Fcpa bullet points


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FCPA Rules & Regs

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Fcpa bullet points

  1. 1. What Private Investors Need to Know About the FCPA July 2007 3163760
  2. 2. Introduction This presentation will: • Describe the requirements and prohibitions of the U.S. Foreign Corrupt Practices Act (“FCPA”) • Outline the risks associated with noncompliance • Explain how the FCPA can impact private equity and venture capital firms and their partners
  3. 3. Understanding The Legal Risks The FCPA prohibits: Improper payments and other practices in connection with overseas business activities The FCPA requires: Maintaining accurate books and records, which includes documenting the nature of all payments Retaining those records for five years Implementing controls to prevent improper payments
  4. 4. Understanding The Legal Risks The FCPA has two provisions: Anti-bribery Accounting and Internal Controls (“Books and Records”)
  5. 5. The Anti-Bribery Provision How is it applied? The anti-bribery provision applies to: •U.S. companies, public and private •Most foreign subsidiaries of U.S. companies •U.S. citizens and resident aliens •Foreign nationals acting for a U.S. company •Foreign nationals who commit an act in furtherance of a foreign bribe while in the U.S.
  6. 6. The Anti-Bribery Provision How is it applied? Private equity firms and their partners may be liable for FCPA violations committed by the companies they acquire • Successor liability for violations that occurred before the acquisition • Partners who serve as directors may face individual liability Venture capital firms and their partners may be liable for FCPA violations committed by the companies in which they invest • Successor liability depends on structure of transaction • Partners who serve as directors may face individual liability
  7. 7. The Anti-Bribery Provision The FCPA forbids people and entities from: Corruptly Making a promise or offer, or authorizing the payment of, A bribe or anything of value Directly or indirectly To a foreign government official To obtain or retain business or to gain an improper business advantage
  8. 8. Anti-Bribery Provision What Is A Foreign Official? Foreign officials include: • Officials of all branches of government • Government entities • Public international organizations • Political parties and party officials • Candidates for public office • Employees of government-owned businesses, such as airlines, hospitals, or oil companies It does not matter whether the foreign official is paid or unpaid or holds an “official” state post
  9. 9. The Anti-Bribery Provision How Does It Affect Me? The FCPA imposes liability on you or your company if you know or have reason to know that: • an improper payment or offer for payment was made; • an improper payment or offer for payment is most likely going to be made; or • there are circumstances in place that will lead to an improper payment or offer for payment Thus, to be liable under the FCPA: • There does not need to be an actual payment, and • You do not need actual knowledge of the payment or offer
  10. 10. The Anti-Bribery Provision How Does It Affect Me? Examples of liability-imposing behavior: Approving an improper payment Knowingly creating or accepting a false invoice Covering up an illegal payment or activity Knowing an improper payment was made or likely made, and not reporting it Ignoring comments indicating problematic business dealings (e.g., in Nigeria, a suggestion that something was handled “the African way”)
  11. 11. The Anti-Bribery Provision Payments by Third Parties A private equity or venture capital firm and its partners can be held liable for improper payments made or actions taken by third parties who act or acted on behalf of a company the firm invested in or acquired These improper payments and actions are scrutinized by law enforcement authorities and can occur in many forms, including: • Gifts and lavish entertainment • Gratuities and kick-backs • Charitable or social contributions • Special processing or intervention fees
  12. 12. The Anti-Bribery Provision Exception for Facilitating Payments There are exceptions under very specific and extremely limited circumstances for “facilitating” or “expediting” payments • Made to ensure or speed the proper performance of a foreign official’s duties • The duties must be essentially clerical and must not require the official to use any discretion or judgment To fall under the exception, the payments must be for small amounts (but there is no magic number) Many local laws (and FCPA policies) forbid facilitating payments These payments MUST be recorded properly
  13. 13. The Anti-Bribery Provision Exception for Promotional Expenditures What is allowed? • Reasonable meals, travel, and entertainment • Small, token gifts and promotional items of nominal value Expenditures must be bona fide and directly related to a legitimate business purpose, such as: • The promotion or demonstration of products or services • The execution or performance of a contract with a foreign government or agency Payments must be : • Authorized as required by the company’s FCPA Policy • Recorded properly (exception: promotional items of nominal value)
  14. 14. The Anti-Bribery Provision Illegal Payments Illegal payments: (not proper facilitating or promotional payments) Excessive payments for “facilitation” or “expediting” Payment to persuade a government official to do something discretionary Lavish gifts, entertainment, or travel Improper campaign contributions Lump sum per diem in advance of travel Payments to family members of government officials for education, shopping, or travel Under-pricing of services or overpayment to government officials
  15. 15. The “Books and Records” Provision Applies to all U.S. and foreign companies with registered securities and companies that file reports with the SEC Requirements: • Maintain accurate books, records, and accounts – Must have reasonable detail – Must accurately and fairly reflect nature of transactions • E.g., document all facilitating payments and nature of all payments to government officials – Must show disposition of assets • Retain records of those payments for five years
  16. 16. The “Books and Records” Provision Requirements (cont.): • Implement a system of internal controls that: – Prevents improper payments – Ensures that transactions are executed with management's authorization – Ensures that assets are recorded to permit preparation of financial statements • Conduct periodic audits at reasonable intervals – The audits should ensure financial accountability – If there are discrepancies in the books, additional research must be done to determine the cause
  17. 17. Due Diligence What Is It, And What Diligence is Due? Due Diligence is an evaluation of the potential advantages and risks of a given transaction (e.g., third party contract, merger, acquisition) To comply with the FCPA, a company must evaluate the individuals and entities with which it associates to determine if their conduct could negatively impact the Company Occurs in third party relationship and M&A contexts Private equity and venture capital firms should conduct FCPA due diligence before acquiring or investing in a company and should ensure the company continues to conduct due diligence on third parties after the acquisition or investment
  18. 18. Due Diligence What Is It, And What Diligence is Due? For third parties: • Choose third parties carefully; inquire into background, reputation • Ensure that all third party relationships are subject to a written agreement, including an FCPA certification, before any work begins • Screen and monitor all business opportunities with third parties who may interact with foreign government officials For mergers and acquisitions: • Understand the target company’s international business and industry • Conduct pre-acquisition due diligence to determine potential FCPA issues • Ensure due diligence is covered in clauses and agreements
  19. 19. Due Diligence Red Flags A “red flag” is a clue that there is a potential FCPA violation When a “red flag” is discovered during due diligence or otherwise, you should: • Subject it to greater scrutiny than normal • Try to resolve it immediately • Implement safeguards Examples: • The transaction is in, or involves, a country known for corrupt payments • Lavish entertaining of government officials or their relatives • Insistence by the foreign customer that a particular agent be used • Objections to FCPA, anti-bribery, or other compliance requirements • Unusual contract terms or payment arrangements • Excessive commissions or fees
  20. 20. Compliance When making compliance decisions: • Use common sense • Document your decisions A “culture of compliance” develops by: • Committing to compliance “at the top” • Developing thorough and value-driven policies • Providing regular training and updates • Giving practical guidance geared to real business situations • Conducting regular audits and other monitoring
  21. 21. The Penalties For the Company Anti-Bribery: • Up to $2 million fine (per violation) and/or restitution Books & Records: • Criminal: up to $25 million fine (per violation) and/or restitution • Civil: $10,000 fine per violation (for public companies) In addition, a company can be: • Suspended or debarred from contracting with U.S. Government • Have its import and/or export licenses revoked or denied
  22. 22. The Penalties For Individuals Anti-Bribery: • Up to $250,000 fine (per violation), 5 years in prison, and/or restitution Books & Records: • Criminal: up to $5 million fine (per violation), 20 years in prison, and/or restitution • Civil: $10,000 fine per violation In addition, foreign nationals may face extradition to the U.S. and/or seizure of personal assets
  23. 23. FCPA Enforcement It Really Happens U.S. v. Kay & Murphy, 2004 • A criminal case brought against Kay and Murphy, executives for American Rice, Inc., for allegedly authorizing payments to customs officials in Haiti to induce the officials to accept false documents underestimating the quantity of rice their company shipped, thus reducing the customs duties and sales taxes owed by the company. • Kay, the Vice President of Operations, was sentenced to 37 months in prison and Murphy, the President and CEO, was sentenced to 63 months. • The court held that in enacting the FCPA, Congress intended to cast “a wide net over foreign bribery” and that a bribe does not have to relate directly to obtaining a particular piece of business to violate the FCPA.
  24. 24. FCPA Enforcement It Really Happens Baker Hughes Incorporated, 2007 • Among other things, Baker Hughes allegedly paid $4.1 million in bribes to a third party consulting firm, knowing that such funds were to be transferred to an official of the state-owned oil company in connection with a $220 million oil field services contract. • Baker Hughes characterized the payments in its books and records as “commissions,” “fees,” and “legal services.” • The DOJ and SEC criminally charged Baker Hughes with violating the anti- bribery and internal controls provisions of the FCPA and a 2001 cease-and- desist order. • Baker Hughes paid a record settlement of almost $44 million in combined fines and penalties.
  25. 25. FCPA Enforcement FCPA in the News Leo Winston Smith, 2007 • Smith, a former executive of Pacific Consolidated Industries (“PCI”), was arrested for allegedly violating the FCPA by offering more than $300,000 in bribes and providing lavish hospitality to a UK Ministry of Defence official to secure equipment contracts valued at $11 million • The case was referred to the DOJ by a private equity investment group, Cherington Capital, that acquired PCI after the alleged wrongdoing and discovered nine suspicious payments during a post- acquisition audit • This is the first FCPA case to involve a private investment firm
  26. 26. Hypothetical Situations Need some practical guidance? Let’s take a look at the following hypothetical situations...
  27. 27. Hypothetical Situations Third-Party Conduct During a board meeting, a U.S. company’s executive reports that the company’s consultant in India has successfully facilitated several large contracts with the Indian Ministry of Communications. When a director inquires about the consultant’s success, she learns that the consultant has a “close relationship” with an influential Communications Minister and was paid a 25% success fee upon the award of each contract. Red Flags: • The “close relationship” with the Procurement Minister could be problematic if the consultant is a relative or has an otherwise improper relationship • Did due diligence uncover this relationship? • “Success fees” are red flags because they do not require detailed invoices or an explanation of the services performed for payment • The director has a duty to inquire further about the details of this transaction
  28. 28. Hypothetical Situations Gifts and Entertainment A U.S. technology company wanted to host several Chinese officials for a tour of the company’s U.S. operations and a demonstration of the company’s products. While the Chinese officials paid for their own airfare to the U.S., the company paid for the officials’ local transportation, hotel charges, meals, and entertainment, and provided them with a $100 /day per diem. They also paid for a weekend excursion to a luxurious local resort. A few of the officials brought their spouses on the trip. One of the officials ran up a very large hotel bill, including lavish food and entertainment charges. Red Flags: • Payment of entertainment expenses and a weekend excursion for the officials is not likely to be considered related to a legitimate business purpose • The spouses should not be allowed on the trip • Large hotel bill – the company should not reimburse the official; to prevent the problem up front, the officials should be asked to pay for all incidentals
  29. 29. Hypothetical Situations Mergers and Acquisitions Company A, a U.S. public company, plans to acquire Company B, another U.S. company with several foreign subsidiaries. During pre-acquisition due diligence, Company A’s auditors discover that Company B made three $30,000 payments to an agent working with its Indonesian subsidiary to a bank account in London. The auditors also discover that Company B entered into a contract with the Cameroon government that required Company B to pay $2 million to improve Cameroon’s schools and to make the payment to a bank account held by the business advisor of Cameroon’s President. Red Flags: • Indonesia and Cameroon are high-risk countries • Large, round-number payments and payments to overseas accounts are red flags • While the $2 million to improve Cameroon’s schools is included in a legitimate contract, making the payment to an individual suggests an improper purpose • An investigation of these issues, and more extensive due diligence, should be conducted before this deal goes through
  30. 30. This presentation is intended only as a general discussion and should not be regarded as legal advice. For more information, please contact your Fund Services Group attorney or Lisa A. Prager of WSGR's white collar crime and internal investigations practice.