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Us foreign corrupt practices act presentation to jsm partners (july 2008) 10049322-3


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Us foreign corrupt practices act presentation to jsm partners (july 2008) 10049322-3

  1. 1. US Foreign Corrupt Practices Act July 2008 20899818 Presentation to Mayer Brown JSM Partners
  2. 2. Overview <ul><li>FCPA overview </li></ul><ul><li>Significant FCPA issues </li></ul><ul><li>PRC cases </li></ul><ul><li>Impact on Mayer Brown JSM clients </li></ul><ul><li>Practice overview </li></ul><ul><li>List of representative clients </li></ul><ul><li>Mayer Brown JSM merger </li></ul>
  3. 3. FCPA overview <ul><li>U.S. law passed in 1977 to prohibit bribery of foreign officials / first aggressive anti-bribery statute among developed nations </li></ul><ul><li>Two Main Components </li></ul><ul><ul><li>Anti-Bribery Provisions : Prohibits bribes (or offers to bribe) made to foreign officials, political parties, candidate for public office whether made directly or through a third party for the purpose of obtaining or retaining business </li></ul></ul><ul><ul><li>Accounting Provisions : Requires accurate books and records and adequate accounting and financial controls / no allegations of bribery are required </li></ul></ul><ul><li>Violations: Include both criminal and civil penalties including imprisonment, fines, loss of export licenses and suspension from competing on government contracts </li></ul>
  4. 4. Who is liable under the FCPA? <ul><li>Domestic </li></ul><ul><ul><li>All US “issuers” and private companies (“domestic concerns”) using instrumentalities of interstate commerce </li></ul></ul><ul><ul><li>Any US corporation or national or any foreign bribery-related conduct </li></ul></ul><ul><ul><li>US citizens or foreign nationals operating in the US or using instrumentalities </li></ul></ul><ul><li>Foreign </li></ul><ul><ul><li>Foreign corporations subject to SEC regulation (e.g., via ADRs) and using instrumentalities </li></ul></ul><ul><ul><li>All foreign corporations when in US territory, whether or not they use instrumentalities of interstate commerce </li></ul></ul><ul><li>Includes directors, officers, employees, and agents of entities subject to the statute </li></ul>
  5. 5. PRC cases <ul><li>InVision Technologies   (2004) </li></ul><ul><ul><li>Made payments to third party distributors and agents to obtain and secure business for InVision’s explosives detection products </li></ul></ul><ul><li>Diagnostic Products Corp. (DPC) (2005) </li></ul><ul><ul><li>Company’s subsidiary, DPC (Tianjin) Co., named as an “agent” for payments made to doctors and other officials at state-owned hospitals in China </li></ul></ul><ul><li>York International (2007) </li></ul><ul><ul><li>Authorized kickback payments to agents and Chinese government officials to obtain orders on commercial and government projects </li></ul></ul>
  6. 6. PRC cases <ul><li>Lucent Technologies, Inc. (2007) </li></ul><ul><ul><li>Provided Chinese government officials with pre-sale trips to the US that included primarily sightseeing, entertainment and leisure activities </li></ul></ul><ul><li>AGA Medical (2008) </li></ul><ul><ul><li>Company caused payments to be paid through a distributor to physicians at state-owned hospitals in exchange for purchases of AGA’s products </li></ul></ul><ul><li>Faro Technologies (2008) </li></ul><ul><ul><li>Company made payments to employees of state-owned enterprises through an intermediary in China to secure contracts </li></ul></ul>
  7. 7. FCPA overview: Significant issues <ul><li>Foreign officials </li></ul><ul><li>Facilitation payments </li></ul><ul><li>Foreign subsidiaries and internal controls </li></ul><ul><li>Intermediaries (agents, consultants, representatives) </li></ul><ul><li>Merger & acquisition </li></ul><ul><li>Joint ventures </li></ul><ul><li>Gifts / travel / entertainment </li></ul><ul><li>Charitable contributions </li></ul>
  8. 8. Significant issue: Who is a “foreign official”? <ul><li>Foreign officials </li></ul><ul><ul><li>Commercial customers are really “Foreign Officials” </li></ul></ul><ul><ul><li>Many businesses are state owned </li></ul></ul><ul><ul><li>Many business people are government officials </li></ul></ul><ul><ul><li>Former government officials serve as “consultants” </li></ul></ul><ul><li>Enforcement actions: </li></ul><ul><ul><li>Diagnostic Products Corporation (2005) – Physicians and lab personnel at government-owned hospitals in China </li></ul></ul><ul><ul><li>GE/InVision Technologies (2005) – Airport officials in China </li></ul></ul><ul><ul><li>Paradigm BV (2007) – Employee of China National Offshore Oil Co. </li></ul></ul>
  9. 9. Significant issues: Facilitation payments <ul><li>Specifically permitted under FCPA </li></ul><ul><li>Facilitating or expediting payment to a foreign official, political party, or party official, the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official </li></ul><ul><li>Examples of facilitation payments </li></ul><ul><ul><li>Obtaining permits, licenses to do business </li></ul></ul><ul><ul><li>Processing government papers – visas </li></ul></ul><ul><ul><li>Police protection, mail delivery </li></ul></ul><ul><ul><li>Phone service, power, water supply, loading/unloading cargo, perishable products </li></ul></ul>
  10. 10. Significant issues: Facilitation payments <ul><li>Enforcement actions: Nigeria oil field initiative </li></ul><ul><li>DOJ steadfast in refusal to define grease payments </li></ul><ul><li>You know it when you see it </li></ul><ul><ul><li>Amount – small </li></ul></ul><ul><ul><li>Key factor: Purpose of payment – is it truly ministerial? </li></ul></ul><ul><ul><ul><li>Reduce a customs/tax obligation </li></ul></ul></ul><ul><ul><ul><li>Licenses/permits/registrations tantamount to obtaining/retaining business </li></ul></ul></ul><ul><ul><ul><li>Were you clearly entitled? </li></ul></ul></ul><ul><ul><ul><li>Where is $$ going? </li></ul></ul></ul><ul><ul><li>Don’t forget local law </li></ul></ul>
  11. 11. Significant issues: Checklist for hiring intermediaries <ul><li>Retention process </li></ul><ul><ul><li>Application </li></ul></ul><ul><ul><li>Background check </li></ul></ul><ul><ul><li>Interview </li></ul></ul><ul><ul><li>Management approval </li></ul></ul><ul><li>Warning signs: experience, payment terms, family members, former government official, prior legal problems </li></ul><ul><li>Contractual safeguards </li></ul><ul><li>Training </li></ul>
  12. 12. Significant issues: Types of intermediaries <ul><li>Consultants </li></ul><ul><li>Vendors </li></ul><ul><li>Distributors </li></ul><ul><li>Professional services firms </li></ul><ul><li>Agents </li></ul>
  13. 13. Significant issues: Agents / Intermediaries <ul><li>Enforcement actions </li></ul><ul><ul><li>Baker Hughes (2007) – $5.2 million to consultant in Isle of Man to secure development of Kazakhstan oil field </li></ul></ul><ul><ul><li>BellSouth (2002) – Nicaragua/Venezuela; $60K to wife of Chairman of legislative committee as “consulting” fee </li></ul></ul><ul><ul><li>Delta Land (2007) – Payments to foreign officials through third party contractor for travel, gifts </li></ul></ul><ul><ul><li>Dow (2007) – Slush fund generated through overcharges by business partner distributor in India </li></ul></ul><ul><ul><li>Vetco International (2007) – Payments to Nigerian customs official by carrying and forwarding agent in order to obtain temporary import permit for oil rig </li></ul></ul>
  14. 14. Significant issues: M&A activities <ul><li>Enforcement actions: </li></ul><ul><ul><li>Titan (2005) – While conducting pre-acquisition due diligence of Titan, Lockheed discovered payments to obtain telephony contract in Republic of Benin. Deal failed to close because of FCPA problems. Titan prosecuted </li></ul></ul><ul><ul><li>GE / InVision (2005) – While conducting pre-acquisition due diligence of InVision, GE discovered FCPA concerns. Target had enlisted consultants to obtain contracts for explosives detection equipment in China, Thailand and Philippines. Deal closed, but acquiring company forced target to make a voluntary disclosure </li></ul></ul>
  15. 15. Significant issues: Due diligence for M&A activities <ul><li>Due diligence: the rationale </li></ul><ul><ul><li>The spectre of successor liability </li></ul></ul><ul><ul><li>The opportunity to resolve potential liabilities </li></ul></ul><ul><ul><li>The determination of transaction structure and value </li></ul></ul><ul><ul><li>The assessment of corporate integration issues </li></ul></ul><ul><ul><li>Proposed Lockheed – Titan merger: Scuttled </li></ul></ul><ul><li>Due diligence: the process </li></ul><ul><ul><li>Risk assessment </li></ul></ul><ul><ul><li>Compliance assessment </li></ul></ul>
  16. 16. Significant issues: JV partners <ul><li>Dow Chemical (2007): Company entered JV with Indian manufacturer, inheriting existing business practices </li></ul><ul><li>Evaluate compliance program </li></ul><ul><ul><li>Content </li></ul></ul><ul><ul><li>Training </li></ul></ul><ul><ul><li>Internal controls </li></ul></ul><ul><ul><li>Books and records </li></ul></ul><ul><ul><li>Compliance history </li></ul></ul><ul><li>Review business with government </li></ul><ul><li>Due diligence of third parties on government business </li></ul><ul><li>Public/proprietary databases </li></ul>
  17. 17. Significant issues: Gifts, travel and entertainment <ul><li>Affirmative defense: Company is permitted to pay “reasonable and bona fide” expenses of government officials “such as travel and lodging expenses” incurred in connection with either </li></ul><ul><ul><li>“ Promotion, demonstration or explanation” of products or services </li></ul></ul><ul><ul><li>“ Execution or performance of a contract with a foreign government or agency” </li></ul></ul>
  18. 18. <ul><li>Government officials selected by foreign country </li></ul><ul><li>Official had no decision-making authority regarding operations in country </li></ul><ul><li>Payments directly to service provider, not government official </li></ul><ul><li>Airline economy class </li></ul><ul><li>Sponsorship for U.S. visit complied with local law </li></ul><ul><li>No per-diem stipend </li></ul><ul><li>Reimbursement for incidental daily expenses with receipts </li></ul><ul><li>Souvenirs are nominal value </li></ul><ul><li>No expenses for family members </li></ul><ul><li>Modest tours permitted </li></ul>Significant issue: Gifts, travel and entertainment Right Way: DOJ Opinion Procedure Releases 2007-01/2007-02
  19. 19. Significant issue: Gifts, travel and entertainment <ul><li>315 Trips </li></ul><ul><li>Value = $10 million </li></ul><ul><li>“ Side trips:” Las Vegas, Disney World, Hawaii, Niagara Falls </li></ul><ul><li>Spouses and children included </li></ul><ul><li>Per diem: $500 - $1,000 </li></ul><ul><li>MBA tuition - $21,000 </li></ul><ul><li>Internal controls violations – Lack of training </li></ul><ul><li>Books and records violations – “Factory Inspection Account” without factory tours </li></ul>Wrong Way: Lucent
  20. 20. Impact on PRC companies <ul><li>US has proven record of enforcing FCPA in relation to violations in PRC </li></ul><ul><li>Chinese companies and business executives can be subject to US prosecution </li></ul><ul><ul><li>Lucent fired four executives based in China on the grounds of possible FCPA violation </li></ul></ul><ul><ul><li>DPC (Tianjin) Co. Ltd., wholly-owned Chinese subsidiary of US-based Diagnostic Products Corp., was fined $4.8 million in 2005 to settle issues related to bribery allegations </li></ul></ul><ul><li>Reputational damage </li></ul>
  21. 21. Impact on PRC companies <ul><li>Areas of exposure </li></ul><ul><ul><li>Companies listed on US stock exchange </li></ul></ul><ul><ul><li>Subsidiary, JV partner of US company </li></ul></ul><ul><ul><li>Companies acting as agents, distributors, representatives and consultants of a US company </li></ul></ul><ul><ul><li>PRC executives: any action in the US in furtherance of a bribe payment </li></ul></ul><ul><li>Practical implications </li></ul><ul><ul><li>Due diligence </li></ul></ul><ul><ul><li>Record-keeping </li></ul></ul><ul><ul><li>Internal controls </li></ul></ul><ul><ul><li>Warning signs </li></ul></ul><ul><ul><li>Compliance program </li></ul></ul>
  22. 22. Impact on PRC companies <ul><li>Importance of compliance program </li></ul><ul><ul><li>Prevent occurrence of violations </li></ul></ul><ul><ul><li>Detect misconduct </li></ul></ul><ul><ul><li>Educate/train employees </li></ul></ul><ul><ul><li>Mitigate potential liability </li></ul></ul><ul><ul><li>Foster culture of compliance </li></ul></ul>
  23. 23. Practice overview: white collar defense & compliance <ul><li>Compliance programs/training </li></ul><ul><li>Discovery of possible violations </li></ul><ul><li>Internal investigations </li></ul><ul><li>Possible voluntary disclosure </li></ul><ul><li>Defending company and individuals in enforcement actions </li></ul><ul><li>Audit committee representation </li></ul><ul><li>Monitors </li></ul>
  24. 24. List of Representative Clients <ul><li>ABB Group </li></ul><ul><li>AEI (Ashmore Energy International) </li></ul><ul><li>Allianz </li></ul><ul><li>Apple Inc. </li></ul><ul><li>Avon Products Inc. </li></ul><ul><li>Baker Hughes </li></ul><ul><li>Coca-Cola Co. </li></ul><ul><li>Dow Chemical Co. </li></ul><ul><li>Global Industries, Ltd. </li></ul><ul><li>Mitsui & Co., Ltd. </li></ul><ul><li>Nobel Corp. </li></ul><ul><li>ProLogis </li></ul><ul><li>Sara Lee Corp. </li></ul><ul><li>Yum! Brands, Inc. </li></ul>
  25. 25. Mayer Brown JSM merger <ul><li>Global platform </li></ul><ul><li>Significant opportunities in Hong Kong/China </li></ul><ul><li>US-China expertise </li></ul><ul><li>US enforcement focus on China </li></ul>
  26. 26. Q & A Thank you
  27. 27. Contacts <ul><li>David S. Krakoff </li></ul><ul><li>Mayer Brown LLP </li></ul><ul><li>1909 K Street, NW </li></ul><ul><li>Washington, DC 20006-1101 </li></ul><ul><li>202.263-3370 </li></ul><ul><li>[email_address] </li></ul><ul><li>Simeon M. Kriesberg </li></ul><ul><li>Mayer Brown LLP </li></ul><ul><li>1909 K Street, NW </li></ul><ul><li>Washington, DC 20006-1101 </li></ul><ul><li>202.263-3214 </li></ul><ul><li>[email_address] </li></ul><ul><li>James T. Parkinson </li></ul><ul><li>Mayer Brown LLP </li></ul><ul><li>1909 K Street, NW </li></ul><ul><li>Washington, DC 20006-1101 </li></ul><ul><li>202.263-3385 </li></ul><ul><li>[email_address] </li></ul>Andrew Legg 11 Pilgrim Street London EC4V 6RW, England +44 (0)20 7782 8386 [email_address] Claudius O. Sokenu 1675 Broadway New York, NY 10019-5820 [email_address] 212.506-2629 Kristy L. Balsanek Mayer Brown LLP 1909 K Street, NW Washington, DC 20006-1101 202.263-3370 [email_address]