In 2011, during NATO’s bombing campaign against Libyan ruler Muammar Qaddafi’s forces, NATO bombs hit a particular oil company’s storage facility containing thousands of barrels of chemicals used in oil drilling. While most barrels were destroyed, a substantial number were intact but their contents were permanently altered, due to extreme heat from bomb explosions and fires. The chemical changes made the barrels’ contents useless for their intended purpose.
Some days later, the oil company’s compliance lawyer with responsibility for the region was contacted by an oilfield operations manager for the company. The manager said that they had been approached by unnamed “authorities” in eastern Libya, who were offering millions of dollars to buy the chemicals to use for drilling for water. He explained that the company would not permit use of the altered chemicals to drill for oil because they no longer met company quality standards.
The oilfield manager also told the lawyer, “We need this deal” and “We haven’t had any significant revenue for years.” He showed the lawyer “photos of the damaged chemicals and the letters requesting the deal from the authorities,” as well as “the approvals from the commercial lawyers and a chain of emails from our leaders showing their desperation to screw some profit out of this situation.” The manager also asserted that “the authorities were running out of patience. They had a window in which they had to get drilling and if we couldn’t help them they would need to find someone who could. So time was of the essence and all that was lacking was the compliance seal of approval.”
The lawyer then conducted a review of possible legal, commercial, and reputational risk from the deal, interspersed with by daily queries from the manager about whether he had made a decision and reminding him “that the clock was ticking.” He spoke with company commercial lawyers, finance employees, and a company chemist, who analyzed the relevant chemicals and reported that none of the chemicals, singly or together, could be used in chemical weapons. The lawyer then gave his approval. “In a matter of days, the sale was completed. We had sold countless barrels of useless chemicals to the Libyan water board for a huge profit. The perfect deal.”
Some time later, the lawyer met with the company’s regional head of security about the sale. The head of security, who apparently was not involved in the lawyer’s due-diligence review, was blunt in his assessment. “‘They didn’t want the chemicals you fucking idiot,’ he said. ‘They wanted the barrels” – for barrel bombs.
The lawyer later wrote: “There was no proof of this. I had done all I could to verify that the deal was genuine but in my heart of hearts I knew that it smelled.”
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The lawyer’s experience, though it involved a unique set of circumstances, is a reflection of the risks that compliance officers can face in reviewing corporate deals and transactions, especially in countries that are politically unstable or burdened with widespread corruption. It also provides a case study in which the facts of the situation can be examined through the lens of behavioral science. That examination can help to identify specific types of behavioral influences and mental shortcuts that can skew the judgment of compliance professionals and business executives.
Based on the preceding account, at least six distinct behavioral influences were at work in the deal negotiations:
1. Loss Aversion:
Loss aversion, as Professor Daniel Kahneman put it,
refers to the relative strength of two motives: we are driven more strongly to avoid losses than to achieve gains. A reference point is sometimes the status quo, but it can also be a goal in the future: not achieving a goal is a loss, exceeding the goal is a gain. . . . [T]he two motives are not equally powerful. The aversion to the failure of not reaching the goal is much stronger than the desire to exceed it.
In the Libyan deal, at the time the “authorities” approached the company, the mindset of the company’s leaders was already fixed on the prospect of substantial loss. In addition, the oilfield manager told the compliance lawyer that their Libyan operation had had no significant revenue “for years.” In those circumstances, failure to close the offered deal would have guaranteed an even greater financial loss for the company. Closing the deal, on the other hand, gave the company “a huge profit.”
2. Context Confusion:
“Context confusion” is a term that reflects the tendency for people to “confuse the context controlling the behavior of another person with the context determining their own behavior. Most people assume that other peoples’ motives and intentions are the same as theirs, although the same behavior may have very different meanings.” In the Libyan deal, the oilfield manager wrongly assumed that the “authorities” had the same interest as the oil company in a standard arm’s-length transaction, and those assumptions governed his interactions with the compliance lawyer.
3. Scarcity, Reactance, and Social Proof:
Another behavioral influence, related to loss aversion, is scarcity: specifically, the concept “that opportunities seem more valuable to use when their availability is limited.” What can make scarcity especially influential in decisionmaking is the concept of reactance. As demonstrated in a series of experiments, psychological reactance reflects
the human response to diminishing personal control. According to the theory, whenever free choice is limited or threatened, the need to retain our freedoms makes us desire them (as well as the goods and services associated with them) significantly more than previously. So when increasing scarcity – or anything else – interferes with our prior access to some item, we will react against the interference by wanting and trying to possess the item more than before.
In the Libyan deal, the oilfield manager was influenced by the Libyan “authorities”’ assertion that they were “running out of patience,” and communicated his anxiety about the potential loss of opportunity (and profit) to the compliance lawyer. Adding comments such as “time is of the essence” and “the clock was ticking” increased the pressure on the attorney to approve the deal.
4. Social Proof:
The influence of scarcity can be intensified when combined with an additional behavioral influence, social proof: the tendency to regard a behavior as more correct or more credible to the extent that we perceive others performing that behavior. As real-world experience and experimental findings have shown, “[n]ot only do we want the same item more when it is scarce, we want it most when we are in competition for it.” In the Libyan deal, the “authorities”’ assertion to the oilfield manager that “if we couldn’t help them they would need to find someone who could” perfectly exemplified the combined power of scarcity and social proof.
5. Confirmation Bias:
Confirmation bias can be described as the tendency of a person to search for or interpret information in a way that confirms that person’s preconceptions. In the Libyan deal, the oilfield manager showed the compliance attorney “photos of the damaged chemicals and the letters requesting the deal from the authorities.” Although the letters proved to be spurious, the oilfield manager clearly regarded them as confirmation of a belief he was already motivated to adopt, and used them in turn to try to persuade the lawyer.
One other behavioral influence that can strongly influence compliance with another’s demands is the concept of authority: more precisely, the tendency for people to conform their conduct, often unthinkingly, in obedience to authority. In this case, the oilfield manager cited two related sources of authority to the attorney: (1) the emails from company leaders “showing their desperation to screw some profit out of this situation,” and (2) the statement about “approvals from the commercial lawyers.” While expressions of concern from business leaders would have been powerful enough influences, the attorney likely also felt some inclination to defer to the professional views of his legal-department peers.
This analysis provides a clear demonstration of what social psychologists have described as “the power of the situation (PDF: 238 KB).” Sometimes, actions and decisions are due not to “a few bad apples,” but to the “bad barrel” of a social situation in which multiple powerful behavioral influences are simultaneously at work.
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What lessons should corporate compliance officers and attorneys take away from this case study? First, they should use the behavioral influences listed above as a checklist, to keep in mind should they experience similar pressures to approve a deal or relationship that they think entails substantial risk. It is noteworthy that the attorney on the Libyan deal resisted so many influences to acquiesce and conducted as much due diligence as he did: reviewing areas of possible legal, commercial, and reputational risk, and consulting company commercial lawyers, finance employees, and even a company chemist.
Second, corporate-compliance professionals can use this case as the basis for a thought experiment and ask themselves, ”If I were in his shoes, could I have done anything else to figure out the real reason for the deal?” The fact that the lawyer himself, at the end of the process, admitted that “in my heart of hearts I knew that it smelled” suggests that he knew he was missing something critical, without being able to identify what it was.
One step that the compliance lawyer apparently did not take was to seek input from the company’s regional head of security before the lawyer gave his approval. The head of security participated in an early meeting about the proposed deal, but was not consulted further until after the decision. Had he been consulted, given the need for corporate security to monitor geopolitical as well as physical risks, the attorney might have learned some relevant and disturbing information.
In 2011, government forces in Sudan — which shares its western border with Libya — reportedly were using “barrel bombs and other unguided munitions” against rebel and civilian targets in two regions of the country. Moreover, large quantities of barrels could have been transported by road from Libya to Sudan. Kufra, a town in southeastern Libya, has been called “the main entry-point for land traffic between the two countries.” Though arduous, travel between Kufra and Northern State in Sudan is possible for four-wheel drive vehicles and large lorries.
The point here is not to criticize the lawyer for having failed to reengage with the head of security. It is instead to suggest that his plight is the kind of situation in which other compliance officers or counsel may find themselves in reviewing a problematic or risky course of action. When a compliance officer has reached the end of an apparently thorough due-diligence process, but still finds himself or herself in a “in my heart of hearts I knew it smelled” frame of mind, the right question to ask may be, “What am I missing?”
If he or she has not found an answer by consulting the conventional sources of risk and compliance expertise, it may be worthwhile to round out due diligence by posing that question to another person within the company whose judgment he or she respects. Even if that person has no better answer, that final effort to check one’s judgment may help the compliance officer, should regulators later ask critical questions about the due-diligence process for that deal, to avoid being put over a barrel.
 Daniel Kahneman, Thinking, Fast and Slow 302-03 (2011).
 Ellen J. Langer, Mindfulness 40 (1989).
 Robert B. Cialdini, The Psychology of Influence 238 (1993).
 Id. 245-46 (emphasis in original).
 Id. 116.
 Id. 262.
 See Robert B. Cialdini, supra note 2, at 218.
 See American Psychological Association, Demonstrating the Power of Social Situations via a Simulated Prison Experiment, apa.org, (accessed February 23, 2019).
 See William Carter, supra note 1.
Jonathan J. Rusch is Principal of DTG Risk & Compliance, a consulting firm specializing in corporate-compliance issues, and Senior Fellow in the Program on Corporate Compliance and Enforcement at New York University Law School.
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