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Chicago And Houston Slides 20111109b


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Chicago And Houston Slides 20111109b

  1. 1. Anti-CorruptionCompliance Solutionsin an AggressiveEnforcement EraMichael Volkov, Partner(202) 263-3288mvolkov@mayerbrown.comVince Connelly, Partner(312) © Copyright Mayer Brown LLP, 2011
  2. 2. Overview I. Trends in Anti-Corruption Enforcement II. Playing Well With Others: Acquisitions, Joint Ventures and Agents III. Third Parties IV. Compliance Programs2
  3. 3. Trends inAnti-Corruption Enforcement3
  4. 4. Trends in Anti-Corruption Enforcement Major Risk Factors for Corruption How much does your business depend on:  Government sales;  Dealings with state-owned enterprises;  Regulatory approvals, visas, and inspections/audits;  Hiring of third party agents and consultants. Do you have an existing policy:  To conduct due diligence of third party agents and consultants;  To conduct due diligence of prospective target company to acquire or joint venture partner;  To prospectively approve expenses for gifts, meals, entertainment and travel.4
  5. 5. Trends in Anti-Corruption Enforcement Anti-Corruption Enforcement GLOBAL enforcement is on the rise. In the past three years, In response to international US prosecutors have pressure, Canada its increasing enforced the FCPA to enforcement of its the tune of $3.6 billion. anti-corruption law. Germany, Spain and other The UK Bribery Act became EU countries are effective on July 1, 2011. increasing enforcement. China and the US are increasing Asia and Latin American countries cooperation and beginning to establish have been slower to enact tough, new a framework for information sharing anti-corruption laws and begin and enforcement; China enacted aggressive enforcement programs. its own foreign bribery law. Risk of anti-corruption multi-jurisdictional, “piggy-back” actions is growing.5
  6. 6. Trends in Anti-Corruption Enforcement Enforcement Trends Aggressive FCPA enforcement has resulted in corporate mega-fines:  For 2010, fines total over $1.6 billion - more than half of all federal criminal fines collected.  Fueled by voluntary disclosures and industry-wide investigations - oil, pharmaceuticals and medical devices, military and law enforcement equipment, and telecommunications.  FBI has dedicated FCPA squad which is using aggressive investigative tactics - consensual recordings, ambush interviews, undercover officers, informants, search warrants and wiretaps.  SEC Dodd-Frank whistleblower bounty program will increase number of credible complaints, investigations and prosecutions.6
  7. 7. Trends in Anti-Corruption Enforcement FCPA Enforcement at a Glance: Increase in Actions 2010 witnessed an 85% increase in FCPA enforcement actions over 2009, which itself was a record year. 60 DOJ 50 48 SEC 40 30 26 26 20 20 20 18 13 14 10 7 7 8 5 2 3 0 2004 2005 2006 2007 2008 2009 20107
  8. 8. Trends in Anti-Corruption Enforcement FCPA Enforcement at a Glance: Blockbusters 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 $400 $800 Technip $300 $579 JGC Corporation Daimler $200 $400 Alcatel-Lucent $218.8 $365 $338 Panalpina Johnson & Johnson $100 $185 $137 $82 $70 $08
  9. 9. Trends in Anti-Corruption Enforcement FCPA Enforcement at a Glance: Prison Sentences Jorge Granados, CEO Latin Node 46 months Robert Antoine, Director 48 months Haiti Telco (2010) Juan Diaz, Owner Third party consultant 57 months to Haiti Telco (2010) Douglas Murphy, President 63 months American Rice, Inc. (2002) Carlos Rodriguez, VP 84 months Terra Telecomm Albert Jack Stanley, CEO 84 months and Chairman, KBR (2009) Charles Paul Edward Jumet, President, Ports Engineering 87 months Consultants Corporation (2009) Joel Esquenazi, Pres. Terra Telecomm (2009) 180 months (15 Years) 0 10 20 30 40 50 60 70 80 90 1009
  10. 10. Trends in Anti-Corruption Enforcement FCPA: Whistleblower Bounty  Whistleblower Bounty program offers rewards of 10 to 30 percent of any settlement over $1 million. SEC’s Whistleblower Office opened on 8/12/2011.  SEC regulations have been adopted (pending appeal).  SEC estimates it will receive 30,000 complaints a year; 1-2 credible complaints each day.  With certain exceptions, whistleblowers must first file complaint internally with company and wait for 120 days before filing with SEC.  Companies will increase self-reporting to pre-empt whistleblowers.10
  11. 11. Trends in Anti-Corruption Enforcement FCPA: Partnerships “Partnerships like the one we have with the Serious Fraud Office are critical to our transnational approach to combating foreign bribery, and we intend increasingly to rely on our foreign partners in future cases.” — Lanny Breuer, Assistant Attorney General, Nov. 4, 2010 SFO Serious Fraud Office THE UNITED STATES of
  12. 12. Trends in Anti-Corruption Enforcement FCPA v. UKBA: Offenses and Defenses FCPA UK Bribery Act Bribery of foreign government officials Bribery of public and private sector (including state enterprise employees, political individuals – includes a discrete offence parties, party officials, political candidates, of bribing a foreign public official public international organization employees) Only penalizes those making bribes Accepting bribes is also punishable Prosecutes active participation in bribery, No accounting offence in the Bribery Act but though internal controls requirement is Companies Act 2006 includes an offence of independent of any bribery activity failing to keep adequate accounting records Consideration of compliance programs at “Adequate procedures” is the only potential prosecution and sentencing stages defense available against failing to prevent bribery Statutory exception for “facilitation Facilitation payments only permitted if local payments” narrowly defined written law so permits Reasonable and bona fide expenditure on travel, No express exception for corporate lodging and entertainment expenses permitted if hospitality but Guidance advises that directly related to promotion of product or service “reasonable and proportionate” or to performance of government contract hospitality is permissible12
  13. 13. Trends in Anti-Corruption Enforcement FCPA v. UKBA: Territorial Effect and Punishment FCPA UK Bribery Act Conduct within the US Conduct (including omissions) within the UK by anyone by anyone Conduct outside of the US if by an issuer Conduct (including omissions) outside of the UK of US Securities or a “domestic concern” by persons (natural and legal) with a close (e.g. a company organized under US law connection to the UK, if that conduct would or having its principal place of business in form an offence if committed in the UK. If a the US) – or anyone acting on its behalf; commercial organization “carries on a business foreign persons who commit an act in the or part of a business in the UK” then may be United States in furtherance of a subject prosecuted for “failing to prevent” bribery even act are also covered if the bribery occurs entirely outside of the UK Up to 5 years prison sentence for bribery, 20 Up to 10 years prison sentence – accounting years for accounting offences offences may be prosecuted under other Statutes Criminal fine for entities up to $2m for bribery Unlimited fine; additionally Serious or $25m for violation of accounting provisions, Crime Prevention Orders, Confiscation or twice the benefit sought, and debarment; for Orders, Winding up proceedings, individuals, fines of up to $100,000 (bribery) or debarment, director disqualification $5 million (accounting offences) and regulatory/disciplinary action Civil penalties up to $10,000 per bribery violation Civil Recovery Orders – no criminal conviction or $500,000 per corporate accountancy violation required (lower threshold of proof)13
  14. 14. Playing Well With Others: Acquisitions, Joint Ventures and Agents14
  15. 15. Playing Well With Others: Acquisitions, Joint Ventures and Agents Case Study: Damn the Torpedoes, Full Speed Ahead! After months of negotiation, CEO reaches deal to acquire target company. For various business reasons, CEO insists on closing the deal within 2 weeks. What anti-corruption risks are created? In such a situation, what should Chief Compliance Officer do?15
  16. 16. Playing Well With Others: Acquisitions, Joint Ventures and Agents Buying into an Anti-Corruption Violation An acquiring company can be held liable for FCPA violations committed by a target company prior to the acquisition:  Alliance One: $4.2 million fine and $10 million disgorgement for pre-acquisition FCPA violations.  Saipem: $240 million fine for conduct of an acquired subsidiary of ENI, Snamprogetti, where the FCPA violations occurred over 2 years prior to the acquisition. NOTE: Not only may liability be inherited for a companys past action, but a firm may be liable for ongoing corruption even if there is no direct evidence that the company or its officers knew of the corrupt acts.16
  17. 17. Playing Well With Others: Acquisitions, Joint Ventures and Agents Due Diligence of Target Companies Basic Risk Assessment (countries of operation, industry, extent of foreign government interactions) Overall Compliance Structure Prior History of Bribery or Internal Investigations Internal Controls Use of Third Party Intermediaries Anti-Corruption Training Employee Discipline/Hot-Line Reporting Assessment and Review Procedures17
  18. 18. Playing Well With Others: Acquisitions, Joint Ventures and Agents Risk Assessment: The Foundation for Compliance The risk assessment should be a formal and documented review which examines:  The geographic and industry risks: nature and extent of corruption (countries reputation for corruption) and history of corruption in industry;  The level of government interactions – business and regulatory, and specific interactions and relationships with former government officials and relatives;  The use of third party agents and consultants;  The level of gifts, entertainment, meals and other benefits given to foreign officials and/or their relatives;  Mergers, acquisitions and joint ventures.18
  19. 19. Playing Well With Others: Acquisitions, Joint Ventures and Agents Who Are the Real Parties in Interest? Complex corporate relationships or the presence of former government officials raise risk that government officials may be real party in interest:  Due diligence must dig as far as possible.  Interviews and site visits of parties are important.  Such steps combined with specific representations and warranties may tip the balance in going forward.  A detailed document outlining investigation is important to avoiding liability.19
  20. 20. Playing Well With Others: Acquisitions, Joint Ventures and Agents Partnering with a Government Enterprise Companies are often required to partner with foreign government enterprises (e.g. China joint ventures).  Due diligence of foreign enterprise is critical.  Building in controls for interactions with foreign state-owned enterprise.  Contractual provisions in joint venture agreement including representations and warranties governing compliance and requiring training.  Policies for gift giving, dealings with foreign officials and other proactive measures should be developed.20
  21. 21. Playing Well With Others: Acquisitions, Joint Ventures and Agents How Much Diligence is Required to Avoid Liability?  Justice Department appears to have modified its policies governing pre- and post-acquisition due diligence requirements, relaxing its policy outlined in 2008 Halliburton Opinion Release (08-02).  In Halliburton, Justice Department decided not to impose successor liability on Halliburton on condition that Halliburton complied with specified stringent conditions relating to due diligence, and reporting requirements.  Halliburton was prevented by UK law from obtaining information from target company before the acquisition.  In recent enforcement settlement involving Johnson & Johnson, Justice Department imposed “enhanced compliance” obligations which relaxed timing obligations on pre- acquisition due diligence and post acquisition FCPA compliance by newly-acquired companies.21
  22. 22. Playing Well With Others: Acquisitions, Joint Ventures and Agents Case Study: Gift Giving in Asia One of the most prevalent areas for violations is operating in a gift-giving business culture.  Chinese business culture is based on relationships, or guanxi, which are formed in part by giving gifts and doing favors.  Line between modest gift giving and illegal intent to influence can be murky.  Establishing a review protocol which balances amount of gift, level of influence of foreign official (or private in case of UKBA) is helpful.  Documenting lack of intent and steps taken to ensure no intent to bribe.22
  23. 23. Third Parties23
  24. 24. Third Parties Case Study: The Critical Agent  Proposed agent is needed to secure regulatory approval in short period of time for transaction: − $1 million 30-day success fee; − Known in the government but not specifically in the office for approval.  Due diligence means “reasonable inquiries” but must address red flags: – Prior history of bribery and other crimes; – Conduct interview, and interview 3 business references; – Nature of services, reasonableness of fee in relation to market and overall size of transaction; and method of payment.  Written contract with representations and warranties on compliance; right to inspect and audit third-party books; and right to terminate contract if believe violation has or will occur.24
  25. 25. Third Parties Due Diligence Screening of Third Party Agents Screen the Initial Terms of Relationship with Third Party:  Develop a different screening procedures for review of individual transactions.  Do not over-standardize procedure. Need to tailor to individual circumstances in each country based on risk.  Need to conduct background check to determine (5-10 year history) to determine if: a) ties to foreign government officials and employees; or b) existence of any pending or prior investigations of bribery or other malfeasance.  Create written package and record of review and approval process to demonstrate compliance.25
  26. 26. Third Parties Case Study: Obtaining the Necessary Permit  In order to open a business in Afghanistan, a company needs a license. Company applies and wait and waits and nothing happens.  Out of frustration, company finds another agent to help obtain the approval. Company conducts limited due diligence. Hires the agent with no success fee or contingency.  Within 24 hours, the agent obtains the license.  Company learns that agent was relative of head of licensing office for new businesses. What should company do?26
  27. 27. Compliance Programs27
  28. 28. Compliance Programs How to Solve Specific Anti-Corruption Compliance Problems? There is a solution which minimizes risk in response to every problem  The ultimate decision whether to go forward in the face of some risks depends on risk sensitivity versus benefit to the business.  Some key principles and strategies are: – Building a record of good faith consideration of issues with documentation. Such a solution will negate any inference of criminal intent; – Good faith attempts to comply based on adherence to procedures and reasonable interpretations of the law.  Acquire all of the facts concerning the issue.  Document your inquiry and reasoning for your action.28
  29. 29. Compliance Programs Principles for a Successful Compliance Program The key elements of a successful program require: 1) A commitment to compliance from top management and a consistent message throughout the company. 2) A careful weighing of risk, commitment to compliance and business needs so that there is “buy-in” at every level of the company. 3) A business-practical approach which is flexible to respond to risks, local business operations, and effective compliance needs. 4) Avoiding a Dr. No. perception and creating a positive compliance structure which emphasizes common sense, communication and issue identification, solutions to common problems; and recognizes importance of new opportunities. 5) Building in controls and procedures which ensure adequate documentation of compliance reviews and actions.29
  30. 30. Compliance Programs The Critical Building Block: Tone at the Top  The company should issue a clear and visible corporate policy against corruption violations.  Demonstrate a strong commitment from senior management.30
  31. 31. Compliance Programs Anti-Corruption Policies and Procedures The company should implement specific policies for:  Gifts, hospitality, entertainment, and travel expenses;  Political contributions, charitable donations and sponsorships;  Facilitation payments, solicitation and extortion.31
  32. 32. Compliance Programs Train, Train, Train: Train of Fools Critical to design, implement and document extensive training program. Communication and education are keys to compliance.32
  33. 33. Compliance Programs Train, Train, Train: Train of Fools Training program should include following elements:  Train board of directors and top management;  Train the trainers;  Train gatekeepers who are most likely to detect corruption (in-house counsel, auditors, HR personnel);  Train sales and regulatory interaction staffs separately;  Message should be tailored to audience;  Records should be maintained of every training program.33
  34. 34. Compliance Programs Keystones  Senior Management Oversight and Reporting: Designate one or more senior corporate executives of the company to implement and monitor compliance.  Guidance and Monitoring: Establish internal guidance protocol, internal reporting via hotline or anonymous internet-based.  Annual Review: Review and assess anti-corruption compliance program at least annually, and implement, where appropriate, continuous monitoring procedures (e.g. regular surveys and other procedures).  Internal Controls: The company should ensure that it has a system of internal controls for the purpose of foreign bribery or concealing bribery.34
  35. 35. Compliance Programs Avoiding Jail: How to Protect Against Criminal Prosecution The two key principles: If decisions are made and actions taken which are transparent and inconsistent with criminal intent, companies will avoid criminal prosecution. Disguising actions and intent make criminal prosecution more likely.35
  36. 36. Compliance Programs Affirmative Defense Reasonable and Bona Fide Expenditures Reasonable and bona fide expenditures, such as travel and lodging expenses that are legal under local law and are directly related to: The promotion, demonstration, OR The execution or performance(s) or explanation of products of a contract with a foreign or services government or agency thereof  CONTRACT 36
  37. 37. Contact InformationMichael Volkov, Partner(202) 263-3288mvolkov@mayerbrown.comVince Connelly, Partner(312) 37