D&O – How honest executives can end up in jail because of rigorous regulatory enforcement. A report on the Willis-Zurich briefing.

The Willis-Zurich breakfast briefing gave members a hair-raising insight into how honest executives can end up in jail because of rigorous regulatory enforcement. The audience was left in doubt as to the importance of compliance. This report from Lee Coppack.

The one-eyed Vietnamese drug trafficker with tattoos and gold teeth, said the former senior British Airways executive, was “the worst criminal he’d ever met”. It wasn’t even a backhanded compliment.

Keith Packer was thousands of miles from home in a US prison camp and did not know what he was going to do when he came out. He hadn’t made any money from his offence and he’d lost his job. His drug trafficking bunk mate was serving a much longer sentence, but he had a stash of money waiting for his release and was making a good network of new contacts in the prison to rebuild his business.

His story of how an honest, hardworking man leading a comfortable life broke the law and ended up in prison was the cornerstone of the Willis and Zurich Insurance Airmic partner breakfast on 14 November – Not another D&O seminar! It certainly wasn’t just another D&O seminar.

“It is so easy to be non-compliant,” he said speaking of the anti-trust violations that landed him in the Florida prison camp. In his role as the general commercial manager for BA in charge of cargo shipping, he had failed to question the sources of information a member of his team was using for information on a competitor’s fuel surcharge plans. The employee had a contact within the other airline, and he was aware of it.

It started with a dawn raid on his office in 14 February 2006 and culminated in his agreeing with the US Department of Justice (DoJ) to plead guilty to charges of anticompetitive behaviour by fixing fees on shipments to and from the United States between 2002 and 2006.

Packer was just one of dozens of airline executives caught up in the prosecution of an international airline fuel surcharge cartel. While the UK Office of Fair Trading pursued claims on passenger transport, the DoJ handled the cargo side, and so he ended up with an eight month sentence in an American gaol.

Since his release in 2009, he has been telling businesses and business executives to take compliance seriously and to pay attention to the training they receive rather than simply waiting impatiently until it’s over and they can get back to work. Keith also urged them to work closely with their legal and compliance teams.

“You’re not paranoid; they actually are out to get you,” was how Mary O’Connor, Willis chief risk and compliance officer, had opened the seminar. She warned the audience that regulators are convinced that pursuing senior executives is the best way to change corporate behaviour, and they are doing so.

A former US prosecutor and later official with the UK Financial Services Authority, O’Connor said that to protect their directors and officers, risk managers need to understand how prosecutors think. They should to keep up to date with what is going on in terms of legislation and enforcement, and ensure that they have policies, procedures, systems and controls in effect to ensure compliance. “For individuals, these could be their get out of gaol card.” Prosecutors would think twice about pursuing someone who was trying to do things the right way.

She also warned risk managers that they could be in the firing line themselves and consider how to protect themselves and ensure that any dubious behaviour or practices were challenged. “I think the prosecutors will start to look at the risk department. It’s not enough in this environment that you haven’t done anything wrong.”

Packer admitted that he had not known about BA’s directors’ and officer’s insurance before the investigation, so he put some questions to the two insurance specialists taking part in the seminar, Paul Schiavone, global chief underwriting officer special lines for Zurich Insurance, and Francis Kean, executive director, of Willis subsidiary FINEX Global.

From their comments, it seems that senior executives are often unaware of the D&O policy, and companies may even be reluctant to let them see the wording, even though they are the insured. “You’d be surprised how often insurers get caught in the middle,” said Schiavone.

There are many issues associated with D&O coverage, the two specialists explained, but coverage is widening in light of experience in the current regulatory environment. For example, a dawn raid now triggers the policy so that a director facing a room full of investigators can get legal advice, but it was not so in the past.

He said that many of the clauses in D&O policies were there for “egregiously bad cases”. In general, as an insurer his aim is to support directors and officers without looking for strict policy wordings. “For the individual,” he said, “the coverage should be as good as possible. I take a different view for entity coverage.”

"You’re not paranoid; they actually are out to get you"

Mary O'Conner
Willis chief risk and compliance officer

"You’d be surprised how often insurers get caught in the middle"

Paul Schiavone
Global chief underwriting officer special lines for Zurich Insurance

Airmic members who would like to know more can contact keith.h.packer@btinternet.com