What Retailers Need To Know Now About the Foreign Corrupt Practices Act. Karen A. Popp Brenda A. Jacobs December 2, 2009

Transcription

1 What Retailers Need To Know Now About the Foreign Corrupt Practices Act Karen A. Popp Brenda A. Jacobs December 2, 2009

2 FCPA Overview What is the FCPA? New Developments and Enforcement Trends How To Manage Risk With Third Party Agents Elements of Effective Compliance 2

3 U.S. Foreign Corrupt Practices Act (FCPA) FCPA first enacted in 1977 Criminalizes the bribery of foreign officials anywhere in the world where the purpose of the bribe is to influence an official decision in order to obtain or retain business. Jointly enforced by the U.S. Department of Justice and the U.S. Securities and Exchange Commission 3

4 Elements of an FCPA Violation A covered person / entity Must offer or give something of value To a foreign official To obtain or retain business With corrupt intent 4

5 Who is a Covered Person? Issuers of registered securities in the U.S. (includes non- U.S. companies who trade ADRs on U.S. stock exchanges) All domestic concerns meaning U.S. citizens, residents, companies, and foreign branches of U.S. companies Officers, directors, employees, and agents of the above 5 Foreign companies or persons who commit acts in furtherance of corrupt payments while in the U.S. or who cause others to do so.

6 What is Value? Anything of value broadly construed Cash and cash equivalent Extravagant hosted travel and non-monetary gifts Intangible benefits such as enhanced reputational value for the official or benefit conferred to favored cause or charity Benefit to third persons with connection to government officials Includes offer or promise alone NO de minimis exception if improper intent 6

7 Who is a Foreign Official? Foreign officials at all levels very broadly defined. any officer or employee of a government or any department, agency, or instrumentality of a government; any person acting in an official capacity on behalf of a government; any officer or employee of a company or business owned in whole or part by a government; any officer or employee of a public international organization such as the World Bank or the United Nations; any officer or employee of a political party or any person acting in an official capacity on behalf of a political party; and/or any candidate for political office. 7

8 Is the Payment to Obtain or Retain Business? Payment made to obtain or retain business by: Influencing any official act or decision Inducing official to do or omit to do acts in violation of official duties Securing any improper advantage Inducing official to influence acts of government Need not relate to specific business opportunity Bribes with any business nexus such as to reduce foreign duties/taxes can violate FCPA 8

9 Is There a Corrupt Intent? Benefit conferred or offered to induce foreign official to abuse or misuse his/her position or authority through action or inaction Quid pro quo generally assumed Gift/payment made with reasonable expectations of some official favor in return Quid pro quo need not be executed Official need not be able to deliver quo herself Government need not establish defendant knew his/her conduct violated FCPA 9

10 Indirect Offers/Payments Prohibited Payment or offers/promises to pay any person while knowing all or portion of value will be given, directly or indirectly, to any foreign official are prohibited Knowing means: Actual awareness A firm belief as to the existence of such circumstance or that such circumstance will occur A high probability of the existence of circumstance unless the person actually believes that such circumstance does not exist No willful blindness - i.e., conscious disregard or deliberate ignorance of known circumstances that should alert one to FCPA violations is not permitted 10

11 Exceptions and Affirmative Defenses Exception Routine governmental action - i.e., grease payments Affirmative Defenses Payments authorized by written foreign law Bona fide business expenditures 11

12 Recordkeeping Requirements Keep accurate books, records and accounts In reasonable detail to accurately and fairly reflect the transactions and dispositions of the assets of the issuer Requirement can apply to foreign subsidiaries Adhere to internal controls to ensure compliance Expenditures have proper management authorization In accordance with GAAP principles Audited to show existing assets match books and records 12

13 13 Enforcement Climate - Penalties Vigorous DOJ and SEC enforcement DOJ criminal penalties and charges for knowing violations Fines: up to $2,000,000 for entities; $100,000 for individuals. Imprisonment: up to 5 years. SEC civil injunctive actions, civil penalties, disgorgement and independent consultants Siemens A.G. (2008): $450 million criminal fine, plus $350 million in disgorgement and independent monitor (for four-year term) (also agreed to pay $750 million fine to Munich prosecutor s office) Willbros Group (2008): $22 million criminal penalties, $10.3 million in disgorgement and prejudgment interest, and independent monitor (for three-year term) Additional Collateral Consequences Negative Publicity Possibility of highly invasive sanctions, including independent monitors 7 of 10 enforcement actions over last year required monitors

14 OECD Anti-Bribery Convention Globalization of U.S. law by Organization for Economic Cooperation & Development (OECD) Establishes standard to be met by all Parties in defining offense of bribery of foreign officials, which is similar to FCPA Calls upon Parties to take all necessary measures to establish bribery of foreign officials as a criminal offense Requires Parties to adopt effective, proportionate and dissuasive criminal penalties for bribery of foreign officials Ratified by 30 OECD countries and 6 non-oecd countries All ratifying countries have enacted some form of implementing legislation 14

15 Australia Other OECD Countries France Japan Poland Non-OECD Countries Austria Germany Korea Portugal Argentina Belgium Greece Luxembourg Slovak Republic Brazil Canada Hungary Mexico Spain + Bulgaria Czech Republic Iceland The Netherlands Sweden Chile Denmark Ireland New Zealand Switzerland Estonia Finland Italy Norway Turkey Slovenia United Kingdom 15

16 U.S. Jurisdictional Reach Issuers - 78dd-1 Who is covered any entity which has a class of securities registered under 15 U.S.C. 78l any entity which is required to file reports under 15 U.S.C. 780(d) Includes non-u.s. companies who issue ADRs Liability requires use of means or instrumentality of interstate commerce covered This requirement is easily satisfied (see Statoil: use of bank account in U.S. sufficient) 16

17 Domestic Concerns - 78dd-2 Who is covered: any individual who is a U.S. citizen, national, or resident any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the U.S., or which is organized under U.S. laws U.S. companies may be liable for acts of non-u.s. affiliates 17

18 Territorial Jurisdiction - 78dd-3 Added as part of 1998 amendments Covers persons other than issuers or domestic concerns Requires that act in furtherance of corrupt payments while in the territory of the United States DOJ has interpreted this to include causing an act to be taken in U.S. territory Syncor: Employees of Taiwanese subsidiary of U.S. company send fax to chairman in U.S. seeking authorization of unlawful payments SSI: Employees of Korean subsidiary of U.S. company conspire with employees of U.S. company to make unlawful payments; U.S. company wires funds from U.S. bank account 18

19 New Developments and Trends 19 Substantial increase in international cooperation and enforcement Dramatic rise in U.S. enforcement (2 cases in 2003; 33 in 2008; 120 current DOJ investigations) Clear priority: increased DOJ/SEC staffing, SEC dedicated unit/fbi task force Focus on inadequate anti-corruption controls and compliance Agents, sales persons M&A transactions scrutiny of FCPA due diligence Voluntary disclosures continue Record penalties and intrusive remedial actions Criminal prosecutions of individuals Use of monitors Investigations targeted on particular industries

20 United States v. Siemens A.G.; SEC v. Siemens A.G. (December 15, 2008) Background: Siemens employed a number of schemes to allegedly make illicit payments, including: Off-the-books accounts outside of Germany Slush funds and cash desks Bearer checks made out to former Siemens employees Between 2001 and 2007, Siemens made over $1.36 billion payments through schemes that circumvented internal controls Payments made in connection with 290 projects or individual sales 1,185 payments to third parties totaling approximately $391 million Varied mechanisms used to cover-up misconduct Ex post facto consulting contracts Removable post-it notes to sign for payments Reported failures to follow-up and investigate red flags 20

21 United States v. Siemens A.G.; SEC v. Siemens A.G. (December 15, 2008) The Result: Siemens pled guilty to violations of the FCPA internal controls and books and records provisions $450 million fine to the DOJ, $569 million fine to the Office of the Prosecutor General in Munich ($285 million fine previously paid) and $350 million in disgorgement to settle the SEC s charges Three Siemens subsidiaries (Argentina, Bangladesh and Venezuela) also pled guilty to separate criminal charges Siemens is permanently enjoined from future violations of the FCPA s anti-bribery, books and records, and internal control-provisions Independent FCPA monitor imposed for 4 year term 21

22 Retail Related Examples 22 Do you know what your subsidiaries and agents are up to? Avery Dennison Corporation charged by the SEC for actions allegedly taken by Avery China's Reflective Division, including paying or authorizing the payments of kickbacks, sightseeing trips, and gifts to government officials with "the purpose and effect of improperly influencing decisions by foreign officials to assist Avery China to obtain or retain business. SEC found that "after Avery acquired a company in June 2007, employees of the acquired company continued their pre-acquisition practice of making illegal petty cash payments to customs or other officials in several foreign countries." SEC found that "Avery's books, records, and accounts did not properly reflect the illicit payments, sightseeing trips and gifts that Avery China made or provided to government officials, and the illicit payments to customs officials in several countries by employees of the acquired subsidiaries. As a result, Avery violated the [the books and records provisions]" Avery agreed to settle the matter by paying approximately $520,000 (disgorgement, prejudgment interest, and a civil penalty) and agreeing to cease and desist from future violations of the FCPA's books and records and internal control provisions.

23 Retail Related Examples Looking for a retail site in China? Consider: A top executive in Morgan Stanley s real estate investment division in China was fired in December 2008 for allegedly paying bribes to Chinese officials. Among the questions is whether the hiring of the daughter of a Chinese official was a quid pro quo for an approval. Morgan Stanley made a voluntary disclosure. 23

24 Retail Related Examples U.S. v. David Kay and Douglas Murphy (American Rice in Haiti) bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA s proscription, but [i]t still must be shown that the bribery was intended to produce an effect - here, through tax savings - that would assist in obtaining or retaining business. Bribing foreign officials to lower taxes and customs duties certainly can provide an unfair advantage over competitors and thereby be of assistance to the payor in obtaining or retaining business. --From the opinion of the Fifth Circuit Court of Appeals 24

25 Components of Effective FCPA Compliance Clearly stated FCPA policy and procedure Description of the FCPA Company policy prohibiting violations Procedure to be followed before engaging in any foreign joint venture or foreign representative agreement Periodic FCPA training sessions Periodic certification of FCPA awareness and compliance Periodic internal audit review of contracts with and payments to foreign agents and any other high risk areas/subsidiaries or countries 25

26 Investigating and Documenting Agreements with Foreign Agents Investigating potential foreign consultants/agents Consultant questionnaire Consultant s reputation, business history, past and present clients Use local counsel, U.S. Embassy, State and Commerce Departments Preparation of consultant agreement Representations and warranties re: compliance with FCPA, other U.S. laws Compliance with foreign country s laws and regulations Periodic certification of compliance with FCPA Consent to review consultant s books and records, if needed 26

27 Investigating and Documenting Agreements with Foreign Agents DOCUMENTATION OF COMPLIANCE EFFORTS Investigation and agreement Review and approval process followed Audit/internal payment controls BASIC RULES Do your own due diligence Look for red flags If something doesn t feel right, it probably isn t If you have any doubts, consult with the appropriate persons in your office or the Company. 27

28 Anti-Corruption Compliance Approach Conduct corruption risk assessment Evaluate management s anti-corruption knowledge and compliance activities Identify high-risk areas/subsidiaries or countries Accumulate electronic data and conduct interviews Implement automated controls and proactive data anomaly detection Select sample of high-risk transactions for further review Conduct on-site transaction testing and follow-up Report on findings to compliance officer, audit committee or counsel 28

29 Once the risk assessment is completed, then what? Verify findings with each business unit and explain the deficiencies and risk areas Remediate significant deficiencies immediately Evaluate significance and likelihood of risks and focus on those that are of the highest risk first Evaluate adequacy of existing controls Modify controls and anti-corruption compliance program as appropriate Review and modify training programs as appropriate Track noted deficiencies and gaps through to resolution Disseminate findings and observations throughout organization Retest noted deficiencies and gaps after remediation efforts have taken place 29

30 Develop A Shared Compliance Culture Consult Identify decision makers and key-figures; Understand local culture and practice; Listen to local concerns and identify risk areas; Understand local anti-corruption law. Train In-country meetings and training; Online training reinforces the idea that compliance is both local and global Provide materials in local language Illustrate Real-world case studies Illustrate what is done/not done locally can impact globally Share Share lessons learned and enhancements in compliance procedures/structure across the organization 30

31 Maintaining a Compliance Program DOJ Opinion 04-02: The ABB Test components of an FCPA compliance program Independent audits to ensure compliance Agreements to include independent audits of agents and partners System of internal controls and accurate books and records Training and annual certification Compliance Chief reports to Compliance / Audit Committee ABB Test Components Disciplinary process Due diligence oversight Standards and procedures apply to all parties Reporting system and helpline Clearly articulated policy Standards on business relationships with reputable partners 31

32 Karen A. Popp Sidley Austin LLP 1501 K Street, NW Washington, D.C direct fax kpopp@sidley.com Brenda A. Jacobs Sidley Austin LLP 1501 K Street, NW Washington, D.C direct fax bjacobs@sidley.com 32