Presented by:

Anti-Corruption (FCPA) in the Banking Industry

Presented to:

2014 AML/Fraud Conference

November 7, 2014

Presented by:

PRESENTER

RICHARD MONTES DE OCA•Managing Partner, MDO Partners •Boutique Global Compliance and Ethics Law Firm

•Former AVP and Assistant General Counsel, Royal Caribbean Cruises•Responsible for Launching and Managing Global Compliance Program

•Former Senior Counsel, World Fuel Services • Former Corporate & International Attorney, Holland & Knight •AV Preeminent-Rated Attorney (Corporate, Contracts and International)•University of Miami, JD, magna cum laude•Florida International University, MBA•University of Florida, BA, with honors

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FCPA – History, Guidance, &Enforcement

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20141977

FCPA

34 Signatory Countries

Criminalizes bribery of foreign public officials in international

business transactions

Enforcement has lead to more than 200 convictions, with a

maximum fine of $1.6 billion.

OECD Convention

Whistleblower Bounty Provisions

Industry –Wide Sweeps

Sting Investigations

Transnational Agency Collaboration

Increase in Government Resources (e.g. SEC, DOJ, FBI)

Dodd-Frank Act

Aggressive Cross-Border anti-corruption enforcement.

Significant Anti-Corruption-related legal developments including the

interpretation of the term "instrumentality"

5 SEC FCPA Enforcement Actions (Bio-Rad, Layne Christensen, Smith &

Wesson, Alcoa, and HP).

Continued Enforcements and Prosecutions

20101997

Enacted in 1977 as a response to the Watergate political

scandal

Only covers public bribery (e.g. bribes to non-US government officials

Only extends to active bribery (e.g. offering, promising, or

giving bribes)

No Strict Liability, but “willful blindness” or “deliberate ignorance” may suffice

HISTORY

Presented by:

GUIDANCE

Foreign Corrupt Practices Act (FCPA) • Prohibits giving, offering or promising, either directly or indirectly, of anything of value to a government

official for the purpose of obtaining business or securing any other improper business advantage. • Requires accurate books and records that properly reflect transactions.• Exemption:

• “Facilitating or Expediting payments” part of routine governmental action.

• Affirmative Defenses:• Local law defense,• Reasonable and bona fide business expenditure defense• No liability for payments made in response to extortion or threat of physical harm.

• Additional Provisions – Dodd-Frank Act:• Whistleblower Program (2012)

• Monetary awards to individuals that present original information that leads to enforcement. • Range from 10% - 30% of the monetary sanctions

Presented by:

GUIDANCE

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Banks can be held directly liable for bribes by officers and directors which are often mischaracterized and recorded in accounts as:

• Commissions or royalties;• Consulting fees;• Sales and marketing expenses;• Travels and entertainment expenses;• rebates or discounts; • write-offs; • Intercompany accounts;• Supplier/vendor payments;

Miscellaneous expenses; and • Petty cash withdrawals.

• Banks can be derivatively liable for “third party” actions:

• brokers • sales and marketing agents• vendors• suppliers• consultants• joint venture partners• distributors• resellers• customs agents• accountants, and • law firms

Presented by:

Department of Justice (DOJ)

ENFORCEMENT

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Securities & Exchange Commission (SEC)

Office of the Comptroller of the Currency (OCC)

• Public and Private Jurisdiction

• Only agency allowed to file criminal charges

• The DOJ has 20 full-time FCPA Prosecutors

• Public Company • Files actions in Federal

Court and Administrative Proceedings

• The SEC FCPA Unit has 36 Prosecutors

• Ensures banks and agencies of foreign banks have necessary controls in place and provide the requisite notices to law enforcement to deter and detect money laundering, terrorist financing and other criminal acts

“Anti-corruption prosecutions have been a critical component of the mission of both the SEC and DOJ for decades.”

Federal Bureau of Investigation (FBI)

• Team of special agents in the Washington Field Office, working all FCPA cases

• The FBI is creating an International Contract Corruption Task Force, based in Washington, to help identify violations of the law.

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• Early 2011: the SEC sent letters to 10 financial institutions, since, international banks such as, Lloyds Bank, HSBC, and ING, have responded to inquiries relating to federal money laundering.

• November 2010: the Chief of the SEC’s FCPA Enforcement Unit announced that the Unit would be focused on conducting “industry-wide sweeps,” and stated that “no industry is immune from investigations.”

ENFORCEMENT “[t]oday’s announcement is a wake-up call to anyone in the financial

industry who thinks bribery is the way to get ahead . . .”

(DOJ)

SUBJECT TO THE PROVISIONS OF THE FCPA

SUBJECT TO THE PROVISIONS OF THE FCPA

US INDIVIDUALS AND COMPANIESAnti-Bribery

Provisions

It is unlawful to bribe foreign public officialsIt is unlawful to bribe foreign public officials

Criminal PenaltiesCriminal Penalties

PENALTIES

Companies must keep accurate books and records that properly reflect transactionsCompanies must keep accurate books and records that properly reflect transactions

Accounting Provisions

Criminal PenaltiesCriminal Penalties

Individuals: up to $5 million or twice the fain or loss caused by the accounting violation and imprisonment up to 20 years. Fines cannot be paid by the employer or principle Entities: up to $2 million under the Alternative Fines Act, may be increased to twice the gain or loss resulting from the corrupt payment

Individuals: up to $5 million or twice the fain or loss caused by the accounting violation and imprisonment up to 20 years. Fines cannot be paid by the employer or principle Entities: up to $2 million under the Alternative Fines Act, may be increased to twice the gain or loss resulting from the corrupt payment

Civil PenaltiesCivil Penalties

cannot exceed the greater of (a) the gross amount of the pecuniary gain to the defendant as a result of the violations or (b) a specified dollar limitation that is based on the egregiousness of the violation for:

• Individuals: range between $7,500 to $150,000.• Entities: range between $75,000 to $725,000

cannot exceed the greater of (a) the gross amount of the pecuniary gain to the defendant as a result of the violations or (b) a specified dollar limitation that is based on the egregiousness of the violation for:

• Individuals: range between $7,500 to $150,000.• Entities: range between $75,000 to $725,000

Individuals: up to $250,000 fine and imprisonment for up to 5 years. Fines cannot be paid by the employer or principle Entities: up to $2 million under the Alternative Fines Act, may be increased to twice the gain or loss resulting from the corrupt payment

Individuals: up to $250,000 fine and imprisonment for up to 5 years. Fines cannot be paid by the employer or principle Entities: up to $2 million under the Alternative Fines Act, may be increased to twice the gain or loss resulting from the corrupt paymentCivil PenaltiesCivil Penalties

Individuals: up to $16,000. Fines cannot be paid by the employer or principle Entities: up to $16,000.

Individuals: up to $16,000. Fines cannot be paid by the employer or principle Entities: up to $16,000.

Presented by:

TOP 10 FCPA FINES

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1. Siemens (Germany): $800 million in 2008.

2. KBR / Halliburton (USA): $579 million in 2009.

3. BAE (UK): $400 million in 2010.

4. Total S.A. (France) $398 million in 2013.

5. Alcoa (U.S.) $384 million in 2014.

6. Snamprogetti Netherlands B.V. / ENI S.p.A (Holland/Italy): $365 million in 2010.

7. Technip S.A. (France): $338 million in 2010.

8. JGC Corporation (Japan) $218.8 million in 2011.

9. Daimler AG (Germany): $185 million in 2010.

10. Weatherford International (Switzerland): $152.6 million in 2013.

Source: http://www.fcpablog.com/blog/2014/1/10/alcoa-lands-5th-on-our-top-ten-list.html#sthash.Er6qRfwe.dpuf

Presented by:

BRAZILCOLOMBIA MEXICO• 2012 - Federal Law

Against Corruption in Public Procurement

• Domestic & Foreign Officials

• Whistleblower Website

• Related to Government Contracting

• Fines & Sanctions

• Individuals: $5k-$250k

• Companies: $50k - $10M

• Debarred: 8-10 Years

• 2011 - Anti-Corruption Act

• Criminalizes extortion, active/passive bribery, foreign bribery, political corruption, trading, money laundering

• Administrative, criminal, fiscal sanctions

• Imprisonment: 9-15 Years; Fines: $15k - $30k

• Whistleblower protection, Prohibits Commercial Bribery

• Presidential Anti-Corruption Program

• Online Anti-Corruption Website

• 2013 – Clean Company Act (Law No. 12,846/2013)

• Law extends liability to parent companies, controlled entities, and affiliates

• Extraterritorial reach for Brazilian companies

• In October 2014, the OECD Working Group on Bribery completed its report on Brazil’s implementation of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions,

• 2010 - Bribery Act

• Applies to bribes that: (i) occur in the UK; (ii) occur anywhere in the world if committed by a UK citizen, resident or company; and (iii) occur anywhere in the world if committed by a non-UK company that conducts any part of its business in the UK.

• Prohibits public and commercial bribery

• Prohibits active and passive bribery

• Penalties:

• Maximum of 10 years imprisonment

• unlimited fines;

UNITED KINGDOM

INTERNATIONAL LAWS

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Adopting an EffectiveAnti-Corruption Compliance Program

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Ethical Culture

Training and

Communication

Monitoringand

Auditing

Risk Assessments

Reporting and

Investigations

Policiesand

Procedures

Anti-CorruptionCompliance

Program

COMPLIANCE PROGRAM FRAMEWORK A one-size-fits-all compliance program or a mere “paper

program” is ineffective and insufficient.

Presented By:

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WORLD MAP

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CPI

Element 1: Ethical Culture

Promote an organizational culture that encourages ethical conduct and compliance with the law.

• Tone at the Top – Board, committees and senior management must establish a culture in which corruption is unacceptable.

• Appoint a senior manager (e.g. CCO) and devote adequate resources to develop and oversee the corruption program.

Element 2: Risk AssessmentThoroughly and regularly assess the nature and extent of the risks relating to bribery.

• Understand and stay informed about the bribery risks affecting the banking industry (e.g. Transparency Int’l CPI, compliance publications, trade associations, office visits)

• Actions by Employees, Third Parties, Portfolio Companies

• Tap into existing resources (e.g. internal audit, ERM and investigation reports).

COMPLIANCEPROGRAM

Presented By:

Presented by:

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• The same theory may be used in circumstances when financial institutions’ proprietary trading or private equity arms expose themselves to liability by the actions of portfolio companies, which they exercise a sufficient degree of control over.

• Control – bank owns more than 50% control of the majority vote on the board of directors

PORTFOLIO COMPANIES Parent companies could be held liable for FCPA violations committed by its

subsidiary, through traditional principles of agency relationships.

(DOJ and the SEC)

Presented by:

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Element 3: Policies and Procedures Establish and distribute standards and procedures to prevent and detect criminal and unethical conduct.

• Adopt and Refine the bank’s anti-bribery policy in its Code of Conduct.• Due diligence policies and procedures must cover all parties to a business relationship.• Banks must properly establish third party due diligence practices:

• Reviewing foreign public records;• Speaking with sources familiar with the banking industry;• Checking third-party’s references• Site visit to third-party’s office • Searching media sources regarding third-party; and • Running background on third parties and their principals• FCPA Contract Clause

COMPLIANCE PROGRAM

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• Procedures must be in place to identify red flags involving Third Parties, such as• large and frequent political contributions or requests;• unusual advance or methods of payments;• donations to local charities;• requests for improper or manipulated invoices;• refusal to execute written contracts, or refusals to comply with regulations;• terminations by other companies due to improper conduct;• allegations of improper payments;• requests for commissions greater than the range that is customary or typical within the industry

and region• requests involvement of other third parties who bring no apparent value or whole role the agent

cannot adequately explain

COMPLIANCE PROGRAM “Around 60%-70% of the SEC’s FCPA actions in 2013 involved

third-party intermediaries.”(SEC)

Element 4: Training and Communication

Continuously train and communicate on standards and procedures to ensure comprehension, endorsement, and adherence.

• Develop and implement an action plan to ensure compliance with the FCPA. • Conduct training to all employees on the Code of Ethics and general policies, and provide

specialized FCPA training for relevant employees.

Element 5: Reporting and Investigations

Maintain a mechanism whereby allegations of criminal and unethical conduct may be reported on a confidential and anonymous basis without fear of retaliation.

• When a violation of law or policy is reported, it is important to promptly and thoroughly investigate such reports.

• Investigations procedures should be adopted and followed during internal investigations• Conduct prompt and thorough investigations

Review, communicate and train on policies and procedures regularly.

Incorporate anti-corruption controls into operations.

Encourage and reward employees for reporting.Visit local offices to increase compliance awareness, understand

operations and assess controls Require employee certifications.

COMPLIANCE PROGRAM

Element 6: Monitoring and Auditing

Establish monitoring and review mechanisms to ensure compliance and identify any issues. • Develop a risk-based employee vendor and agent screening process. • Establish, promote and monitor internal compliance hotline (e.g. website, posters, surveys, etc.)

• Maintain a mechanism whereby allegations of criminal and unethical conduct may be reported on a confidential and anonymous basis without fear of retaliation.

• Collaborate with relevant departments (e.g. HR, Supply Chain, Internal Audit, etc.)• Consider external verification or assurance of the compliance program(e.g. Open Compliance and Ethics Group

(OCEG), Ethisphere, public auditing firms, etc.)• Although, many financial institutions already have internal controls anti-money laundering policies in

place these existing policies should be reviewed and reexamined, alongside the bank’s FCPA policies.

COMPLIANCE PROGRAM

Presented by:

Morgan Stanley’s Managing Director in charge of Real Estate Group’s Shanghai office in China:

• charged with evading internal controls by transmitting a multimillion-dollar ownership interest in a Shanghai building to himself, a Canadian lawyer, and a Chinese public official.

• faced five years in prison and maximum fine of $250,000 or twice the gross gain from the offense. He was sentenced to principally nine months imprisonment.

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The DOJ cited Morgan Stanley’s robust Anti-Corruption Compliance Program, which included:

• Training Policies and Procedures• Dedicated Compliance Officers & Anti-

Corruption Specialists• Anti-Corruption/FCPA Notices and Reminders• Annual Certifications• Payment Approval Process• Transactional Due Diligence Efforts

MORGAN STANLEY

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• FCPA and Legislative History• DOJ & SEC Resource Guide to the FCPA (2012)• Very Limited Case Law• Settlements, Non-Prosecution Agreements, and

Deferred Prosecution Agreements• DOJ Advisory Opinions• US Federal Sentencing Guidelines• UK Bribery Act • OECD’s 2009 Anti-Bribery Recommendation and its

Annex II, Good Practice Guidance on Internal Controls, Ethics, and Compliance

• Asia-Pacific Economic Cooperation—Anti-Corruption Code of Conduct for Business;335

• International Chamber of Commerce—ICC Rules on Combating Corruption;336

• Transparency International—Business Principles for Countering Bribery

• United Nations Global Compact—The Ten Principles

• World Bank—Integrity Compliance Guidelines; and

• World Economic Forum—Partnering Against Corruption–Principles for Countering Briber

RESOURCES