session 1 –fcpa and anti corruption law

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1©2013 Foley & Lardner LLP

Session 1 – FCPA and Anti‐Corruption Law

Thursday, April 25, 2013

©2013 Foley & Lardner LLP

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Presenters

Jeff AtkinPartnerSolar Industry Team – [email protected]

Jaime [email protected]

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Outline

1. FCPA Enforcement Activity2. FCPA Basics

Prohibitions and Essential ElementsCommon Issues and Traps

3. Other Anti‐Corruption Regimes4. Anti‐Corruption Compliance

Company policiesKey issue: Agents, Distributors, and Other Third‐PartiesKey issue: Mergers & AcquisitionsBest Practices and Takeaway


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FCPA ENFORCEMENT ACTIVITY

Source: http://www.gibsondunn.com/publications/pages/2012MidYearFCPAUpdate.aspx

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TOP 10 FCPA‐RELATED MONETARY SETTLEMENTS

Source: http://www.millerchevalier.com/Publications/MillerChevalierPublications?find=71404


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Where the FCPA Enforcement Action Is:

Source: http://www.millerchevalier.com/Publications/MillerChevalierPublications?find=71404

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CORRUPTION PERCEPTION INDEX (CPI) (2012)


2012 CPI Scores and Rankings of Countries Where Energy Projects are Being Developed

Nigeria – score 27, rank 139/174Ecuador – score 32, rank 118/174Dominican Republic – score 32, rank 118/174Mexico – score 34, rank 105/174Colombia – score 36, rank 94/174India – score 36, rank 94/174Peru – score 38, rank 83/174China – score 39, rank 80/174Brazil – score 43, rank 69/174Costa Rica – score 54, rank 48/174Bahamas – score 71, Rank 22/174Chile – score 72, rank 20/174

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FCPA ENFORCEMENTENERGY INDUSTRY

Alstom– In April 2013, the DOJ announced charges against an Alstom sales

representative and Alstom’s former VP of U.S. sales with bribing officials of Indonesia’s state-owned power company to help Alstom win a contract for a Taharan power project. The prosecution is ongoing.

Griffiths Energy– In 2009, Griffiths entered into a consulting contract with, and paid $2

million USD to, a company owned by the wife of an ambassador of Chad, where Griffiths was seeking, and was later awarded, government oil production sharing contracts.

Griffiths has been prosecuted by Canadian authorities under Canadian legislation similar to the FCPA. In January 2013, Griffiths agreed to a USD $9 million fine plus a 15% victim fine surcharge due to the offense’s severity. It remains to be seen whether the SEC or DOJ will also prosecute Griffiths.


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FCPA ENFORCEMENTENERGY INDUSTRY

Data Systems & Solutions, Inc. (“DDS”)– In 2012, the DOJ alleged that between 1999 and 2007, DDS secured service

contracts with a Lithuanian state-owned power plant by bribing power plant officials with cash payments and vacations.

– In June 2012, DDS agreed to pay a $8.82 million USD criminal penalty, among other stipulations.

ABB– From 1997 to 2004, a U.S.-based ABB affiliate operating in Mexico made

multiple cash payments and gifts, including a yacht, a Ferrari, and a Mediterranean vacation, to officials of the Mexican state-owned electric utilities CFE and LyFZ in exchange for contracts worth more than $90 million USD.

The ABB parent company, the ABB affiliate, and the ABB representatives involved in the bribery scheme were all prosecuted. The individuals have faced jail time and monetary fines. The ABB entities paid over USD $22 million in disgorgement and interest, over USD $16.5 million in civil penalties, and over USD $17 million in criminal penalties

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THE BASICS:

The FCPA’s Prohibitions and Essential Elements


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TWO MAIN COMPONENTS:

Anti‐Bribery Provisions

Books and Records and Internal Control Provisions

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ANTI‐BRIBERY PROVISIONS

Apply to:– Domestic concerns (“private” companies, LLC’s, etc., and U.S.

citizens);

– Issuers (basically, “public” companies); and – Any person who, while in the U.S., commits an improper act

Including non‐U.S. citizens

Covers payments made by third parties with “knowledge” that the payment would be used to fund FCPA‐illegal activity

Extra‐territorial jurisdiction


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WHAT IS PROHIBITED?

Paying or offering to pay “anything of value”Directly or indirectly

To a “foreign official,” or to any other person “while knowing” that all or part of the thing of value will be paid or offered to a foreign official

Corruptly

For the purpose of influencing the official in some official act or to secure any improper advantage

In order to “obtain or retain business”

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“ANYTHING OF VALUE”

Examples:Cash or a cash equivalentGiftsTravel expenses and/or payment of personal expensesServicesGolf outings or other entertainmentCharitable donationsMedical treatmentLoansJobs for relatives


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FOREIGN OFFICIAL?

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“FOREIGN OFFICIAL”Any officer or employee of a foreign government or any department, agency, or instrumentality thereof– DOJ interprets instrumentality to include employees of state owned or controlled enterprises (“SOEs”)

– No distinction made as to rank or title

U.S. v. Esquinazi – “foreign official” challenge pending before 11th Circuit Court of Appeals– Conviction premised on bribes paid to employees of Haiti Teleco, a state‐owned telephone utility


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“OBTAIN OR RETAIN BUSINESS”“Business Purpose” Test– Includes payments related to the renewal of contracts, the execution or performance of contracts, or the retention of existing business

Examples from DOJ/SEC:– Winning a contact– Influencing procurement process– Circumventing import rules– Gaining access to non‐public bid tender– Evading taxes or penalties– Influencing enforcement actions or litigation– Obtaining exceptions to regulations– Avoiding contract termination

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EXCEPTIONS & AFFIRMATIVE DEFENSES

Affirmative Defenses– Written local law

Custom is not the same as written laws and regulations

– Facilitating paymentsEmerging “best practice”– prohibition of facilitating payments except where the health and safety of an employee is involved


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Reasonable and bona fide expendituresDirectly related to – The promotion or demonstration of product or

services or – The negotiation, execution or performance of a

contract

Examples:– Travel and expenses to visit company facilities– Travel and expenses for training– Travel and expenses for meetings

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DOJ/SEC List of Safeguards:– Do not select officials who will participate (or use pre‐determined criteria)

– Pay costs directly to vendors– Do not advance funds to participants or pay cash per diems

– Limit expenditures to those necessary and reasonable– Ensure expenditures are transparent on both sides– Do not condition payment of expenses on actions by officials

– Obtain written confirmation that payment is not prohibited by local law

– Accurately record expenses


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PENALTIES FOR VIOLATING ANTI‐BRIBERY PROVISIONS

Criminal Penalties (Knowing/Willful Blindness)– Business Entities: Up to $2 million per violation.– Individuals: Up to $100‚000 and/or receive prison sentences of up to 5 years. – Alternative Fines: U.S. law authorizes alternative maximum fines equal to the

greater of twice the gross gain or twice the gross loss to the extent a criminal offense causes a pecuniary gain or loss.

Civil Penalties– Business Entities & Individuals: Up to $10‚000.– Additional Fines: In an SEC enforcement action‚ the court may impose an

additional fine not to exceed the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation‚ or (ii) a specified dollar limit ranging from $5‚000 to $100‚000 for a natural person and $50‚000 to $500‚000 for business entities.

Disgorgement

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OVERVIEW OF ACCOUNTING AND INTERNAL CONTROLS PROVISIONS

Only apply to “issuers” (publicly traded companies or companies which have reporting requirements with the SEC).Must maintain accurate books and records that reflect in reasonable detail‚ accurately and completely‚ transactions and asset dispositions.Must establish effective systems of internal accounting controls.GAAP standard.Accounting controls apply to foreign affiliates and JV partners depending on the issuer's voting power (discussed below). You don’t need any evidence of a bribe in order for a books and records violation to occur.Unrecorded facilitating payment will violate the books and records provisions of the FCPA even though they qualify under an exemption in the anti-bribery section of the FCPA.


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PENALTIES FOR ACCOUNTING AND INTERNAL CONTROLS VIOLATIONS

Criminal Penalties (Knowing/Willful)– Business Entities: Fines up to $25 million per willful violation.– Individuals: Fines up to $5 million and/or prison sentences of up

to 20 years for willful violations.– Additional Fines: In an SEC enforcement action‚ the court may

impose an additional fine not to exceed the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of theviolation‚ or (ii) a specified dollar limitation ranging from $5‚000 to $100‚000 for a natural person and $50‚000 to $500‚000 for business entities.

Civil Penalties– Business Entities: Penalties of up to $500‚000.– Individuals: Penalties of up to $50‚000.

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COMMON ISSUES: THE PERILS OF HOSTING CUSTOMER VISITS

Lucent (2007)


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CUSTOMER VISITSQuestions to Ask:

Are any of the visitors “foreign officials” under the FCPA’s broad definition of that term?Is the entire trip for the purpose of promoting the company’s products or services or in connection with the execution or performance of a contract? Are the proposed expenses proportionate and reasonable in relation to the company’s business purpose for inviting the foreign officials?How are the foreign official’s expenses being paid? Who within the company is approving the trip? Is that person sensitive to FCPA issues?Are the expenses accurately described and recorded on the company’s books and records?

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COMMON ISSUES: GIFTS, MEALS & ENTERTAINMENT

“A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law.”

‐‐ U.S. SEC and U.S. DOJ FCPA Resource Guide


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“Items of nominal value, such as cab fare, reasonable meals and entertainment expenses, or company promotional items, are unlikely to improperly influence an official, and, as a result, are not, without more, items that have resulted in enforcement action . . . . The larger or more extravagant the gift, however, the more likely it was given with an improper purpose. DOJ and SEC enforcement cases thus have involved single instances of large, extravagant gift giving as well as widespread gifts of smaller items as part of a pattern of bribes.”

‐‐ U.S. SEC and U.S. DOJ, FCPA Resource Guide

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Companies may provide meals and entertainment, if in good faith, without corrupt intent, and with no expectation of a favorMust be directly related to legitimate business purposeMust be reasonable in valueBest practices:– Should be in accordance with generally accepted business standards

– No cash or equivalents– Company personnel should be in attendance– Should be properly documented


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COMMON ISSUES: THIRD‐PARTY INTERMEDIARIES

FCPA expressly prohibits improper payments made through third partiesThe majority of recent enforcement actions have involved improper payments made through third‐partiesRegulators do not need to prove that the third‐party acted on the company’s direct orders or even that a company actually knew the intermediary engaged in prohibited conduct– Most enforcement actions have involved allegations of

actual knowledge, however– Willful blindness constitutes knowledge

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THIRD‐PARTY INTERMEDIARIES

Willful Blindness = Knowledge


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Eli Lilly (2012)– $29 million– Various payments made by agents and distributors in China, Russia, Brazil, Poland

– According to SEC:“Eli Lilly and its subsidiaries possessed a ‘check the box’mentality when it came to third‐party due diligence. Companies can’t simply rely on paper‐thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.”

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Oracle (2012)– $2 million SEC settlement

– India subsidiary and distributors

– NO ALLEGATION OF BRIBES ACTUALLY PAIDJust a claim that “slush fund” could have been used to pay bribes


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Halliburton (2009)– KBR (former sub) part of JV to develop LNG facilities in Nigeria

– JV hired two agents who paid bribes to Nigerian officials

– SEC internal controls/books and records charges against Halliburton

Premised on:– Exercised control and supervision over KBR, which had control over the JV

– Halliburton’s performed inadequate due diligence on agents hired by JV

– Halliburton derived an economic benefit from contracts secured by the JV

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COMMON ISSUES: ENGAGING THIRD PARTIES

Appropriate due diligence inquiry to expose any potential red flagsSuggested due diligence– Risk‐based

Relationship should be memorialized in writing and contract should include:– Anticorruption reps and warranties– Audit rights

Payment mechanism should be transparent and traceable – no cashCommission/payment should be reasonable and customary


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RED FLAGS

In the event a third‐party ends up making an improper payment, a due diligence file that shows a thorough investigation and no red flags (or adequate resolution of red flags) will be the company’s best defense against an enforcement action by the U.S. government, or, at the very least, the best argument for mitigating any fine or penalty.

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THIRD‐PARTY RED FLAGS

Excessive commissions

Unreasonably large discounts

Consulting agreements that include only vaguely described services

Third‐party in different line of business than that for which it was engaged

Third‐party related to or closely tied to government official


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THIRD‐PARTY RED FLAGS

Third‐party became involved at the express request of the foreign official

Third‐party is a shell corporation incorporated in an offshore jurisdiction

Third‐party requests payment to offshore bank accounts

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COMMON ISSUES: CHARITABLE CONTRIBUTIONS

Companies may provide gifts or contributions to charities, if in good faith, without corrupt intent, and with no expectation of a favorEven though payment is not made directly to a government official, if the contribution is urged by official as quid pro quo for business or approval, could be a violationPoland?– Eli Lilly– Schering PloughBest practices:– Due diligence before charitable contributions– Special care where government official has position with

charity– Public disclosure of contribution– Following donation, confirmation that donation used for

intended purpose


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COMMON ISSUES: M&A

Many recent FCPA enforcement actions arose in context of M&A due diligencePfizer (2012)– Importance of pre‐acquisition due diligence

Pharmacia vs. Wyeth: no attribution to Pfizer for Wyeth’s conduct versus full attribution for Pharmacia’s (entirely pre‐acquisition) conductThe difference: Pfizer’s extensive review and its efforts to integrate Wyeth into Pfizer’s internal controls

– Use of a risk‐based approach to due diligence (from the Wyeth transaction)

DOJ’s apparent recognition that companies have limited resources and that extensive due diligence might not always be appropriateReemphasizes the importance of a basic FCPA risk assessment

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COMMON ISSUES: M&A

Due diligence should include:– Evaluation of target’s compliance program

– Evaluation of contractual arrangements with third parties

– Evaluation of contracts

– Evaluation of distributor and joint venture arrangements

– Red flag follow up

Plans to integrate compliance programs


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COMMON ISSUES: M&A

Look beyond the target’s financial statements

The existence of an improper payment – even prior to the effective date of the agreement –can expose the acquiring or partnering company to an enforcement action based upon knowledge and benefit from past payments

DOJ FCPA Opinion Procedure Release No. 08‐01 (Jan. 15, 2008) establishes “best practice” due diligence steps

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BEYOND THE FCPA: CORRUPTION GENERALLY

Travel Act Can Reach Commercial BriberyControl Components Inc. (CCI) – Simultaneous charge under both the FCPA and Travel Act– Travel Act violation based upon violation of California’s

anti‐bribery law – Indictment alleged payment of $1.95 million to officers

and employees of foreign and domestic privately owned companies

– Unclear whether the government will go after violations that are purely to private parties (conduct here included payment of $4.9 million in bribes to state‐owned enterprise), but the possibility is there that even purely private bribes could result in substantial fines and penalties


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BEYOND THE FCPA: CORRUPTION GENERALLY

Bribery can also have non‐FCPA complications– Bribery can violate the mail fraud, wire fraud and RICO statutes

– Depending on how conducted, could violate the False Statement statute

U.S. law isn’t the end of the story– Facilitating payments, even if legal under U.S. law, will violate local law

– Bribery of private parties may violate local lawFor example, Article 164 of the Chinese Criminal Law– Enforcement?

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UK BRIBERY ACT OF 2010

Prohibits: – Active bribery (paying bribes)– Passive bribery (accepting bribes)– Failure of commercial organizations to prevent bribery by “associated persons”

“Relevant commercial organisation”– Incorporated in the UK or under UK law– Corporate entities that carries on a business or part of a business in the UK

– Affirmative defense: “Adequate procedures”


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UK BRIBERY ACT OF 2010

Key Differences with FCPA– Bribery Act explicitly prohibits commercial bribery– No facilitating payments exception– No reasonable promotions exception– “Adequate procedures” as affirmative defense, as opposed to mitigating factor

– No whistleblower incentives– Scope of indirect knowledge: “associated persons”versus knowledge standard

– No books and records provision

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Global Anti‐Corruption Enforcement:Parallel Actions

Global law enforcement agencies working together to investigate and prosecute bribery and corruption charges.

U.S. DOJ recently announced 56 new extradition and mutual legal assistance treaties to bolster international cooperation.

Recent U.S FCPA investigations have included parallel investigations in numerous foreign jurisdictions, including:

– Brazil (Gtech);

– China (Siemens);

– Costa Rica (Alcatel Lucent);

– France (Halliburton, Total SA);

– Germany (Bristol Myers, DaimlerChrysler, Siemens);

– Indonesia (Freeport, Monsanto, Siemens);

– Italy (Immucor, UDI, Siemens);

– Korea (IBM); and

– Nigeria (Halliburton, Siemens).


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ASSESS FCPA RISK

Major point of emphasis by DOJ/SEC:“DOJ and SEC will give meaningful credit to a company that implements in good faith a comprehensive, risk‐based compliance program, even if that program does not prevent an infraction in a low risk area because greater attention and resources have been devoted to a higher risk area”FCPA compliance risk is a combination of– Who (public vs. private customers)– What (large public projects vs. producing widgets)– Where (the country’s corruption reputation)– How (use of third parties)Focus on all variables– Recent FCPA enforcement actions instruct that while

compliance efforts should focus on high‐risk situations, business leaders must be alert to the risks present in all countries in all situations

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FCPA COMPLIANCEKEY COMPLIANCE TOUCHSTONES

Know your customers (any government agencies, any “private” entities owned or controlled by the state).Marketing initiatives (what sort of entertainment or marketing expenses are being incurred).“Go to market” strategies (any use of third‐party agents, distributors).Logistical issues (import/export issues, permits, licenses, certifications).


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FCPA COMPLIANCEBEST PRACTICES

In light of ever increasing government enforcement, companies need to implement and monitor anti‐corruption compliance programs.

Anti‐corruption compliance programs can mitigate exposure.

Effective compliance programs can also act as a defense under the UK Bribery Act and as a mitigating factor for purposes of sentencing under the U.S. sentencing guidelines.

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Takeaway – Our Offer

1. Review existing Compliance Program2. If no program in place, assist company to

prepare and implement Compliance Program

3. Provide training to employees

session 1 –fcpa and anti corruption law

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