Middle East Summit on Anti-Corruption


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Join us for the 5th Middle East Summit on Anti-Corruption and take part in the region’s only event that addresses your company’s local bribery risks and provides a detailed look at the anti-bribery landscape in countries including the UAE, Saudi Arabia, Egypt, Qatar, Iraq and other jurisdictions crucial to your operations in the Middle East.

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Middle East Summit on Anti-Corruption

  1. 1. Anti-Corruption Due Diligence: A Solutions-Based Approach to Identifying & Managing Third Party Risk Brian F. Saulnier K&L Gates LLP Currency House, Level 4 Dubai International Finance Centre P.O. Box 506826 Dubai, UAE +971 (0) 4.427.2797 brian.saulnier@klgates.com
  2. 2. Introduction  Overview of Anti-Bribery Provision Elements  Knowledge  Case Law Developments  Baker Hughes  Nature’s Sunshine  Identifying Corruption Risk  Commercially Reasonable Due Diligence  Managing Corruption Risk 1
  3. 3. Overview of FCPA Anti-Bribery Provision Elements 2
  4. 4. U.S. Foreign Corrupt Practices Act  Two Distinct But Complementary Sets of Provisions:  Anti-Bribery: Prohibiting bribery of foreign public officials  Books & Records: Requiring internal controls and imposing accounting standards for publicly-traded companies 3
  5. 5. FCPA Anti-Bribery Provisions Elements The FCPA’s anti-bribery provisions prohibit –  any knowing act in support of  a payment, an offer to pay or an authorization to pay  money or anything of value  directly or indirectly  to any foreign government official, foreign political party or party official, foreign political candidate, or officers of a public international organization (―foreign officials‖); or  to a third person knowing it will be passed on to a foreign official 4
  6. 6. FCPA Anti-Bribery Provisions Elements (cont.)  Corruptly  With the intent to: (i) influence an official’s act or decision; (ii) induce action (or inaction) in violation of a lawful official duty; (iii) secure any improper advantage; or (iv) induce an official to use influence to sway an act or decision  It does not require that the act be fully consummated or succeed in producing the desired outcome  In order to obtain or retain business, or to direct business to any person, or to achieve any business-related objective  Anything with a business nexus 5
  7. 7. FCPA Anti-Bribery Provisions Definitions  Knowing  Actual knowledge  Firm belief  Awareness of high probability  Directly or Indirectly  Includes not only direct payments but also any payments made indirectly through any third party intermediary, broker, consultant, representative, or agent  You must make efforts to know your foreign business partners 6
  8. 8. Case Law Developments 7
  9. 9. Lessons from Baker Hughes  Liability for ―indirect payments‖ – e.g., to agents, consultants, or intermediaries that may pass all or some portion on to a foreign government official  Any business with overseas operations will likely face some risk under the FCPA  Relationships with foreign business partners and foreign government officials may increase the risk profile  Failure to conduct adequate due diligence will likely cause the government to take the position that the ―knowledge‖ element has been satisfied –  Conscious disregard, willful blindness, and deliberate ignorance 8
  10. 10. A Message from Nature’s Sunshine  Control Person Liability for FCPA violations  Application of Section 20(a) of the ’34 Act in the FCPA context  Circumventing the knowledge element  CEO and CFO charged with violations of the books & records and internal controls provisions 9
  11. 11. Identifying Corruption Risk 10
  12. 12. Identifying Corruption Risk  Mitigation of corporate liability  Undertake commercially reasonable efforts to detect and prevent (potential) violations  Due diligence enables ―knowledge‖ defense  ―Knowledge‖ element may be deemed satisfied for failure to conduct due diligence  Not an aggravating factor but unlikely to receive compliance credit 11
  13. 13. Identifying Corruption Risk  Continued scrutiny of international business relationships and transactions     Assess risk Conduct commercially reasonable due diligence Negotiate anti-corruption provisions Devise, implement, and integrate compliance strategies  Use Opinion Procedure 12
  14. 14. Identifying Corruption Risk  Anti-corruption due diligence should include the following general assessment—  What is the competence, expertise, and reputation of the foreign business partner?  Are there any relationships between business partner and foreign officials?  Is the compensation reasonable – e.g., is it commercially justified, consistent with market for similar services? 13
  15. 15. Identifying Corruption Risk One size does not fit all!  No statutory requirement  But see Baker Hughes  Case-by-case  Phased-approach  Preliminary risk assessment based on such factors as jurisdiction, high-value transactions, and involvement of government entities as customers or regulators. 14
  16. 16. Identifying Corruption Risk       Initial desktop due diligence Written questionnaires ICP from U.S. Commercial Service TPIA from investigative firm In-person interviews Local counsel opinion 15
  17. 17. Identifying Corruption Risk  Due Diligence Summary Report  Diaries and other records of your due diligence activities  Who performs the work?  In house  Outside counsel  Other third parties  Where risks are higher, an independent assessment has greater value 16
  18. 18. Managing Corruption Risk 17
  19. 19. Managing Corruption Risk  ―Red Flags‖ are not violations       Notice of a potential issue requiring follow-up Eliminate, or mitigate and manage to reduce risk Remediate or otherwise address Intelligent, risk-based assessment Business decision What is your risk tolerance? 18
  20. 20. Managing Corruption Risk  Devise and implement—     Train relevant personnel—      FCPA Policy FCPA Procedures Codes of Business Conduct for International Business Transactions Management Compliance personnel Local managers and (perhaps) partners Financial personnel Agreement include—       Representations and warranties regarding anti-corruption compliance Termination rights for breach of such reps and warranties Narrowly defined performance obligations (but tailored to meet needs) Restrictions on business partner’s rights to assign the contract or delegate duties Audit rights Prohibition on cash payments by and to your business partners 19
  21. 21. Managing Corruption Risk  Insist on itemized invoices  Seek annual compliance certifications  Perform periodic and/or remedial risk assessments  Who? Internal compliance personnel, auditors, outside counsel, compliance experts  How? Scope and work plan will vary based on need  Target known problem areas – hit the likely suspects first  Review policies, procedures, and communications regarding same  Targeted interviews with key personnel internally and with business partner  Transaction sampling 20
  22. 22. Managing Corruption Risk  Do JVs pose different risks from those presented by agents?  Minority or majority partner?  Scope of foreign partner’s obligations?      Who controls the joint venture? Per se control and liability Parent liability for JV even without control Jurisdiction over JV independent from parent Difficulty of minority partner status 21
  23. 23. Managing Corruption Risk  Pre-acquisition due diligence in cross-border M&A a critical factor in charging decisions related to merger activity  Enforcement authorities expect maximum possible preacquisition diligence  Demonstrate intelligent, risk-based efforts to detect and resolve corruption  OPR 08-02 for guidance on post-close diligence and integration  Expectation that post-close organization be in full compliance with regardless of prior state of compliance  Regulators view transactional due diligence as good for business  Real, tangible benefit to compliance, self-disclosure and cooperation 22
  24. 24. Managing Corruption Risk    Acquirer and target should consider the effect anti-corruption scrutiny will have on respective businesses Business risk of bringing target into compliance Develop a plan and tailor due diligence to transaction-specific risks         Who will lead—buyer or seller? Standards for voluntary disclosure, if any? Negotiation regarding existing anti-corruption investigations, if any Issues uncovered by diligence and MAC clauses Completion before signing? Work plan outlining scope and liability for post-sign/pre-close diligence Consider how to document and protect findings Employ certain baseline best practices to meet regulators’ expectations 23
  25. 25. Managing Corruption Risk Due diligence is essentially the same as with other business partners  Identify potential corruption risk—    Assess controls environment—       Employee training Audit environment Practices, policies and procedures regarding entertainment of, gifts to, and travel for government officials Facilitating payments Process for retention and use of third-party intermediaries Vet third-party intermediaries—    LOBs/Industry, countries of operation, government customers/contacts Risk of improper payments, kickbacks, side agreements, etc. Review contracts Analyze payments Analyze books and records—   Fair and accurate representation of expenditures and transactions No materiality lens 24
  26. 26. Questions? 25