ENS forensics anti-corruption breakfast seminar

an overview of what companies must do to ensure compliance to

global and South African anti-corruption legislation

July 2012

objectives?

to provide an overview of:

• the anti-corruption legislative regime

in SA

• dramatic new anti-corruption

compliance requirements contained

in the new Companies Act

regulations

• the key principles of the UK Bribery

Act & differences between UKBA &

FCPA

• to create awareness of critically

important anti-corruption compliance

obligations, including the cost of non-

compliance

international anti-corruption conventions

• Starting in the mid-1990s, a number of international conventions

were signed that required member countries to pass laws

criminalising the bribery of foreign public officials in nearly the

same words as the U.S. Foreign Corrupt Practices Act (“FCPA”)

• Inter-American Convention against Corruption (Organisation of

American States) (1997)

• OECD Convention on Combating Bribery of Foreign Public

Officials in International Business Transactions (1999)

• Council of Europe Criminal and Civil Conventions on Corruption

(2002, 2003)

• African Union Convention Against Corruption (2003)

• UN Convention Against Corruption (2005)

UN Convention against corruption

• Requires each Party to criminalise:

– Bribery of foreign public officials

To prohibit, “when committed intentionally, the promise, offering or

giving to a foreign public official or an official of a public international

organisation, directly or indirectly, of an undue advantage, for the

official himself or herself or another person or entity, in order that the

official act or refrain from acting in the exercise of his or her official

duties, in order to obtain or retain business or other undue

advantage in relation to the conduct of international business”

– Offences in support of corruption (obstruction of justice, money

laundering, or participation as accomplice, assistant or instigator)

• Invites each party to consider criminalising private sector bribery

• SA is a signatory to this convention

the anti – corruption infra structure in SA

• POCA 1998 – Prevention of Organised Crime Act

• PDA 2000 – Protected Disclosures Act

• FICA 2001 – Financial Intelligence Centre Act

• PCCAA 2004 – Prevention and Combating of Corrupt Activities Act

• CPA 2001 – Plea agreements - insertion of Sec 105A into the

Criminal Procedure Act 51/1977

• SCCC – Specialized Commercial Crime Courts - piloted in 1999

• NPA Criminal Justice cluster - Prioritized corruption cases – 100 case

target

POCA

• The Prevention of Organised Crime Act, (POCA) Act 121 of 1998,

introduced asset forfeiture as a deterrent measure in South Africa

• POCA gave the authorities the ammunition to freeze and seize the

proceeds of crime from known offenders, taking the profit element

out of the illicit activities and ironically, depositing the proceeds of

the asset forfeiture activities into the Criminal Assets Recovery

Account, either for reimbursement to victims or for utilisation by the

state in its efforts to fight crime

• POCA also introduced the crime of racketeering with its focus on

organised criminal activities into our legislative regime

• also introduced non drug based money laundering

PDA

• the Protected Disclosures Act (Whistle Blowers Act) Act 26 of 2000,

protects employees from discrimination in circumstances where they

blow the whistle on corruption

• the PDA has numerous shortcomings, which government is looking

at correcting but remains the first invaluable effort to create

legislative protection for whistleblowers

• paper protection

• sad history in SA

• SEC is busy overhauling whistleblower protection legislation in US

• changes in SA are imminent

FICA

• the Financial Intelligence Centre Act (FICA) Act 38 of 2001, our anti-

money laundering initiative, followed soon after, preventing South

Africa from becoming a haven for drug dealers and gangsters

• This legislation imposes an obligation on “accountable institutions”

(lawyers brokers, estate agents, etc) to report suspicious

transactions

• These institutions are also obliged to know their clients so that they

are able to recognise transactions that are inconsistent with the

client’s profile

• The FIC then channels the reports to the

appropriate bodies to investigate or take action

the Prevention & Combating of Corrupt Activities Act (Act

12 of 2004) is the major anti-corruption initiative in SA:

• defines categories of corrupt activities

• creates reporting obligation if you know or suspect acts of

corruption, fraud, theft, extortion, forgery & uttering

• prohibits cross border acts of corruption (extra territorial jurisdiction

for SA courts)

• provides a black list for companies convicted of corruption

The reporting obligation is set out in Section 34 – any person who knows,

ought reasonably to have known, or suspects that an act of corruption, fraud,

theft, extortion, forgery or uttering has been committed, where value

exceeds R100,000.00, it is a criminal offence if you fail to report to SA Police

Services

criminal justice initiatives

• plea bargaining was introduced by a 2001 amendment to the

Criminal Procedure Act 51 of 1977 – insertion of Section 105A which

allows a prosecutor and an accused to enter into a plea and

sentence agreement

• in the into the criminal justice system to address the backlog of

cases particularly in white collar crime which usually took years to

complete

• In terms of sentencing guidelines – where the value involved

exceeds R500, 000.00 a mandatory 15 year jail term is applicable,

however, this long term imprisonment is negotiated into a reduced

sentence in exchange for co-operation, typically an effective five

year term is imposed where several million Rands are involved in

the > one million category often correctional supervision is imposed

the specialized commercial crime unit

• SCCU - dedicated commercial crime courts established in all of the

major centres to address a declining conviction rate in white collar

crime matters have been a great success

• These courts are staffed by expert prosecutors from both the private

and public sectors and are presided over by magistrates and judges

who have sufficient white collar crime expertise to properly

understand the often complex fraud and corruption cases

• The conviction rate in these courts has consistently remained higher

than 90% which is indicative of the success of this initiative

• The pilot project partnered dept of justice, saps and business

against crime - first one in Pretoria 1999

the latest anti-corruption weapon in South Africa

- Section 43 of the regulations to the companies act requires the

establishment of a social and ethics committee

applies to:

• every state owned company

• every listed public company

• any other company that has in two of the previous 5 years scored

more than 500 points in relation to reg 26(2)

score is determined by one point per average employee number, -

one point per every R1 million in third party liability, - one point for

every million in t/o and - one point for every person with

direct/indirect beneficial interest in issued securities, and then for

NPO’s – one point per member or per association that is a member

Section 43 of the 2011 regs to the Companies Act

The Social and ethics committee of the company shall monitor the

company’s progress and standing regarding:

• the implementation of the OECD recommendations on preventing

corruption:

– Not offer, promise or give undue pecuniary or other advantage to public

officials or the employees of business partners.

– Develop and adopt adequate internal controls, ethics and compliance

programmes or measures for preventing and detecting bribery,

developed on the basis of a risk assessment addressing the individual

circumstances of an enterprise, in particular the bribery risks facing the

enterprise (such as its geographical and industrial sector of operation)

– Prohibit and discourage facilitation payments

recommendations contd

• Perform due diligence on agents and intermediaries

• Enhance the transparency of their activities in the fight against

bribery, bribe solicitation and extortion

• Promote employee awareness of and compliance with company

policies and internal controls, ethics and compliance programmes or

measures against bribery, bribe solicitation and extortion

• not make political donations

The committee must ensure companies adhere to UN Global compact

principles – Principle 10 is reducing corruption

the two most radical sets of anti-corruption legislation

United States Foreign Corrupt Practices Act 1977 (FCPA)

• 2008 – 11 companies paid $890 million

• 2009 - 11 companies paid $644 million

• 2010 - 23 companies paid $1.8 billion

• 2011 – slow year - fifteen companies settled FCPA enforcement actions by paying a total of $ 508.6 million

United Kingdom Bribery Act

2010 (effective July 2011)

• set to follow US example - pre –

UKBA, SFO setting huge fines

• currently restructuring under

new head – David Green QC

• it will take a few years for the

SFO to get enforcement into

gear

• first FCPA prosecutions only

took place in 1995

The Foreign Corrupt Practices Act of 1977 (FCPA)

The FCPA is a US Federal law which focuses on two main provisions:

• anti-bribery - the offer, promise or provision of anything of value to a

foreign official, either directly or indirectly, for the purpose of

influencing that official so as to obtain or retain business or other

advantage

• accounting requirements - applicable to companies required to file

periodic reports with the U.S. Securities Exchange Commission

(SEC), such companies are required to 1) maintain a system of

internal accounting controls to ensure accuracy of the books and

records to prevent illegal activity and 2) maintain accurate and

detailed books and records

direct parent company involvement not required

• DOJ & SEC will prosecute or charge parent companies based on

the conduct of far removed foreign subsidiaries and even in

absence alleged knowledge or direct involvement

• companies must ensure that their anti-corruption compliance

procedures are extended throughout their corporate structure and

are extended quickly to newly acquired subsidiaries

• foreign subsidiaries are treated as agents of the parent

• this has made enhanced anti-bribery due diligence a pre-requisite

for large corporates doing business in Africa

• paper procedures are not enough

increased international co-operation between anti-

corruption regulators

• BAES

• Siemens

• Imnospec

• Alcatel Lucent

Above settlements and on-going Hewlett Packard all involved

international co-operation between US and European countries

Regulators are talking to each other on an almost daily basis

the cost of FCPA non compliance 2010-$1,8 billion

• $1,6 billion combined US & German fines against Siemens

• $579 million KBR/Halliburton settlement

• $400 million BAES

• $365 million Snamprogetti/ENI

• $185 million Daimler

• $137 million Alcatel Lucent

includes profit disgorgement - as in local comp commission matters

and an increasing number of individuals prosecuted

the cost of FCPA non compliance – 2010 contd

• 22 Companies resolved FCPA cases

• Total $1.8 billion paid in fines to DOJ & SEC

• 8 out of the top 10 largest company fines are non U.S. companies

• 53 individuals were indicted, tried, or sentenced—the longest

sentence was imposed (7 years, but 2011 - 15 years)

• 72 Companies have disclosed through SEC filings that they are

undergoing FCPA-related investigations – Alcoa, China Northeast

Petroleum Corp, Golden Minerals Company, Marathon Oil

Corporation, Statoil Hydro ASA

cost of non - compliance 2011 - $508,6 million

• Aon - (Costa Rica, Egypt, Vietnam, Indonesia, the United Arab

Emirates, Myanmar, and Bangladesh) - $16.2 million

• Johnson & Johnson (Greece, Poland, Romania, UN food for oil

programme) - $70 million

• JGC Nigeria - $218.8 million

• Bridgestone (Corporation Mexico) - $28 million

• Converse Technology (Greece) - $2.8 million

• Diageo plc (India, Thailand, South Korea) - $16.4 million

• IBM (China) - $10 million

• Armor Holdings (UN Contracts)- $16 million

• Ball Corporation (Argentina) - $300,000

the UK Bribery Act

• UKBA of 2010, which came into effect on 1 July 2011 is the most

dramatic change to the global corruption environment since the

introduction of FCPA more than 25 years ago

• for years the US was the only country that aggressively enforced

anti-bribery but the UKBA threatens to overtake the FCPA as the

most aggressive and far reaching anti-bribery statute

• enforcement has never been as aggressively pursued as it is at

present and now UK has joined the anti-graft war

• there are more and more investigations around the world, higher

penalties and more multilateral cooperation among countries & anti-

corruption compliance has become a focal point in board room

discussions across the globe

The UKBA

• The UK Bribery Act 2010 is a lot more thorough and repeals all

previous UK statutory and common law provisions relating to

bribery, replacing them with the crimes of

– bribery,

– being bribed,

– the bribery of foreign public officials and importantly for SA

organisations with links to the UK)

– the introduction of a new strict liability corporate offence:

“the failure of a commercial organisation to prevent bribery

on its behalf”

– reasonable and proportionate corporate hospitality is permitted

the UKBA

• The new Act is broad and applies to "ordinary residents in the UK”

and “relevant commercial organisations” i.e. UK partnerships, UK

incorporated companies as well as entities that “carry on business

or part of a business in the UK” regardless of where they are

incorporated or registered.

• It is important for applicable SA companies to understand that under

this new Act they may be charged with the offence of failing to

prevent bribery on their behalf through their business dealings and

links with the UK.

• provides strict liability for “associated persons” who pay bribes on

behalf of co – includes employees, agents, subsidiaries, and even

subcontractors and suppliers

more specifically the UKBA contains

• two general offences covering the offering, promising or giving of an

advantage, and requesting, agreeing to receive or accepting of an

advantage, covering both active and passive bribery and applies to

individuals and corporate bodies in the UK and covers bribes using

agents or intermediaries paid anywhere in the world

• the distinct offence of bribery of a foreign public official;

• the new offence of failure by a commercial organisation to prevent a

bribe being paid for or on its behalf

(note that it may be a defence if the organisation has “adequate

procedures” in place to prevent bribery based on a balance of

probabilities standard, with consideration to the company’s size,

type of industry it operates in, the risk of corruption in its markets

and also how actively the business fosters a culture of compliance).

Who are government officials?

Government Officials require special scrutiny:

• Officers, employees, and people acting on behalf of

– a government at any level

– a government-controlled company

– a public international organisation (e.g., World Bank or the OECD)

• Any political party, party official, candidate

• Anyone performing duties in a position created by custom or

convention (e.g., some royal family members or tribal leaders, or a

person exercising public functions in a country where no lawful

authority exists)

the adequate procedures defence

• In its Guidance notes on the new Act the Ministry of Justice states

that the objective of the Act is not to bring the full force of the

criminal law to bear upon well run commercial organisations that

experience an isolated incident of bribery on their behalf

• consequently - there is a defence if the organisation has “adequate

procedures” in place to prevent bribery - recognises the fact that no

bribery prevention regime will be capable of preventing bribery at all

times

• the guidelines set out six non prescriptive fundamental principles

that commercial organisations should consider when wishing to

prevent bribery being committed on their behalf

the six principles - (what you have to do to have a defence)

• Proportionate procedures - A commercial organisation’s procedures

to prevent bribery by persons associated with it are proportionate to

the bribery risks it faces and to the nature, scale and complexity of the

commercial organisation’s activities

• Top level commitment – Management tone will be critical. The top-

level management of a commercial organisation (be it a board of

directors, the owners or any other equivalent body or person) should

be committed to preventing bribery by persons associated with it

• Risk assessment - The commercial organisation assesses the nature

and extent of its exposure to potential external and internal risks of

bribery on its behalf by persons associated with it

the six principles contd

• Due diligence - The commercial organisation applies due diligence

procedures, taking a proportionate and risk based approach, in

respect of persons who perform or will perform services for or on

behalf of the organisation, in order to mitigate identified bribery risks.

• Communication (including training) - The commercial organisation

seeks to ensure that its bribery prevention policies and procedures

are embedded and understood throughout the organisation through

internal and external communication, including training, that is

proportionate to the risks it faces.

• Monitoring and review - The commercial organisation monitors and

reviews procedures designed to prevent bribery by persons

associated with it and makes improvements where necessary.

facilitation payments are criminalized by UKBA

• offence of failure to prevent bribery applies to non UK companies that

“carry on a business, or any part of a business in any part of the UK”

• and importantly – it criminalizes facilitation payments (which have

always been illegal in SA)

• MOJ on facilitation payments “exemptions create artificial distinctions

that are difficult to enforce, undermine corporate anti-bribery bribery

procedures, perpetuate an existing culture of bribery and have the

potential to be abused”

• The choice may boil down to making the payment or not doing

business in a region at all (companies who gain a competitive

advantage by paying facilitation payments as opposed to those who

adopt a zero facilitation payment approach will be targeted)

• Health and safety payments are OK if imminent threat to wellbeing!

generally appropriate behaviour

• Any gift, meal, entertainment, travel or anything else of value offered,

promised or given to anyone must meet the following criteria:

1. Not given to influence or reward action/inaction

When deciding, consider all of the gifts, meals, entertainment and travel

provided by the Company to the recipient in the past six months

2. Serves only a legitimate business purpose

3. Will not cause embarrassment to the Company (newspaper test)

4. Appropriate in value and nature considering local law and custom, the position

of the recipient, and circumstances

5. Cant use agent or intermediary to do what you are prohibited from doing

anti-bribery/corruption due diligence

anti-bribery red flag reports should identify corruption risks

• government officials, including former govt officials

• PEP’s

• adverse anti-bribery histories

• corporate affiliations

• sanctions lists

• watch lists

• adverse media

Worldcheck, Thompson Reuters, Dow Jones, credit bureaus, etc

conclusion

• all companies should be taking steps to reduce corruption, it is good

governance and the right thing to do, but...

• it is also a companies act requirement for all state owned and listed

companies as well a large unlisted co’s that meet criteria

• if you have operations in UK or US or are listed in those jurisdictions you

have to comply - the cost of non-compliance can destroy your business

(OECD recommendations similar to regs)

• the regulators will find ways to found jurisdiction & africa is a target

• the anti-corruption compliance principles are a defence

• get your procedures in place and do due diligence on business partners

agents & intermediaries – you are accountable for their actions

• talk to ENS forensics

questions

cases studies

• Large retailer – 2 security managers on the adjudication panel –

specialist advisors – R640k in kickbacks

– plea agreement – fine &suspended sentence

• German motor car manufacturer – head of procurement

– Harley Davidson

– new 4X4

– home renovations

– matter on SCCU court roll

• Hillstar vehicle part scam – 10 year jail sentences for 3 kingpins

thank you

tel +2721 410 2553

cell 082 820 1036

spowell@ens.co.za