Avoiding Pittfalls of the FCPA


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The United States Department of Justice and Securities and Exchange Commission have dramatically increased their efforts to prosecute companies under The Foreign Corrupt Practices Act (“FCPA”). If your company conducts business outside of the United States, it is imperative that you understand the FCPA. Criminal and civil penalties may result for those that violate the FCPA. Further, officers and directors can be prosecuted even if they were not directly involved in the act that constitutes a violation of the FCPA. Recent trends have also shown that no industry is immune; even companies in traditionally “low-risk” industries are subject to prosecution.

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Avoiding Pittfalls of the FCPA

  1. 1.  The Foreign Corrupt Practices Act was enacted in 1977 in response to a growing number of companies that admitted to making “questionable payments” to both foreign and domestic entities. The Foreign Corrupt Practices Act has two primary components:  the anti-bribery provisions; and  books and records provisions.  includes internal controls
  2. 2.  The Foreign Corrupt Practices Act prohibits:  Any person or entity from using jurisdictional means to corruptly make a payment or give anything of value to a foreign governmental official for the purpose of obtaining or retaining business. See 15 U.S.C. §§ 78dd-1(a) & 78dd-2(a).
  3. 3. ‣ The FCPA applies to: ‣ Any publicly traded company that is registered with the SEC. See 15 U.S.C. § 78dd-1. ‣ All officers, directors, agents, employees, and shareholders of publicly traded companies. See 15 U.S.C. § 78dd-1(a). ‣ Any individual who is a citizen, national or resident of the United States. See 15 U.S.C. § 78dd-2(h)(1)(A). ‣ Any corporation, partnership, association, joint-stock company, business trust, unincorporated organization or sole proprietorship which has its principal place of business in the United States or which is organized under the laws of a State of the United States or a territory, possession or commonwealth of the United States. See 15 U.S.C. § 78dd-2(h)(1)(B). • This includes all officers, directors, employees, agents, stockholders or representatives of an entity. See 15 U.S.C. § 78dd-2(a). ‣ The 1998 amendments expanded the FCPA to allow for the prosecution of any person who takes any act in furtherance of a corrupt payment while in the territory of the United States. See 15 U.S.C. § 78dd-3(a).
  4. 4.  Using “jurisdictional means” is making use of the mails or any means or instrumentality of interstate commerce in furtherance of a corrupt act. See 15 U.S.C. §§ 78dd-1(a) & 78dd-2(a).  There is no requirement the corrupt act make use of the U.S. mails or other means or instrumentalities of interstate commerce.
  5. 5.  The person or entity making or authorizing the payment must have a corrupt intent. • The payment must be intended to induce the recipient to misuse his or her official position to direct business wrongfully to the payer or to any other person. See H.R. Rep. No 95-640, at 8 (1977); S. Rep. No. 95-114, at 10-11 (1977), as reprinted in 1977 U.S.C.C.A.N. 4098, 4108; see also United States v. Kay, 513 F.3d 461, 463 (5th Cir. 2008).
  6. 6.  The offer, promise or authorization of a corrupt payment constitutes a violation of the statute. See 15 U.S.C. §§ 78dd-1(a) & 78dd- 2(a). • If the payment is intended to influence any act or decision of a foreign official in his or her official capacity, to obtain an improper advantage or to induce a foreign official to use his or her influence improperly to affect or influence any act or decision, it is a violation and can be prosecuted.
  7. 7.  The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value. See 15 U.S.C. §§ 78dd-1(a) & 78dd-2(a). • The DOJ and SEC continue to expand this definition to include more items that are prohibited. A few examples of “items of value” that were determined to constitute violations of the FCPA:  charitable donations;  loans with favorable terms;  transportation of household goods; and  college scholarships.
  8. 8.  “Facilitating payments” are currently permitted under the FCPA.  Any facilitating or expediting payment to a foreign official, political party or party official for the purpose of expediting or securing the performance of routine governmental action is permitted. See 15 U.S.C. §§ 78dd-1(b) & 78dd-2(b).
  9. 9. ‣ The following actions are permissible under the FCPA. See 15 U.S.C. §§ 78dd-1(f)(3) & 78dd-2(h)(4).  Obtaining permits, licenses or other official documents to qualify a person to do business in a country. • Processing governmental papers, such as visas and work orders. • Providing police protection, mail pick-up and delivery, scheduling inspections associated with contract performance or inspections related to the transport of goods across the country. • Providing phone service, power and water supply, loading/unloading cargo or protecting perishable products or commodities from deterioration.
  10. 10.  A "foreign official" is defined as any officer or employee of a foreign government, a public international organization, or any department or agency thereof, or any person acting in an official capacity, including public officials. See 15 U.S.C. §§ 78dd-1(f)(1)(A) & 78dd- 2(h)(2)(A). • The definition of foreign official is very broad and encompasses political parties, party officials, and even candidates for foreign political office.
  11. 11.  The FCPA prohibits payments made in order to assist the company in obtaining or retaining business for or with or directing business to any person. See 15 U.S.C. §§ 78dd-1(a) & 78dd-2(a). • The term "obtaining or retaining business" is interpreted very broadly, and encompasses more than the mere award or renewal of a contract. • Please note the business to be obtained or retained does not need to be with a foreign government or foreign government instrumentality.
  12. 12. ‣ Examples of violations include: • Actions taken by a company to reduce its tax burden was a violation as the company saved valuable resources which permitted it to submit more competitive bids, thereby creating an unfair advantage. United States v. Kay, 359 F.3d 738, 739 (5th Cir. 2004). • Money paid to influence the repeal of a government decree was a violation as a potential future advantage could be gained. See SEC v. Monsanto Company, Case No. 1:05CV00014, (U.S.D.C., D.D.C) (filed January 6, 2005).
  13. 13.  The FCPA prohibits corrupt payments through intermediaries. It is unlawful to make a payment to a third party knowing that all or a portion of the payment will go directly or indirectly to a foreign official. See 15 U.S.C. §§ 78dd-1(a)(3) & 78dd-2(a)(3).  Intermediaries may include joint venture partners, agents or representatives.
  14. 14.  The term “knowing” includes conscious disregard, willful blindness, and deliberate ignorance. See 15 U.S.C. §§ 78dd-1(f)(2) & 78dd-2(h)(3).
  15. 15.  Due diligence  Be cautious when forming business relationships; and  Investigate potential foreign representatives and joint venture partners. Potential inquires may include:  Does the person have personal or professional ties to the government;  Who are their clients;  What is their reputation with their clients; and  What is their reputation with the U.S. Embassy or Consulate, local bankers and other business associates.
  16. 16.  A country with a history of violations; An industry with a history of violations; A refusal by an agent or representative to certify compliance; An agent that has family or business ties to a governmental official; The agent or representative insists his or her identity not be disclosed; and The potential foreign governmental official recommends the agent.
  17. 17.  The agent lacks the staff to perform his or her services; The agent claims a particular amount of money is needed to get the business or make the arrangements; The size of the payment or commission is substantially above the going rate; and The payment is made through indirect means.
  18. 18. ‣ Corporations can be fined up to $2,000,000 for a single violation of the FCPA. See 15 U.S.C. §§ 78dd-2(g)(1) & 78ff(c)(1).  Under the Alternative Fines Act, the actual fine may be up to twice the benefit that the defendant sought to obtain by making the corrupt payment.‣ Officers, directors, employees or agents acting on behalf of companies who willfully violate the bribery provisions can be fined up to $100,000, imprisoned for up to five years or both. See 15 U.S.C. §§ 78dd-2(g)(2) & 78ff(c)(2).  Whenever a fine is imposed upon an officer, director, employee, agent or stockholder of a company, the fine may not be paid, directly or indirectly, by the company. See 15 U.S.C. §§ 78dd-2(g)(3) & 78ff(c)(3).
  19. 19. ‣ The Attorney General may bring a civil action against any company or any officer, director, employee, or agent of a company, or stockholder acting on behalf of the company, who violates the anti-bribery provisions. A penalty of up to $10,000 may be imposed for a single violation. See 15 U.S.C. § 78dd-2(g).‣ The Attorney General can also seek injunctive relief. See 15 U.S.C. § 78dd-2(d).‣ Prohibition from doing business with the Federal Government.‣ Actions by foreign and/or state governments.‣ Private actions by competitors.
  20. 20.  The general federal five-year statute of limitations applies to FCPA prosecutions. See 18 U.S.C. §3282. ***However, the government routinely charges companies and individuals with conspiracy to violate the FCPA in place of or in addition to substantive FCPA charges, which the government can use to stretch the statute of limitations period. For conspiracy offenses, the government would need to prove that an act in furtherance of the conspiracy occurred during the limitations period. See, e.g., United States v. Milstein, 401 F.3d 53, 71 (2d Cir. 2005). Tolling Agreements
  21. 21. ‣ The payment, gift, offer or promise of anything of value was lawful under the written laws of the foreign official’s country; or‣ The payment, gift, offer or promise of value that was made was reasonable and a bone fide expenditure, such as travel and lodging expenses, incurred by a foreign official and was directly related to:  the promotion, demonstration or explanation of products or services; or  the execution of a contract with a foreign government or agency. See 15 U.S.C. §§ 78dd-1(c) & 78dd-2(c).
  22. 22. ‣ The Department of Justice and Securities and Exchange Commission prosecuted more cases between 2005-2010 than it did from 1977-2005.  In December of 2008, Siemens AG resolved an FCPA dispute by agreeing to pay $1.6 billion to the Department of Justice, SEC, and the Munich Public Prosecutor’s Office (approximately $800 million was paid to U.S. authorities).  In February of 2009, Kellogg Brown & Root, Inc. (“KBR”) agreed to pay $579 million to regulators.  In June of 2010, Technip settled with the SEC and DOJ for a total of $338 million.  In July of 2010, Snamprogetti Netherlands B.V. and its parent company Saipem agreed to pay $365 million to resolve FCPA-related charges. Snamprogetti, KBR, Technip, and JGC of Japan were part of a four- company joint venture called TSKJ. The combined settlement, $1.28 billion, is the largest paid to date to the United States from an FCPA violation.
  23. 23. Prosecutions Against Companies353025 Department of20 Justice15 SEC10 5 0 2004 2005 2006 2007 2008 2009 2010 2011
  24. 24. Individual Criminal Prosecutions605040 Department of30 Justice2010 0 2004 2005 2006 2007 2008 2009 2010 2011
  25. 25. “The prospect of significant prison sentences for individuals should make it clear to every corporate executive, every board member, and every sales agent that we will seek to hold you accountable for FCPA violations.”
  26. 26.  The U.S. government assessed approximately $1.7 billion dollars in fines during 2010. In January of 2010, the U.S. government charged 22 individuals with FCPA violations, which is the largest single investigation and prosecution against individuals in the 34-plus year history of the FCPA. In March of 2010, NEXUS Technologies became the first company to cease operations in the United States as a result of FCPA prosecution. In April of 2010, Charles Jumet was sentenced to 87 months in prison for bribing Panamanian officials to secure maritime contracts for Ports Engineering Consultants Corporation, and making a false statement to federal officials. In addition to his prison sentence, Mr. Jumet was ordered to pay a $15,000 fine and will serve three years of supervised release following his prison term. This is the longest prison term imposed to date against an individual for violating the FCPA.
  27. 27.  Settlements:  Johnson & Johnson;  Tyson Foods;  Maxwell Technologies;  IBM;  Ball Corporation; and  Rockwell Automation. Jeffrey Tesler agreed to forfeit $148 million for his role in the TSKJ consortium. Albert Jack Stanley sentenced to 84 months in prison and will pay $10.8 million in restitution.
  28. 28. • Avery Dennison Corp. (adhesives and consumer products)• Nature’s Sunshine Products, Inc. (nutritional supplements)• Gerald and Patricia Green (entertainment executives)• Control Components Inc. (valves)• Smith & Wesson (firearms)• Avon (cosmetics)• Johnson & Johnson (pharmaceutical products)• Tyson Foods (food industry)
  29. 29. Is the U.S. company liable underthe FCPA? Books and records of U.S. Entity Subsidiary B are incorporated into books and records of U.S. Entity for purposes of financial reporting. Subsidiary A Subsidiary B engages an agent who makes improper payments partially facilitated by Subsidiary Bs inflated commission payments. Subsidiary B
  30. 30.  Comverse Technology Inc. (telecommunications) Total settlement amount was $2.8 million (A criminal fine of $1.2 million was paid in connection with a DOJ non-prosecution agreement; $1.6 million in disgorgement and prejudgment interest was paid to settle the SEC complaint).
  31. 31. DOJ Prosecutions Self-reporting Government Initiated
  32. 32.  The Department of Justice recommends self- reporting.  Credit can be given to companies that report violations and cooperate fully with the DOJ.  Siemens  Helmerich & Payne  DOJ can offer guidance on the issues that it wishes to investigate.  Creates an open dialogue with the DOJ regarding investigation and remediation.
  33. 33.  The Dodd-Frank Wall Street Reform and Consumer Protection Act rewards whistleblowers who assist the SEC in investigating securities violations, including violations of the FCPA. • The whistleblower incentive program allows a whistleblower, who contributes "original information" that leads to recoveries of monetary sanctions of more than $1 million in any criminal or civil enforcement action under the securities laws by the SEC, the US Justice Department, another federal agency, a self-regulatory organization, or a state attorney general, a bounty of between 10 and 30 percent of the recovery. • For example, a whistleblower in the KBR matter could have received between $57.9 and $173.7 million based on the combined DOJ and SEC settlement amounts paid by the company.
  34. 34.  Prosecutions will continue to increase.  The DOJ reportedly has over 160 open FCPA investigations. The DOJ is devoting additional resources as well as utilizing specialized task forces to deter individuals and companies from violating the FCPA.
  35. 35. ‣ Educate and communicate with all employees, agents, and representatives the importance of following the guidelines set forth in the FCPA;‣ Implement an FCPA Compliance Program into your business; and‣ Use due diligence when forming partnerships or relationships.
  36. 36.  A compliance program that punishes violations but rewards ethical behavior; A strong whistle-blower program (and protection) through a hotline or other mechanism; Significant and direct reporting by the FCPA Compliance Officer to the Board of Directors; A compliance program that evolves with change; and A compliance program that’s open and visible.
  37. 37. • The Federal Sentencing Guidelines Manual states: “… the prior diligence of an organization in seeking to prevent and detect criminal conduct has a direct bearing on the appropriate penalties and probation terms for the organization if it is convicted and sentenced for a criminal offense.”• The U.S. Attorney’s Manual lists "the existence and effectiveness of the corporation’s pre-existing compliance program," and "the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one," among the factors relevant to whether an organization should be charged.
  38. 38.  Looper Reed & McGraw, P.C.  Joshua R. Walker  (713) 986-7138  jwalker@lrmlaw.com The Department of Justice  Foreign Corrupt Practices Act Opinion Procedure  http://www.usdoj.gov/criminal/fraud/fcpa/