FCPA Enforcement Trends Corporate mega fines fueled by voluntary disclosure process. DOJ has dedicated additional prosecutors to FCPA cases and is increasing use of industry-wide investigations. FBI has dedicated FCPA squad and is using aggressive investigative tactics. Dodd-Frank whistleblower bounty program will increase prosecutions by exponential factor. 4
FCPA – DOJ Priority 5 “[T]he Department’s enforcement of the FCPA is aggressive, and it’s on the rise… This year alone, we’ve collected well over $1 billion already… [L]ast year and this year combined, we’ve charged over 50 individuals. Moreover, last year we tried three FCPA cases successfully to verdict… and approximately 35 individuals currently await trial on FCPA charges in the United States. In all, our message to companies and individuals who would bribe foreign officials is clear: foreign bribery is not an acceptable way of doing business, and we won’t tolerate it.” — Lanny Breuer, Assistant Attorney General, Nov. 4, 2010
“The SEC and Justice Department are sending a clear message that those who engage in corrupt activities face a strong and united front around the world.” — Mary L. Schapiro, SEC Chairman, July 9, 2010 "The new [SEC FCPA] unit will give us the resources and the ability to do even more going forward. People on the ground will be focusing exclusively [on FCPA investigations], making them smarter about industry practices [and] problem areas.” — Cheryl Scarboro, SEC FCPA Unit Chief, Feb. 25, 2010 “We’ll explore all parties’ conduct and make a determination of the facts of each case.”It is a trend you will see going forward.” — Cheryl Scarboro, SEC FCPA Unit Chief, Nov. 8 & 10, 2010 6 FCPA Enforcement – SEC Priority
Increase in FCPA Enforcement Actions 7 2010 witnessed an 85% increase in FCPA enforcement actions over 2009, which itself was a record year. 60 48 50 40 DOJ 30 26 26 SEC 20 20 18 20 14 13 8 10 7 7 5 3 2 0 2004 2005 2006 2007 2008 2009 2010
* Eight of the top ten monetary settlements in FCPA history were reached in 2010. $900 Siemens 2008 $800 2009 $700 2010 KBR/Halliburton 2011 $600 $500 BAE Systems ENI/Snamprogetti $800 $400 Technip $579 $300 JGC Corporation Daimler $400 $200 Alcatel-Lucent $218.8 $365 $338 Panalpina Johnson & Johnson Johnson & Johnson $100 $185 $58 $52 $137 $70 $82 $0 Blockbuster FCPA Settlements 8
David Kay,American Rice, Inc. 37 months John Warwick,Ports EngineeringConsultants Corporation 37 months Robert Antoine,Haiti Telco 48 months Juan Diaz,Third party consultantto Haiti Telco 57 months Douglas Murphy,American Rice, Inc. 63 months Albert Jack Stanley,KBR 84 months Charles Paul Edward Jumet,Ports EngineeringConsultants Corporation 87 months 0 10 20 30 40 50 60 70 80 90 100 9 Most Severe Jail Sentences for FCPA Violations
DOJ is employing strategies and tactics typically used for violent gangs, drug trafficking organizations and organized crime Developing intelligence pool based on cooperating witness information gathered across all white collar cases (e.g. antitrust, fraud) Undercover Officers and Confidential Informants Search Warrants Wiretaps Seizure of assets and forfeiture 10 AggressiveLaw Enforcement Tactics
11 Two-Year Undercover Operation: Undercover informant who recorded over 5000 telephone calls and over 100 hours of video recordings. 22 Individuals arrested in Las Vegas and indicted in US District Court in DC. Take down involved over 150 FBI agents. 21 search warrants executed in US and UK. Investigation has expanded to companies and additional individuals. The “Shot Show” Sting
$70 million settlement for improper payments, gifts and travel to doctors at state-owned hospitals in Romania, Greece and Poland. Substantial discount in fine (approximately $17 million):
Cooperation against other medical deviceand pharma companies
Johnson & Johnson may have assisted DOJ in launching industry-wide FCPA investigation targeting medical device and pharma practices in foreign companies. 12 Johnson & Johnson Settlement
13 Oil and Oil-Services Industry – Panalpina Investigation – Vetco settled FCPA case in 2007 based on illegal bribes made through Panalpina. Following settlement, DOJ issued at least 11 letters to oil and oil services companies, requesting information about their dealings with Panalpina. On Nov. 4, 2010, DOJ and the SEC announced settled FCPA enforcement actions against Panalpina plus six of these oil and oil services firms (most of which were Panalpina customers) totaling $236.5 million in disgorgement, fines, and penalties. Industry-Wide Investigations
Eli Lilly, Merck, Astra Zeneca, Bristol-Myers Squibb, GlaxoSmithKline, SciClone
Military and Law Enforcement Products Industry
SHOT Show Sting targets, Armor Holdings, DynCorp, Smith & Wesson, Allied Defense, Blackwater/Xe
Alcatel-Lucent, Haiti Teleco, ITXC, Latin Node, Magyar Telekom, Siemens entities, UTStarcom, Veraz
SEC recently launched industry-wide investigation against global financial companies focusing on dealings with sovereign wealth funds. Industry-Wide Investigations
15 Dodd-Frank bill created whistleblower bounty program which authorizes whistleblowers to recover between 10 and 30 percent of any settlement that exceeds $1 million. SEC has proposed regulations, selected chief of program and requested funding for 43 new positions. SEC has been inundated with whistleblower complaints and recently disclosed it has received 1-2 credible complaints each day. Businesses have filed comments opposing regulations claiming that program creates incentives for whistleblowers to avoid internal reporting programs. Whistleblower Bounty
Elements of the Offense Elements of theOffense 16
Elements of the Offense Elements of an FCPA Violation A payment, offer, authorization, or promise to pay money or anything of value to a foreign government official Includes a party official or manager of a state-owned company, or public organizations such as World Bank or UN), or to any other person,; Knowing that the payment or promise will be passed on to a foreign official With a corrupt motive for the purpose of (i) influencing any act or decision of that person, (ii) inducing such person to do or omit any action in violation of his lawful duty, or (iii) securing an improper advantage; Corrupt” payments extend to business advantages such as tax refunds and reductions; government inspection reports and certifications; customs clearance for improperly or illegally imported goods and equipment; expedited government registration certifications; and beneficial changes to laws and regulations 17
18 Elements of the Offense Elements of an FCPA Violation Accounting / Recordkeeping Provisions Under the books and records provisions, issuers must keep accurate books and records and maintain adequate internal controls.
Elements of the Offense Who is liable under the FCPA? Domestic: All US “issuers” and private companies (“domestic concerns”) Any US corporation or national or any foreign bribery-related conduct US citizens or foreign nationals operating in the US or using instrumentalities Foreign: Foreign corporations subject to SEC regulation (e.g., via ADRs) and using instrumentalities All foreign corporations when in US territory, whether or not they use instrumentalities of interstate commerce Includes directors, officers, employees, and agents of entities subject to the statute 19
Criminal Penalties For companies, criminal violations can result in: $2 million fine for an anti-bribery violation; and $25 million fine for a books and records violation. Individuals face up to: 5 years in jail with a maximum $250,000 fine for an anti-bribery violation; and up to 20 years in jail with a maximum $5 million fine for abooks and records violation. Under a federal alternative fine provision,companies and individuals may be fined up totwice the benefit sought or received. 20
Civil Penalties In the civil context, the SEC and DOJ can impose a $10,000 fine per violation upon individuals and companies. The SEC may also impose further civil penalties ranging between $7,500 to $150,000 upon individuals and $75,000 to $725,000 upon companies. Alternatively, the SEC may impose a civil penalty equal to the gross pecuniary gain to an individual or company and equitable relief, such as disgorgement of profits. 21 Elements of the Offense
A “foreign official” includes any officer or employee of a non-U.S. government, agency, or “instrumentality” of a non-U.S. government The SEC and DOJ liberally construe the term “instrumentality” to cover employees of private company where foreign government owns controlling interest or exercises control. District court recently upheld DOJ interpretation of statute in Noriega case. Issue pending in two other cases 22 Elements of the Offense “Foreign Official”
Facilitation Payments FCPA exempts “facilitation” payments (small “grease” payments) to expedite routine governmental action”. Limited to payments that “merely move a particular matter toward an eventual act or decision” – applies only when the government official has no discretion in performing duties. Payment must be for something to which the payor was already entitled, e.g., the mere receipt of an application, as opposed to approval of the application. Best practices counsel to prohibit facilitation payments entirely – 80% of U.S. companies have banned them. 23 Elements of the Offense
Affirmative Defense: Reasonable Bona Fide Marketing and Promotion Payments Reasonable and bona fide expenditures, such as travel and lodging expenses directly related to (A) the promotion, demonstration, or explanation of products or services, or (B) the execution or performance of a contract with a foreign government or performances of a contract with a foreign government or agency thereof. Travel expenses to United States (FCPA Op. Proc. Rel. 07-01) Product samples for testing (FCPA Op. Proc. Rel. 09-01) Journalist stipends (FCPA Op. Proc. Rel. 08-03) Trips to tourist destinations (US v. Metcalf & Eddy, Inc) 24 Elements of the Offense
Elements of the Offense UTStarcom Incorporated (2009) Arranged and paid employees of Chinese state-owned telecommunications companies to travel to popular tourist destinations in the United States, including Hawaii, Las Vegas and New York City, and making improper payments to consultants in China and Mongolia while knowing that they would be used to pay bribes to foreign government officials. UTSI voluntarily disclosed the violations, and agreed to pay a $1.5 million penalty to the DOJ, plus $1.5 million to the SEC. 25
Elements of the Offense Liability for Subsidiaries — Nature Sunshine In 2009, CEO and CFO of Nature’s Sunshine, a manufacturers of nutritional products, were held responsible under books and records provision for bribes made by employees of a wholly-owned subsidiary in Brazil. SEC alleged that they had overall responsibility for the international operations of the company and that the people who would know about the relevant issues were under their control. This was the first time the SEC imposed liability on individuals under a theory of "control person" liability in an FCPA case. Under that theory, the SEC may charge an individual who manages a company absent evidence that he or she knew about or participated in a bribery scheme. 26
Elements of the Offense Expanding Enforcement Theories Travel Act prohibits the use of interstate or foreign commerce or the U.S. mails to further an activity that violates state or federal bribery laws and can be used to criminalize bribes to private parties if they violate state or federal law (Control Components Inc.) Money laundering charges permit DOJ to prosecute foreign officials—the bribe takers, intermediaries and third-party agents (Haiti Teleco) Export control laws (Shu Quan-Sheng) Charging a non-issuer based on theories of aiding and abetting and its role as an agent of a U.S.-issuer (Panalpina) Control person liability for an executive’s failure to supervise(Nature’s Sunshine) False certifications and redactions of references to bribery as part of an internal audit (Bobby Benton) 27
Elements of the Offense Cooperation Credit and Voluntary Disclosure Voluntary reporting, cooperation, and a pre-existing compliance program will result in “meaningful credit” to companies in setting fine amounts. In Panalpina, DOJ and the SEC declined to prosecute Global Industries for any possible FCPA violations because it had a strong, pre-existing internal compliance program that allowed it to identify and disclose the issues to DOJ. Noble Corp. received a steeply discounted fine and a non-prosecution agreement (“NPA”) in recognition of its “early voluntary disclosure, thorough self-investigation… , full cooperation with [DOJ,] and extensive remedial measures…” Pride, Tidewater, and Transocean also received substantial discounts of 55%, 30%, and 20%, respectively, from the low end of the applicable sentencing guidelines range, in part, for disclosing the suspected violations before being contacted by DOJ. Universal Leaf received credit from DOJ for its pre-existing compliance program, specifically its compliance hotline, that helped identify certain FCPA violations. 28
Elements of the Offense Cooperation Credit and Voluntary Disclosure(cont’d) At the same time, DOJ officials’ comments suggest that they expect disclosure in nearly every case: “If there is a bribe we want to hear about it, even if it is small.” —Charles Duross, Deputy Chief, DOJ’s Fraud Section and Head of its FCPA Unit, Sept. 16, 2010 “I can assure you that if you do not voluntarily disclose your organization’s conduct, and we discover it on our own,… the result will not be the same.” —Lanny Breuer, Nov. 16, 2010 29
Asset Forfeiture Asset Forfeiture and Recovery Remains “A Global Imperative”:Continuing its focus on this topic, on July 25, 2010, DOJ announced the creation of the Kleptocracy Asset Recovery Initiative, a team of prosecutors dedicated to combating large-scale foreign official corruption, and recovering and repatriating public funds. DOJ has already filed civil forfeiture complaints to seize U.S.-based assets of the former president of Taiwan, who was convicted of bribery there. DOJ now routinely includes a forfeiture count in every FCPA-related charging document. 30 Elements of the Offense
31 Elements of the Offense Mergers and Acquisitions:Buying an FCPA Violation Acquiring company can be held liable for FCPA violations which occurred prior to the acquisition unless the acquiring company conducts a “due diligence” review:
Due diligence review will identify the past FCPA violations and the target will need to make a disclosure to the Justice Department.
Companies will have to address past FCPA violations: change in price, structure, additional warranties and indemnifications; deal could terminate or be delayed.
32 Elements of the Offense Mergers and Acquisitions:Buying an FCPA Violation
Failure to identify and remediate can expose acquiring company or joint venture partner to FCPA liability.
Due diligence is not a legal defense but it can minimize risk of successor liability when coupled with acquiring company’s FCPA compliance commitment.
Timing of voluntary disclosures should be carefully considered since DOJ involvement raises stakes.
Due diligence has to be tailored to transaction – whether it is merger, asset acquisition, joint venture or minority stake purchase.
Overall strategy should be flexible as information is learned.
Elements of the Offense International Anti-Corruption Enforcementis on the Rise UK Anti-Bribery Act – effective July 1 Costa Rica: Alcatel-Lucent paid $10 million to settle local corruption charges, the first time in Costa Rica’s history that it has recovered “social damages” from a foreign corporation for corruption of its own government officials. Nigeria: Its Economic and Financial Crimes Commission (“EFCC”) reached several settlements with former FCPA defendants, including Siemens ($46.5 million), Halliburton ($35 million), and Snamprogetti ($32.5 million). On Jan. 13, 2011, the EFCC reportedly arrested 12 oil executives from firms including Noble Corp, Tidewater, and Transocean in a series of raids in connection with an alleged $100 million bribery scheme. 33
Elements of the Offense International Anti-Corruption Enforcement Vietnam: A Vietnamese official convicted of receiving bribes from a Japanese company was sentenced to life imprisonment and ordered to disgorge $262,000 in bribe proceeds. Spain, Netherlands, and the Czech Republic all updated their anti-bribery laws. (Spanish created criminal liability for corporations). China recently enacted new law prohibiting bribery of foreign officials. Russia is considering adopting new legislation. Canada has a robust law but enforcement is lax. OECD recently criticized Canada’s enforcement efforts and Canada is expected to icnrease enforcement. 34
UK Bribery Act: Effective this Year UK Bribery Act: Basics Two general offenses for bribing or taking a bribe A discrete offense of bribing a foreign official A new corporate offense for failure to prevent bribery 36
UK Bribery Act: Effective this Year UK Bribery Act:Corporation’s Failure to Prevent Bribery Person associated with a commercial organization bribes another: The term “associated persons” includes any person who “performs services for or on behalf of the relevant commercial organisation” – and may include subsidiaries, employees, agents, JV partners, consortium members. Defense to liability if the commercial organization has “adequate procedures” to prevent such bribery from occurring: A “commercial organization” includes UK entities and those companies and partnerships incorporated or formed overseas that “carry on a business or part of a business in the UK.” The bribery may occur anywhere in the world – a conviction for bribery in the local jurisdiction is not required. 37
FCPA v. Bribery Act Comparison 38 UK Bribery Act: Effective this Year
UK Bribery Act: Effective this Year UK Bribery Act Guidance Issued On March 30 UK Bribery Act effective date is July 1 – Ministry of Justice sought to address business concerns and restrain Serious Fraud Office Guidance addressed four key issues: Jurisdiction over foreign corporations for failing to prevent bribery of a foreign official The definition of “associated persons” Adequate procedures as a defense to the corporate offense for failure to prevent a bribe Corporate hospitality 39
UK Bribery Act: Effective this Year Jurisdiction Over Non-UK Companies Extends to non-UK companies that carries on a business or part of a business in the UK Guidance defines to require “demonstrable business presence” UK stock listing is not sufficient by itself to satisfy this requirement, nor is a UK subsidiary if it acts “independently” of the parent Key issue will be harm to UK business interests 40
UK Bribery Act: Effective this Year Associated Persons An “associated person” includes a person who performs services for or on behalf of the company, e.g. an agent, subsidiary or employee if the payment is Intended to obtain or retain business, or a business advantage, for the commercial organization (not solely for the associated person or a third party) Employees are presumptively associated persons. Bribes by a subsidiary only create liability if the subsidiary intended the parent to benefit. A supplier performing services probably is an associated person; a seller of goods probably is not Joint ventures and joint venture partners are not automatically “associated” with their members and co-venturers. A member will only have liability for JV payments if the JV performs services for the member, AND a bribe was paid with the intention of benefiting the member. Indirect benefit to the member is not enough. In some JVs, the member’s degree of control over the payor determines if the payor was performing services for the member. So, a bribe paid by a JV partner’s employee or agent will probably implicate the JV partner alone, and not the co-venturers 41
UK Bribery Act: Effective this Year Adequate Procedures – 6 Principles Proportionate procedures: Procedures to prevent bribery by persons associated with the organisation are proportionate to the bribery risks it faces and to the nature, scale and complexity of the organisation’s activities. They are clear, practical, accessible, effectively implemented and enforced. Top level commitment: Top level management should issue statement of commitment to counter bribery in all parts of the organisation’s operation. Risk Assessment: Regular and comprehensive assessment of the nature and extent of the organisation’s risks relating to bribery (more detail on later slide) Due-diligence: Polices and procedures cover all parties to a business relationship, including the organisation’s supply chain, agents and intermediaries, all forms of joint venture and similar relationships Business partners: Reputation for bribery, Linked to public office holders or Politically Exposed Persons (“PEPs”) Communication (including training): Policy and Procedures, training, and support and operational procedures Monitoring and Review 42
UK Bribery Act: Effective this Year Corporate Hospitality “Reasonable and proportionate” hospitality is legal Legitimate purposes: Improving your image, Presenting products and services, and Establishing cordial relations Use of limits and pre-approval is recommended MoJ examples of acceptable hospitality (private sector): Wimbledon, Grand Prix, Airport transfers, and Dining and tickets to an event MoJ examples of acceptable hospitality (FPOs): Reasonable travel and accommodation to visit mining operations Flights and hotel in New York, along with fine dining and baseball(“match”) for FPO and partner, as long as there is “genuine mutual convenience” Ordinary travel and lodgings to enable a visit to a hospital But, if hospitality is not clearly connected with business activity, or is excessively lavish, the likely inference is that it is a disguised bribe 43
UK Bribery Act: Effective this Year The Risks of FCPA and UK Bribery ACTEnforcement Action DOJ intends to increase “joint” enforcement actions; will coordinate information sharing and enforcement actions. No company wants to be the “guinea pig” for initial UK Bribery Act enforcement actions. Companies need to review and revise FCPA compliance programs to address Bribery Act. Enforcement and interpretation of Bribery Act will be dynamic and require companies to keep up with requirements. 44
Designing and Implementing an Anti-corruption Compliance Program Designing andImplementing anAnti-corruptionCompliance Program 45 45
46 Designing and Implementing an Anti-corruption Compliance Program Basic Elements of FCPA Compliance Program FCPA Compliance Policy and Tone at the Top. The Company should develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA and a strong commitment from senior management. Strong policy statement should be adopted by the Board. Board and senior management should be required to make commitment to anti-corruption compliance. Compliance commitment must be demonstrated by actions.
47 Designing and Implementing an Anti-corruption Compliance Program Anti-Corruption Policies and Procedures The Company should develop and promulgate compliance standards and procedures which shall include policies governing: gifts; hospitality, entertainment, and expenses; customer travel; political contributions; charitable donations and sponsorships; facilitation payments; and solicitation and extortion.
48 Designing and Implementing an Anti-corruption Compliance Program Use of Risk Assessment The Company should develop its compliance standards and procedures using a risk assessment. The risk assessment should be a formal and documented review which examines:
the nature and extent of corruption in each country in which the company does business relying on public and internal sources of information (Transparency International, OECD, etc);
the extent of government interactions and the persons in the company responsible for such interactions; and
the use of third-party agents, consultants in each country.
Designing and Implementing an Anti-corruption Compliance Program Corruption Risks 49
50 Designing and Implementing an Anti-corruption Compliance Program Ongoing Assessment Annual Review. The Company should review its anti-corruption compliance standards and procedures, on no less than an annual basis to ensure they are working. Ongoing Assessment. The Company should conduct ongoing assessments of its FCPA compliance program.
During the year, spot checks and quarterly audits of the compliance program should be conducted.
Dynamic process for modifying the compliance program should be made as new information is learned.
51 Designing and Implementing an Anti-corruption Compliance Program Senior Management Oversight and Reporting The Company should assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of its Company's anti-corruption policies. Company should designate a compliance officer in senior management and provide adequate resources to compliance office.
Compliance officer should be separate from General Counsel and internal auditing functions.
52 Designing and Implementing an Anti-corruption Compliance Program Internal Controls The Company should ensure that it has a system of internal controls for the purpose of foreign bribery or concealing bribery. Internal controls are key to identifying and preventing bribery. Internal audits must be supplemented with forensic audits since internal audits hinge on “materiality” and may not catch bribery schemes. Every expenditure of money where bribery may occur should have specific controls and management procedures to prevent bribery (e.g. gifts and hospitality, review form for certain amounts and review by compliance and legal offices).
53 Designing and Implementing an Anti-corruption Compliance Program Training FCPA training which shall include: (a) training for all directors and officers, and, where necessary and appropriate, employees, agents, and business partners; and (b) annual certifications, certifying compliance with the training requirements. Training programs should be tailored to different audiences and risks. Offices that have interactions (sales and regulatory) with foreign officials should have different program from senior management. Legal and compliance staff throughout organization should have separate training program.
54 Designing and Implementing an Anti-corruption Compliance Program Ongoing Advice and Internal Reporting The Company should establish or maintain an effective system for
Internet-based guidance and reporting systems Hot-line reporting system for employees to make anonymous reports Detailed procedure for review and response to internetand hot-line reports
55 Designing and Implementing an Anti-corruption Compliance Program Discipline The Company should have appropriate disciplinary procedures to address violations of the anti-corruption laws and the Company's anti-corruption compliance code, policies, and procedures. Specific disciplinary procedure should be adopted for employees who commit corruption offense. No tolerance policy should be adopted and enforced.
56 Designing and Implementing an Anti-corruption Compliance Program Foreign Business Foreign Business Representatives.The Company shall:
Perform appropriate due diligence on foreign business representatives;
Inform foreign business partners of its FCPA compliance program;
Seek reciprocal written anti-corruption and anti-bribery commitments from its foreign business partners.
Compliance Terms and Conditions.The Company should include FCPA terms and conditions in its contracts with foreign business partners.
Right to terminate contract if believe violation has or will occur
61 Red Flags Due diligence review of relationship or individual transactions must include red flags which require additional investigation before approval. Red flags are facts and circumstances that raise serious questions of an FCPA violation. Companies which ignore red flags run the risk of FCPA enforcement actions, criminal fines and the need for costly remedial measures. A red flag only means that further scrutiny is warranted.
62 Red Flag Procedure Red flags should be tailored to each country and the relevant risks. Red flags should be categorized based on risk factors (some are significant and require more investigation than others).
Contact Ryan Morgan Direct: +1 305.579.2298 Ext. 262 RyanM@worldcompliance.com Richard L. Cassin firstname.lastname@example.org Michael Volkov Direct: (202) 263-3288 Cell: (240) 505-1992 email@example.com The FCPA Blog