation of wrongdoing after the fact, we can come in.”

While JP Morgan had policies in place to meet books and records requirements, the very executives responsible for implementing it were telling their teams to start an offline WhatsApp chat to talk about different transactions, said Grewal.

Responsible Behavior

The SEC is trying to reward responsible behavior by forgoing fines should management do the right thing and cooperate with the regulator. While every case is unique, Grewal emphasizes that cooperation is more than doing the bare minimum. It means having the right policies and procedures in place, remediating misconduct once you identify it, putting together a report that you show the SEC and then working with them in the investigation.

“But where people lose credibility is when they come in and the self-report becomes an advocacy piece to say, ‘the conduct wasn’t so bad, we discovered it and you shouldn’t find a violation here,’” Grewal warned.

“That doesn’t work. It is really about the robust self-report, acknowledging the misconduct and then we will make the assessment.”

It is likely that fraud examiners will see more and more wrongdoing come to light as the markets turn south amid fears of a looming recession or even stagflation. Grewal noted, “[Investor] Warren Buffett said that when the tide rolls out you see who has been swimming naked, right now, you are going to see a lot of naked swimmers.”

Grewal encourages CFEs to push executives and higher management to self-report to the SEC. “Tell them the enforcement director said it is always better when you come to us first before we come to each of you,” he said. “I have seen this movie play out dozens and dozens of times. The self-report is the way to go.”