 This is Waylon Chow. Welcome to Introduction to Law and Legal Risk Management, Module 1, Part B. In this part, we will finish our examination of legal risk management by looking at the relationship between legal risks and reputational risks, and in particular examine the case of CIBC and Enron. At the end of the last module, we looked at the case of the exploding Ford Pinto, and I asked you to think about the risk management process that the Ford executives might have gone through in making their decision in that case, and also to assess what you think went wrong in that risk management process. What the Ford managers failed to consider in that risk management process was both the ethical and moral considerations and reputational risk of producing a vehicle that they knew would harm or even kill a certain number of people. I would like to read a quote now from a CEO of Coca-Cola. The CEO said, If I lost all of my factories and trucks but kept the name Coca-Cola, I could rebuild my business. If I lost my name, the business would collapse. And the next quote is from an article that is one of the required readings for this module. It says, The biggest threat to reputation is seen to be a failure to comply with regulatory or legal obligations. So the general message that we have now is that legal risk is specifically linked to reputational risk. Let's look specifically now at how legal and reputational risk is considered in the banking and investment industry here in Canada. Most Canadian banks and investment firms have in place a legal and reputational risk policy. What these policies essentially require is that transactions must be reviewed in terms of the risk to the firm's reputation. And that is not enough that a transaction is profitable and legal. We also have to look at the overall risk to the firm's reputation. The case in Canada which made everyone sit up and take notice that reputational risk is indeed something important that has to be considered is the case involving CIBC and an American company called Enron. Back in 2001, Enron, which was a huge major energy company in the U.S., Enron was exposed for reporting inaccurate financial information, which eventually led to Enron's bankruptcy. The U.S. Securities and Exchange Commission sometime after that accused CIBC of aiding and abetting Enron's manipulation of its financial results. Specifically, the accusation was that the loans provided by CIBC were structured as asset sales for accounting purposes. So what that essentially does for accounting purposes is to remove these loans off of the balance sheet of Enron. The end results of this manipulation was that it increased Enron's reported earnings by $1 billion, increased its cash flow by $2 billion, and also avoided reporting $2.6 billion of debt on the balance sheet. Without ever admitting any guilt for these accusations, CIBC was able to reach a settlement with the SEC and also the Canadian regulator, OSV, which stands for Office of Superintendent Financial Institutions. So this settlement was reached in 2003. So what this settlement involved was that CIBC had to pay $80 million penalty. CIBC was also prohibited from engaging in certain structured finance transactions for a certain period of time. And also, most importantly, CIBC was required to implement an enhanced reputational risk management policy for its worldwide operations. So essentially, CIBC in many ways had to change the way it did business in terms of assessing the transactions that it would enter into. This settlement required CIBC to implement a policy that it called the Global Reputational and Legal Risk Policy, or RLR policy for short. This broad-ranging policy included a requirement that every single CIBC employee complete a reputational and legal risk course. In other words, every employee had to be trained and be aware of reputational and legal risks. What the policy also required, it required that many proposed transactions needed special review by specific departments within the bank, which were compliance, the legal department, accounting, and taxation. What the policy also required on top of those reviews was a final review by a special committee of top executives, which included senior vice presidents of risk management, accounting, law, and taxation. This RLR review implemented by CIBC required clients provide more information about the reasons why they wanted to do a particular transaction. It was no longer enough for the client to just show that it was credit worthy enough to repay a loan, for example. Now it had to tell CIBC all of the specific reasons for the transaction, which could be a tax-motivated reason, a regulatory reason, or some kind of accounting treatment motivation. The two key points here are that it was no longer enough that a transaction was both legal and profitable. Now we had to start looking at the purposes behind a transaction to determine the reputational risks that arose from the transaction. And these last two points are really the lessons learned from this whole debacle involving CIBC and Enrona. These are lessons learned not just by CIBC, but by the whole banking industry and other businesses.