CFCS Examination Preparation Series
February 24, 2014

Part 1:
Financial Crime Commonalities
Money Laundering
Ethics
Inter...
Brian Kindle
Executive Director
Association of Certified Financial Crime Specialists
Miami, FL
Charles A. Intriago
President and Founder
Association of Certified Financial Crime Specialists
Miami, FL
Certification | News
Guidance | Training | Networking
Global Private and Public Sector Community
CFCS Certification
The Mark of Knowledge and Skill
The Designation the Times Demand
What the CFCS Certification is
• Universal and not based on the laws or regulations
of any country
• Allows diverse profes...
Construction of CFCS Certification
• Eight month process
– Identification of Job Tasks
– Worldwide survey
– Writing of exa...
Demand for CFCS Certification
• More than 1,000 professionals in 64 countries
have earned CFCS certification, or registere...
CFCS Exam Study Aids
• An extensive 347-page Exam Study
Manual, regularly revised and updated
• Live Online Exam Training ...
About the Exam
• 145 scenario based, four choice, multiple
choice questions
• Four hour exam session with no breaks, at on...
Preparation Suggestions
• Recommended three weeks of study, if you commit 6
– 8 hours a week
• Review manual in detail, in...
CFCS Examination Preparation Series
February 24, 2014

Financial Crime
Commonalities
Defining Financial Crime and its Permutations
• Crimes that have money or economic advantage as goal
• Non-violent action ...
The Financial Crime Spectrum
• Money Laundering
• Fraud
• Corruption
• Tax evasion
•Terrorist financing
•Asset recovery
• ...
Globalization of Financial Crime
• FCPA, UK Bribery Act, GAC crackdown
• FATCA, IGAs, multinational tax enforcement
• OECD...
Technology and Financial Crime
• Identity theft, data breaches, other cybercrimes
• Compliance and enforcement technology-...
Commonalities of All Financial Crimes
• Require money laundering
• Require a financial institution
• Result in tax evasion...
Benefits of Convergence


Regulatory expectations, emerging best practice



Government agencies doing it



Leveraging...
Practical Considerations on Convergence


A single financial crime job family



Sharing best practices



Merge organi...
CFCS Examination Preparation Series
February 24, 2014

Money Laundering
Overview and Definition
• Actions or conduct designed to conceal
source, movement, control or ownership of money
illegally...
Stages of Money Laundering
• Placement
• First step in the process
• Infusion of criminal proceeds into traditional or non...
Stages of Money Laundering
• Layering
• Separates criminal proceeds from source through layers of
transactions
• Often inv...
Stages of Money Laundering
• Integration
• Puts laundered proceeds into legitimate economy to appear
legitimately derived,...
AML Compliance Programs
• Obviously better to prevent illicit funds from entering financial
system than chasing them after...
Characteristics and Indicators of Money Laundering
• Red flags are situation-specific, depend on type of
organization, cus...
Characteristics and Indicators of Money Laundering
Potential red flags
• Account activity inconsistent
with customer profi...
Money Laundering Methods and Vehicles
Financial Institutions, Intermediaries
and Other Entities
•
•
•
•
•
•
•
•

Correspon...
Money Laundering Methods and Vehicles

Financial Vehicles and Value Transfer Systems

•
•
•
•
•
•

International Trade Pri...
Money Laundering Methods and Vehicles

Structures to Conceal Beneficial Ownership

•
•
•
•
•
•

Shell Companies
Shelf Comp...
Money Laundering and Beneficial Ownership
• Determining “ultimate beneficial ownership” is
persistent issue in AML field
•...
Money Laundering Trends and Technologies
• Money laundering risks in new technologies
• Mobile payments
• Digital currenci...
Key Lessons
• Money laundering a constant element of all financial
crimes; each has money laundering nexus
• Unraveling co...
Practice Question
A compliance officer at a major insurance company has recently
noticed a pattern of potentially suspicio...
Practice Question
A. The customer often requests that refunds be made by wire
transfer to banks outside of the country.
B....
Review Question
You are an AML officer at a local bank, which holds accounts for a variety of
businesses in your region. M...
Practice Question
A. The restaurant makes large cash deposits into its account
biweekly from June until early September.
B...
CFCS Examination Preparation Series
February 24, 2014

Ethics
Overview
•

There is no one accepted international standard

•

Ethical standards for different professions and
organizati...
Duties to Client
• Financial crime specialist owes highest duty of
honesty, transparency and professionalism to
constituen...
Conflicts of Interest
• Take variety of forms – personal interests, current
and past clients, multiple clients
• Maintaini...
Conflicts of Interest
• Organizations should screen for conflicts of interest
at the start of relationships:
• Assess serv...
Conflicts of Interest
• Conflicts should be recognized early in relationship
• If not, timely response is required, which ...
Data and Privacy Concerns
• Financial sector professionals often have access to
sensitive financial, personal information
...
Ethics Policies and Procedures
• Code of ethics

• Employee training, ethics policies
• Confidential reporting, escalation...
Key Lessons
• Acting in client’s best interests guides ethical
behavior
• Information barriers are essential safeguard at
...
Review Question
•

What should be one element of an organization’s
ethics policies?

A. Senior management approval for all...
CFCS Examination Preparation Series
February 24, 2014

International
Standards
Overview
• Combating financial crime is an international and
cooperative affair
• Financial crime is global phenomenon, re...
United Nations
• UN Security Council Resolutions
– Sanctions programs

• United Nations Convention Against Corruption

50
UNODC
• IMOLIN database
–Legal library of AML and related laws
–https://www.imolin.org/
Transparency International
• Anti-corruption NGO with over 100 chapters
worldwide
• Provides research, analysis and report...
Corruption Perceptions Index

53
OECD
• OECD Anti-bribery Convention
• Initiatives related to:
– Anti-money laundering
– Tax fairness and sharing
• Databas...
FATF
• Outgrowth of OECD
• Formerly 40 + 9 Recommendations, now 40
Recommendations
• Sets standards for AML cooperation am...
World Bank
• Stolen Asset Recovery Initiative (StAR)
• http://star.worldbank.org/star/

• Doing Business Reports
– Databas...
Basel Committee
• Establishes principles relating to banking
supervision
• http://www.bis.org/bcbs/
• Basel III Accords
• ...
Wolfsberg Group
• Group of largest international banks
– Set standards for private banking, correspondent
banking relation...
EGMONT Group
• Organizations of FIUs meeting standards
• Provides cooperation between FIUs

59
INTERPOL
• Cooperative effort among police of countries
• Issue Notices to members that share
information, provide warning...
FATF-style Regional Bodies
• Modeled after FATF on regional basis
• APGML
• Others

• Conduct peer reviews
National Laws with International Effect
• US:
• USA Patriot Act
• FCPA
• FATCA
• UK:
• UK Bribery Act
• EU:

• Directives
...
Key Lessons
• May not be used on day-to-day basis, but
international standards shape public and
private efforts
• Internat...
Review Question
• What organization would likely provide the most
useful sources of information for assessing
corruption r...
CFCS Examination Preparation Series
February 24, 2014

Global
Anti-Corruption
Overview
• Corruption has many definitions, takes many forms
• “Grand” corruption
• Petty corruption
• Commercial bribery ...
What is a Corrupt Payment?
• Bribe or corrupt “payment” does not have to be made in cash

• Made from “payor” to recipient...
Methods to Make and Conceal Corrupt Payments
•
•
•
•
•
•
•

Gifts, travel and entertainment expenses
Charitable contributi...
Red Flags of Corrupt Payments
•

Records of fee payments to a third party are significantly higher
than other third partie...
Red Flags of Corrupt Payments
•

Invoices from companies or third parties that are vaguely
worded or do not clearly descri...
NGOs and Anti-Corruption Advocacy
• Non-governmental organizations, with and without backing of
national governments, have...
What Is the Foreign Corrupt Practices Act?
• US law enacted in 1977
• Two areas
- Anti-bribery provision
- Books and recor...
Who the FCPA Covers
• Any issuer under US securities laws
• Domestic or foreign public companies registered
required to fi...
FCPA Anti-Bribery Provision
•

Prohibits corruptly making, offering or
promising to make a payment, gift, or anything
of v...
FCPA Enforcement
FCPA Enforcement
Who Is A Foreign Official?
•
•
•
•

•
•
•

Very broadly defined
Not limited to high-level officials
Includes people acting...
Books and Records Provisions
• Only applicable to issuers under US securities laws
-BUT: Should still be part of robust co...
UK Bribery Act
• Enacted in 2010, effective July 2011

• Goes beyond FCPA in enforcement scope, strictness
• Covers any UK...
Provisions of UK Bribery Act
• Blanket prohibition on bribing any person, public or
private
• Specific provision criminali...
Anti-Corruption Compliance
US, UK have provided guidance, along with many public and
private-sector organizations. Best pr...
Anti-Corruption Compliance
• Procedures for confidential reporting of corruption
violations and internal investigation
• U...
Third Parties
• Managing third-party relationships is critical for FCPA, anticorruption compliance
• Three steps to retain...
Key Lessons
• Corrupt payments are increasingly made through complex
channels – not just stacks of cash and a bag man
• Th...
Practice Question
Global Widget Co. recently acquired a local company in Benistan, a country with a high
level of state in...
Practice Question
A. Global Widget did not include its distributors in Benistan when it conducted
its anti-corruption due ...
Your Questions
Thank you for attending
Next Session is Wednesday,
February 26, 12:30 PM ET
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Commonalities, money laundering, ethics, international standards, gac 2 24-14

  1. 1. CFCS Examination Preparation Series February 24, 2014 Part 1: Financial Crime Commonalities Money Laundering Ethics International Standards Global Anti-Corruption Presented By Charles Intriago Brian Kindle
  2. 2. Brian Kindle Executive Director Association of Certified Financial Crime Specialists Miami, FL
  3. 3. Charles A. Intriago President and Founder Association of Certified Financial Crime Specialists Miami, FL
  4. 4. Certification | News Guidance | Training | Networking Global Private and Public Sector Community
  5. 5. CFCS Certification The Mark of Knowledge and Skill The Designation the Times Demand
  6. 6. What the CFCS Certification is • Universal and not based on the laws or regulations of any country • Allows diverse professionals to demonstrate skill and knowledge across multiple fields • Designed for private and public sector specialists • Promotes career growth, better jobs and pay, confidence
  7. 7. Construction of CFCS Certification • Eight month process – Identification of Job Tasks – Worldwide survey – Writing of exam items based on job task and survey findings – Detailed review and selection of items by 60 experts and psychometricians • Experienced ACFCS staff that has built 3 prior certifications
  8. 8. Demand for CFCS Certification • More than 1,000 professionals in 64 countries have earned CFCS certification, or registered for it, since its release in late May 2013 • 15 global institutions and organizations have purchased certifications in bulk numbers for their staffs
  9. 9. CFCS Exam Study Aids • An extensive 347-page Exam Study Manual, regularly revised and updated • Live Online Exam Training Course and prerecorded versions on acfcs.org • Topic specific online training courses now available on crucial subjects, such as – The US Foreign Corrupt Practices Act – The Foreign Account Tax Compliance Act (FATCA)
  10. 10. About the Exam • 145 scenario based, four choice, multiple choice questions • Four hour exam session with no breaks, at one of over 730 testing centers or online proctored • Passing rate is 68% • Results given immediately
  11. 11. Preparation Suggestions • Recommended three weeks of study, if you commit 6 – 8 hours a week • Review manual in detail, including referenced materials in appendix • Prepare based on your own strengths and weaknesses • Exam based on best practices, not what particular organizations do
  12. 12. CFCS Examination Preparation Series February 24, 2014 Financial Crime Commonalities
  13. 13. Defining Financial Crime and its Permutations • Crimes that have money or economic advantage as goal • Non-violent action resulting in unlawful taking, moving or disguising of money or other value by artifice, corruption or deception for benefit of perpetrator or another • ACFCS does not include profit-motivated crimes, like drug and human trafficking at their source • But, nearly all criminals become ‘financial criminal’ when they possess or control the criminal proceeds
  14. 14. The Financial Crime Spectrum • Money Laundering • Fraud • Corruption • Tax evasion •Terrorist financing •Asset recovery • Sanctions • Compliance • Enforcement
  15. 15. Globalization of Financial Crime • FCPA, UK Bribery Act, GAC crackdown • FATCA, IGAs, multinational tax enforcement • OECD call for automatic financial account data sharing •Global push against secrecy havens •G20 call for greater financial transparency, cooperation •FATF’s changing standards pointing to convergence
  16. 16. Technology and Financial Crime • Identity theft, data breaches, other cybercrimes • Compliance and enforcement technology-driven • Data analytics in transaction monitoring, investigations, customer due diligence • Data security grows in importance for public, private sectors
  17. 17. Commonalities of All Financial Crimes • Require money laundering • Require a financial institution • Result in tax evasion • Have interface with a government agency • Create necessity to recover assets • Often involve multiple countries • Often involve public or private corruption
  18. 18. Benefits of Convergence  Regulatory expectations, emerging best practice  Government agencies doing it  Leveraging data, systems, tools to access and study data  Common case management system  Helps manage stakeholder interests, expectations  Can produce better SARs  All financial crime cases have AML component  Many cases involve complicit employees; security, HR  Broader career choices for staffs of converged units 18
  19. 19. Practical Considerations on Convergence  A single financial crime job family  Sharing best practices  Merge organizations or just work together?  History and culture clash  Skills – some units have skills others lack  Managing internal stakeholders’ expectations  Managing external stakeholders’ expectations 19
  20. 20. CFCS Examination Preparation Series February 24, 2014 Money Laundering
  21. 21. Overview and Definition • Actions or conduct designed to conceal source, movement, control or ownership of money illegally derived • Movement of money derived through legitimate means, but which is intended or destined to further a crime • Common element of all financial crimes 21
  22. 22. Stages of Money Laundering • Placement • First step in the process • Infusion of criminal proceeds into traditional or nontraditional financial institutions • Typically most vulnerable to detection at this point • Moving assets away from their source • Structured deposits • Changing currency into other financial instruments • Using non-bank institutions, like casinos • Complicity of banks, brokers or other institutions 22
  23. 23. Stages of Money Laundering • Layering • Separates criminal proceeds from source through layers of transactions • Often involves multiple participants and entities, like shell corporations, cross-border transactions • More layers, more difficult it is to trace funds to perpetrator • Wire transfers • Asset movement among entities perpetrator controls • Purchasing multiple financial instruments 23
  24. 24. Stages of Money Laundering • Integration • Puts laundered proceeds into legitimate economy to appear legitimately derived, allowing funds to return to financial criminal • Makes it difficult to distinguish legitimate, illegitimate funds • Detecting integration often requires informant, undercover agent, forensic accounting. Examples: • Real estate investments • Trade-based money laundering • Loans, business arrangements among complicit entities 24
  25. 25. AML Compliance Programs • Obviously better to prevent illicit funds from entering financial system than chasing them after the fact • Key is robust anti-money laundering programs: • Customer due diligence measures, including ongoing due diligence • Customer profiling and risk assessment • Automated transaction monitoring systems • Customer screening • Investigation of suspicious or atypical customer transactions and behavior • Enhanced due diligence procedures for higher-risk customers • Will be described in more detail in later section 25
  26. 26. Characteristics and Indicators of Money Laundering • Red flags are situation-specific, depend on type of organization, customer and scenario • Key is to understand customer’s behavior, source of funds to establish “normal” behavior • Create customer profile, compare activity, transactions against expectations and peer group • Good KYC and customer due diligence programs, monitoring essential for detecting laundering 26
  27. 27. Characteristics and Indicators of Money Laundering Potential red flags • Account activity inconsistent with customer profile • Account operated by third party • Funds transfers from/to tax haven • Funds transfers to offshore jurisdictions with no rationale • Large cash transactions over short period • Multiple deposits to account by different people • Multiple transactions on same day from different geographic locations • Many large deposits by ATM • Same home address for funds transfers by different people • Structuring of transactions • Variations in spelling of names, addresses • Withdrawing all or most funds in short period 27
  28. 28. Money Laundering Methods and Vehicles Financial Institutions, Intermediaries and Other Entities • • • • • • • • Correspondent Accounts Private Banking Securities Brokers Insurance Real Estate Agents Precious Metal Dealers Casinos Gatekeepers: Lawyers, Accountants, Auditors, Notaries, Others 28
  29. 29. Money Laundering Methods and Vehicles Financial Vehicles and Value Transfer Systems • • • • • • International Trade Price Manipulation Prepaid Cards Mobile Money Credit Facilities and Lending Black Market Peso Exchange Hawala 29
  30. 30. Money Laundering Methods and Vehicles Structures to Conceal Beneficial Ownership • • • • • • Shell Companies Shelf Companies Trusts Bearer Bonds and Securities Nonprofits, Charities and Foundations Fronts and Nominees 30
  31. 31. Money Laundering and Beneficial Ownership • Determining “ultimate beneficial ownership” is persistent issue in AML field • Corporate registries are one key source • Business data providers, open source intelligence can also be useful • Increasing regulatory scrutiny, attention being focused on the issue 31
  32. 32. Money Laundering Trends and Technologies • Money laundering risks in new technologies • Mobile payments • Digital currencies • Virtual worlds • Online banking and securities trading • Money laundering schemes becoming more complex • Facilitated by many institutions and intermediaries, including company formation agents 32
  33. 33. Key Lessons • Money laundering a constant element of all financial crimes; each has money laundering nexus • Unraveling complex corporate structures, determining beneficial ownership is key to due diligence, investigations • AML compliance relies heavily on customer profile, risk assessment, expected transactions and activity • “Three stages” are useful way to frame, analyze suspicious activity 33
  34. 34. Practice Question A compliance officer at a major insurance company has recently noticed a pattern of potentially suspicious transactions from a longtime customer. The customer is employed in a consulting position that requires her to travel internationally on an unpredictable schedule and she often resides overseas for extended periods. The customer has several properties insured with the company for large amounts. In the past three years, she has overpaid her premiums numerous times and then requested a refund be issued. Concerned that the customer may be laundering funds through the overpayment of premiums, the officer is investigating the transactions. Which fact would BEST indicate money laundering may be taking place? 34
  35. 35. Practice Question A. The customer often requests that refunds be made by wire transfer to banks outside of the country. B. The customer makes the overpayments at different times of the year and in varying amounts. C. The customer has recently taken out a sizeable new insurance policy on a commercial property with your company. D. The customer has requested that refunds on excess premiums be made to an offshore corporation 35
  36. 36. Review Question You are an AML officer at a local bank, which holds accounts for a variety of businesses in your region. Most businesses are tied to the tourism and hospitality industry, as the region is a major vacation destination during the summer months. Many accountholders are small businesses that deal primarily in cash. You are investigating an alert produced by your transaction monitoring system on an account held by a local, family-owned restaurant located near one of the largest tourist resorts in the area. After reviewing KYC information on the account, you determine the family lives in a neighboring country. Upon reviewing the account’s activity, you learn the following information. Which fact best supports the possibility that the restaurant account may be used for money laundering? 36
  37. 37. Practice Question A. The restaurant makes large cash deposits into its account biweekly from June until early September. B. The account shows a pattern of funds transfers each month to an account held at a bank in a neighboring country. C. The restaurant’s account shows consistent deposit activity throughout the calendar year. D. The restaurant’s cash deposits were made through a combination of counter and ATM deposits. 37
  38. 38. CFCS Examination Preparation Series February 24, 2014 Ethics
  39. 39. Overview • There is no one accepted international standard • Ethical standards for different professions and organizations – compliance, regulation, enforcement, law, investiga tion, etc. • Financial crime professionals confront numerous ethical risks • “If you have to ask about it, it’s probably wrong.” 39
  40. 40. Duties to Client • Financial crime specialist owes highest duty of honesty, transparency and professionalism to constituents, client, organization, colleagues • Identifying who is your client in broad terms, acting in their best interests is key to ethical behavior • Does not permit unethical or illegal behavior to further “best interests” of client 40
  41. 41. Conflicts of Interest • Take variety of forms – personal interests, current and past clients, multiple clients • Maintaining ethical standards relies on finding fair and equitable resolution to conflicts • In most cases, one client’s interests should not be privileged over another 41
  42. 42. Conflicts of Interest • Organizations should screen for conflicts of interest at the start of relationships: • Assess services, activities, types of employees to identify areas where conflicts of interest may arise • Implement written disclosure policies • Designate conflict of interest officer or committee • Create “conflicts of interest database” • Training programs for employees on conflicts of interest and their ethical resolution 42
  43. 43. Conflicts of Interest • Conflicts should be recognized early in relationship • If not, timely response is required, which can include: • Promptly disclosing to past or present colleagues, clients or organizations the nature of a potential conflict of interest • Asking these persons and organizations to waive conflicts of interest that may exist, if it is appropriate • Creating an information wall or other safeguards to assure that persons who were involved with a prior matter will not see or have access to files from the new matter, and will not participate in the new matter • Declining to accept the prospective matter or case 43
  44. 44. Data and Privacy Concerns • Financial sector professionals often have access to sensitive financial, personal information • Organizations need policies and procedures to ensure information of customers, clients, and other parties is managed ethically • “Information barriers” to separate sensitive data and reduce potential for conflicts of interest • Multi-tiered access systems to limit information to essential staff • Processes to end relationships and purge or delete information 44
  45. 45. Ethics Policies and Procedures • Code of ethics • Employee training, ethics policies • Confidential reporting, escalation policies • Commitment, communication from top leadership 45
  46. 46. Key Lessons • Acting in client’s best interests guides ethical behavior • Information barriers are essential safeguard at financial institutions • Conflicts of interest are common ethical dilemma; understanding how to resolve them is critical 46
  47. 47. Review Question • What should be one element of an organization’s ethics policies? A. Senior management approval for all new customer relationships B. Dismissal of any employees with conflicts of interest C. Reporting of ethical violations through business lines D. Regular communication on ethics from senior management 47
  48. 48. CFCS Examination Preparation Series February 24, 2014 International Standards
  49. 49. Overview • Combating financial crime is an international and cooperative affair • Financial crime is global phenomenon, requires coordinated action at international level • International standards set the pace for most of the formal financial sector • Some national laws have an extra-territorial “international standards” effect 49
  50. 50. United Nations • UN Security Council Resolutions – Sanctions programs • United Nations Convention Against Corruption 50
  51. 51. UNODC • IMOLIN database –Legal library of AML and related laws –https://www.imolin.org/
  52. 52. Transparency International • Anti-corruption NGO with over 100 chapters worldwide • Provides research, analysis and reporting on corruption, corporate and financial transparency issues globally • Releases Corruption Perceptions Index annually • http://www.transparency.org/research/cpi/ove rview 52
  53. 53. Corruption Perceptions Index 53
  54. 54. OECD • OECD Anti-bribery Convention • Initiatives related to: – Anti-money laundering – Tax fairness and sharing • Database of tax sharing agreements – Corporate transparency – Illicit financial flows
  55. 55. FATF • Outgrowth of OECD • Formerly 40 + 9 Recommendations, now 40 Recommendations • Sets standards for AML cooperation among countries • Peer reviews • “Non-cooperative” jurisdictions, black or grey lists 55
  56. 56. World Bank • Stolen Asset Recovery Initiative (StAR) • http://star.worldbank.org/star/ • Doing Business Reports – Database of business laws, regulations and data on business climate and transparency – www.doingbusiness.org
  57. 57. Basel Committee • Establishes principles relating to banking supervision • http://www.bis.org/bcbs/ • Basel III Accords • Customer Due Diligence for Banks • Consolidated KYC Risk Management 57
  58. 58. Wolfsberg Group • Group of largest international banks – Set standards for private banking, correspondent banking relationships • Wolfsberg AML Principles for Private Banking • Wolfsberg Principles for Intermediaries – Maintains Due Diligence Repository database – http://www.wolfsbergprinciples.com/diligence.html
  59. 59. EGMONT Group • Organizations of FIUs meeting standards • Provides cooperation between FIUs 59
  60. 60. INTERPOL • Cooperative effort among police of countries • Issue Notices to members that share information, provide warnings, or request that members track or detain suspects
  61. 61. FATF-style Regional Bodies • Modeled after FATF on regional basis • APGML • Others • Conduct peer reviews
  62. 62. National Laws with International Effect • US: • USA Patriot Act • FCPA • FATCA • UK: • UK Bribery Act • EU: • Directives 62
  63. 63. Key Lessons • May not be used on day-to-day basis, but international standards shape public and private efforts • International best practices may not be your best practices • Review source documents where possible 63
  64. 64. Review Question • What organization would likely provide the most useful sources of information for assessing corruption risks of a country? A. Basel Committee B. Transparency International C. Interpol D. Wolfsberg Group 64
  65. 65. CFCS Examination Preparation Series February 24, 2014 Global Anti-Corruption
  66. 66. Overview • Corruption has many definitions, takes many forms • “Grand” corruption • Petty corruption • Commercial bribery and corruption • Widespread negative consequences of corruption to economic development, fair markets and competitiveness, civil society • ACFCS focuses on corruption of public officials, especially involving corporations, business entities 66
  67. 67. What is a Corrupt Payment? • Bribe or corrupt “payment” does not have to be made in cash • Made from “payor” to recipient • Can include nearly anything that induces recipient to grant some official favor or advantage that payor should not or would not otherwise have received • Luxury goods • Services • Free use of property or goods • Access and influence 67
  68. 68. Methods to Make and Conceal Corrupt Payments • • • • • • • Gifts, travel and entertainment expenses Charitable contributions, contributions to nonprofits under control of government official Direct payment of campaign expenses Payments to fictitious employees, or adding associates of official to company payrolls Payments to fictitious businesses, inflated payments to businesses for the products or services provided Payments through loans, or allowing official free use of services or property Third parties – sales agents, vendors, contractors, attorneys 68
  69. 69. Red Flags of Corrupt Payments • Records of fee payments to a third party are significantly higher than other third parties in the same industry sector, without compelling business rationale • Abnormal compensation arrangements, such as excessive commissions or unusual reimbursements • Payments to domestic businesses, persons made to offshore accounts • Substantial payments to contractors , employees or third parties with little experience in the field they purportedly work in 69
  70. 70. Red Flags of Corrupt Payments • Invoices from companies or third parties that are vaguely worded or do not clearly describe services performed • Employees or third parties with close ties or past business associations with government officials • Employees or third parties who have entered into business arrangement or transaction at request of a government official • Third parties using multiple shell companies to conduct transactions, or are themselves a shell company 70
  71. 71. NGOs and Anti-Corruption Advocacy • Non-governmental organizations, with and without backing of national governments, have been active in anti-corruption • World Bank • Transparency International • Corruption Perceptions Index, other publications • United Nations and UN Office on Drugs and Crime • Convention Against Corruption with 140 signatories • Organization for Economic and Cooperation and Development • Anti-Bribery Convention with 40 signatories 71
  72. 72. What Is the Foreign Corrupt Practices Act? • US law enacted in 1977 • Two areas - Anti-bribery provision - Books and records/internal controls provisions • Enforceable by DOJ and SEC - DOJ: Criminal, civil jurisdiction over US companies, their subsidiaries - SEC: Civil jurisdiction over US “issuers”
  73. 73. Who the FCPA Covers • Any issuer under US securities laws • Domestic or foreign public companies registered required to file periodic reports with SEC • Domestic concerns, including US companies, citizens, nationals, residents • Person or entity that engages in any act in furtherance of corrupt payment while in US territory • International scope – 9 of top 10 largest FCPA cases are non-US companies 73
  74. 74. FCPA Anti-Bribery Provision • Prohibits corruptly making, offering or promising to make a payment, gift, or anything of value, directly or indirectly, to a foreign official for purpose of obtaining or retaining business
  75. 75. FCPA Enforcement
  76. 76. FCPA Enforcement
  77. 77. Who Is A Foreign Official? • • • • • • • Very broadly defined Not limited to high-level officials Includes people acting on behalf of government entity Includes employees of government-owned or government-controlled entities - "Instrumentality" = fact-specific inquiry Includes political parties, party officials and candidates Includes employees of international organizations Effective "control" of the entity is key
  78. 78. Books and Records Provisions • Only applicable to issuers under US securities laws -BUT: Should still be part of robust compliance program for private companies • Issuers must "[m]ake and keep books, records… which… accurately and fairly reflect transactions and dispositions of assets of the issuer“ • Issuer also must "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances" that transactions are: - Executed and access to assets is permitted only in accordance with management authorization - Transactions are recorded in a way to permit financial statements to be prepared according to GAAP
  79. 79. UK Bribery Act • Enacted in 2010, effective July 2011 • Goes beyond FCPA in enforcement scope, strictness • Covers any UK citizen, all corrupt activities in UK, and any company with operations in UK • Stiff penalties – unlimited fines for corporations, 10 years for individuals • Very limited enforcement so far 79
  80. 80. Provisions of UK Bribery Act • Blanket prohibition on bribing any person, public or private • Specific provision criminalizing bribery of public officials – can be any “financial or other advantage” • Creates standalone offense of “failing to prevent bribery” at an organization • Organizations can avoid prosecution by demonstrating effective anti-corruption compliance 80
  81. 81. Anti-Corruption Compliance US, UK have provided guidance, along with many public and private-sector organizations. Best practices include: • Commitment from senior management • Effective procedures for risk assessment and internal audit • Clearly articulated compliance policies, procedures, code of conduct • Compliance program oversight by senior management with autonomy, adequate resources • Ongoing training for new and current employees, as well as third parties 81
  82. 82. Anti-Corruption Compliance • Procedures for confidential reporting of corruption violations and internal investigation • Updating compliance programs and policies through testing and review • Risk-based due diligence on third parties and transactions • Due diligence on mergers, acquisitions and proper integration after acquisition, merger, or joint venture 82
  83. 83. Third Parties • Managing third-party relationships is critical for FCPA, anticorruption compliance • Three steps to retain third parties, reduce FCPA exposure 1. Due diligence on third party's background, reputation, experience, connections with local government officials 2. Contractual provisions (FCPA representations, warranties) 3. Active oversight to ensure third party's commitment to FCPA, other laws
  84. 84. Key Lessons • Corrupt payments are increasingly made through complex channels – not just stacks of cash and a bag man • Third parties are a recurring risk, should be one focus of anti-corruption programs • US FCPA has international reach, has acted as standardsetter in many respects – should be understood
  85. 85. Practice Question Global Widget Co. recently acquired a local company in Benistan, a country with a high level of state involvement in the economy and history of corruption. Before purchasing the company, Global Widget hired a major international law firm to conduct a due diligence review and uncover any potential violations of global anti-corruption laws. When the review came back free of problems or issues, Global Widget completed its acquisition. Three years later, Global Widget compliance executives were conducting their first anticorruption training with employees from the Benistan office. During the training session, Global Widget was alerted by Benistan-based employees that the distributors the company uses may be bribing local government officials. Global Widget had not conducted a review of the distributors in Benistan. When it looked into the allegations, it found widespread potential Foreign Corrupt Practices Act (FCPA) and UK Bribery Act violations. What are two weaknesses in Global Widget anti-corruption compliance program? 85
  86. 86. Practice Question A. Global Widget did not include its distributors in Benistan when it conducted its anti-corruption due diligence and training. B. The due diligence review should have been conducted exclusively by local counsel in Benistan because they would be better versed in the country’s culture and laws. C. Global Widget should have conducted anti-corruption compliance training as soon as possible after acquiring the company in Benistan. D. Global Widget failed to reach out directly to government agencies in Benistan to request information on any history of corrupt payments at the company it was acquiring. 86
  87. 87. Your Questions
  88. 88. Thank you for attending Next Session is Wednesday, February 26, 12:30 PM ET

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