The Tao of Compliance

Alcoholic beverage compliance is a complex world; and a good compliance person must respect not just the laws of the land, but also the more subtle laws that govern human interactions.

Regulatory compliance is not all black and white—far from it! Many important decisions fall into a gray area. The real edge goes to the people who can maximize the number of yes's they get in the gray; in other words, the number of judgment calls that come out in their favor.

A successful outcome in the imprecise field of compliance requires more than quoting verse and line from a government rule book. A good compliance person must have a healthy respect, not just for the laws of the land, but also for the more subtle laws which govern human interactions.

In this issue, our column strays from the timely to the timeless. We'll consider a relatively "enlightened" perspective on regulatory compliance… with a little help from the venerable Chinese compliance master, How Tzu. We'll present and explain a few of his most useful maxims.

How Tzu said: Respect the law, but respect free will more.

At the bottom line, what is approvable is what the regulator is willing to approve.

Interpretation (of rules) rules! A high percentage of laws and regulations are written in general terms, leaving their specific application to be worked out, on a case by case basis, by the bureaucrats charged with enforcing them. For example:

Section 24.165 Premises. Wine premises will be located, constructed, and equipped, subject to approval by the appropriate ATF officer, in a manner suitable for the operations to be conducted and to afford adequate protection to the revenue.

Such a vague regulation is good news to industry members, since it leaves a wide berth for creative solutions to meet regulatory objectives, such as "the protection of the revenue." On the other hand, a non-specific rule provides virtually no "safe haven" that a proprietor can count on one hundred percent for approval. Therefore, every compliance person must be prepared to deal with the regulators' subjective interpretations. You have to dance with the way THEY see things, since they are your judge and jury.

How Tzu said: Don't let experience lull you into a false sense of security.

In a world where regulations allow the regulators lots of discretion, experience is particularly valuable. If you've gotten something approved before, you will understandably feel you have at least one guaranteed formula for success. And if you've been around the block many times, like we have, you may even feel quite confident about knowing the lay of the land. Beware! Not even precedents are set in stone.

One reason is, of course, laws change. Statutory change is simply a fact of life in compliance, and it's relatively easy to live with. At least when the legislature overrules past practice, the change is no secret.

Precedents can also be invalidated when circumstances change. It's bad enough when some little change you make in your operations affects your privileges. But sometimes, factors outside your control may also affect the legality of what you are doing. For example, a winery had had several vintages approved with label puffery describing the specific locations where the grapes were grown. They were shocked to have their most current submissions suddenly rejected. When they sought an explanation, they discovered that some of the locations named on their back label had acquired "viticultural significance" since their last COLA submission, due to pending AVA applications. As a result, the geographic references were no longer legal on labels.

Regulatory policy changes offer the most challenging and disappointing surprises, because usually, the only way you find out about them is when you've proceeded with your plan of action based on past experience, only to find a new and immovable road block on what was formerly a well-paved highway.

TTB is especially notorious for unexpected changes in policies. One of the most memorable and widely publicized changes happened in 1990 when TTB (then ATF) abruptly sped allowing the so-called "Mondavi mission statement" (a carefully crafted description of wine's place in history and culture), after three years of approving that verbiage on the labels of many producers.

Similar reversals happen periodically. We stumbled on another recent reversal after submitting a client's viticultural area petition ourselves. TTB challenged some of the evidence submitted, even though the agency had approved several AVAs previously on the basis of the exact same kind of evidence. What had prompted the change? No regulatory difficulties had arisen from the previous approvals, and no members of the public had complained. It was simply a result of a changing of the guard, bringing a new opinion of what's "good enough" into power.

How Tzu said: Flexibility furthers.

People complain about being boxed in by regulations. Actually, the most binding box is the one circumscribed by your own preconceptions and attachments. Don't box yourself in, by being unwilling to adapt and compromise on how you will achieve your goal. Don't even be too rigid about the goal itself!

We're not recommending abandoning your dreams—just being willing to consider more than one way to skin the cat. For example, a few of our clients over the years have set out to develop private brands and ended up developing small wineries in the process. Each of them was forced to raise their sights due to tied house obstacles which prevented them from holding the type of license typical to custom crushers in California, but which left them free to apply for a winery license due to that state's liberal tied house exceptions. In the end, they all got their brands, and then some!

How Tzu said: When the surf's up, ride the wave.

Busy people OFTEN think they're too busy to follow up with regulators frequently. But in this case, procrastination is false economy. Continuity is the secret of efficient communications. If you wait three weeks to call back you'll have to explain what you need all over again; if you call back in three days, it's easier on both you and the regulator.

How Tzu said: If you want to leave with the prize, don't arrive empty-handed.

This maxim simply restates the wisdom of, "You can't get something for nothing." What is the approval you want worth to you? If it's important, then it more than justifies the effort to provide the regulator with what it takes to give an approval. Here are four tips to maximize your chances:

First, do what you can to make a "yes" easier to justify. That means, do your homework! In most cases, the regulator doesn't have time to do a lot of research to evaluate your unconventional idea or request. And more important, what's their motivation in that scene? You're asking them to risk incurring the disapproval of a superior or setting a precedent they or someone else may regret. They're not going to work hard for that privilege!

However, fabulous results await those who build a good case in their own favor. We succeeded in getting the regulators in one state to permanently reverse a well-established rule when we discovered, by carefully reading their regulations, that the rule purported to interpret federal tied house laws, not state statutes. We simply and respectfully pointed out a discrepancy between the rule and the federal law, and the regulators happily reversed their own regulation. In another situation, we needed regulators to rule on a situation that had never come up before. By presenting them with some carefully chosen hypotheticals, we gave them the confidence to forge a policy that helped our client, and hopefully many other business people in the future.

Second, choose your expectations with care. In every area of life, the spirit of your approach may impact the results; people tend to become who you presume they are. For example, confrontation breeds combat and resistance. Disrespect offends people, and makes them offensive.

On the other hand, you bring out the best in the regulator by approaching them with your need, fully expecting that they will want to help you. We do this quite unabashedly, introducing many a request with, "I have a problem, maybe you can help me." They almost always do a great job at it! When we are pleasant and patient with a regulator, we find that each time we follow up they are happier to talk to us; they spend more time looking into our matter, and helping it along.

Third, presume affinity. Remember, you and the regulators have a lot in common: You want them to say yes, and they want to say yes. It's true! Although their cautious judgments and discouraging statements may hide that fact, everyone—including regulators—wants to be helpful. They want to help others, as much as any human being does. And regulators are just as sensitive as any person to the pain of disappointing someone else.

How do you create affinity? Friendly chit-chat isn't nearly enough. Affinity is pre-developed in advance, before the meeting or the phone call. And in between conversations, you get to improve your affinity in the same way.

How? In your mind. You set the tone for how the relationship will feel, by how you think about the regulator in advance. Walk a mile in their shoes. Understand their challenges. Penetrate the intimidation barrier and feel what's likeable and human about them. You have to try it to believe it, but it works wonders.

Fourth, share the wealth. Regulators don't appreciate just your research. Like all human beings, they thrive on your attention and energy. Being generous with your energy makes the regulator smarter, happier. And of course, being smarter and happier makes it much more likely for them to think outside the box and come up with an answer you'll like.

How Tzu said: It's better to have lost and loved than to lose any other way

No one likes a sore loser. And everyone feels defensive when someone argues with them. So it's easy to see why a disgruntled or argumentative response to disapproval sometimes hurts your cause. On the other hand, defeat gracefully accepted may plant the seeds of future victories.

We've used this principle to good effect many times. We have often been able to convert an early "no" to an eventual "yes," not by challenging the "no," but by taking it in stride and then continuing to talk about the issues. Another variation on this theme is to present a few requests or scenarios, willingly sacrificing the first few on the altar of disapproval, on the theory that a regulator doesn't want to say no to you forever on everything you bring up. If you're building good will even in your losses, they're going to look for a chance to switch from "bad cop" to "good cop" eventually—if you give them enough chances.

The moral of this story

What makes compliance interesting and challenging is not the multiplicity and complexity of the rules, but the number of different people you deal with and depend on, to get the results you want. So, we'll leave you with one final maxim:

How Tzu says: Don't ignore the human factor.

Remember the rules of multiplication: Any negative factor in an equation produces a negative result. So, it doesn't matter how much you know about compliance, and how convincing you think you are. You are still dealing with people and their feelings and impressions. So it not only feels good, it makes real business sense, to keep your interactions with regulators truly positive.