Asian briefings. What Every In-house Counsel Should Know About Compliance with the US Foreign Corrupt Practices Act

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1 1 What Every In-house Counsel Should Know About Compliance with the US Foreign Corrupt Practices Act By Mukesh Advani, Esq. Asian briefings 11 PRC s New Environmental Protection Law: Impact for Enterprises, the Public and the Government By Sherry Tao 15 Recent Developments on PRC Food Safety Law By Lili Jian a special supplement to ACC Docket graciously sponsored by UBIC, Inc. What Every In-house Counsel Should Know About Compliance with the US Foreign Corrupt Practices Act By Mukesh Advani, Esq., Member UBIC, NA Advisory Board Fang Fang, former JP Morgan s chief executive for China investment banking and vice chairman of investment banking in Asia, was recently arrested by the Hong Kong anti-corruption agency and questioned for compliance with anti-corruption laws as it relates to hiring of employees. The arrest is part of a much wider probe by the US investigators looking into whether JP Morgan and four or more other banks violated the US Foreign Corrupt Practice Act (FCPA) with respect to their hiring practices in Asia. With respect to Fang, the issue relates to the hiring of the son of China Everbright Group Chairman Tang Shuangning. According to published reports, Shuangning approached Fang regarding a job for his son, Tang Xiaoning, at the bank. Fang jumped at the opportunity because it could and did lead to assignments from China Everbright Group. Such high-profile investigations and arrests are not uncommon under the FCPA and many other anti-corruption laws that are now on books in various jurisdictions in Asia. The largest penalty imposed under the FCPA has been a staggering $800 million against Siemens. The longest prison terms imposed under the FCPA has been 15 years. The reach of the FCPA is very broad and sweeping. It is a law that can land the top executives of a company, including the CEO, in prison. There has also been a rapid increase in the enforcement of such laws. Under the new strategy adopted by the US Department of Justice (DOJ) and the Securities & Exchange Commission (SEC), there is a renewed and aggressive effort to target not just companies, but also responsible individuals. Both the Interesting in authoring for Asian Briefings? Visit edguide.cfm, or contact Editor in Chief Tiffani Alexander at alexander@acc.com.

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3 SEC and the DOJ, the two US agencies responsible for enforcing compliance with the FCPA, have made their intentions clear: They intend to use more resources than ever to investigate and prosecute such violations throughout 2014 and beyond, with particular emphasis on prosecutions of individuals. The idea is that substantial fines and prison terms for the individuals will deter violations of the FCPA. As an in-house counsel sitting in Asia, if you think that your company or its employees are beyond the territorial reach of the FCPA, think again. The FCPA s reach is expansive and it can even extend to foreign nationals sitting thousands of miles away, who may have never set foot on US soil by simply sending an , text message or facsimile to the United States or routing it through a server located in the United States, or even by making a phone call to the United States. The enforcement agencies stated goal is to eradicate corruption worldwide and preserve the integrity of the world markets. Indeed, a majority of the largest fines have been against non-us corporations. At least a third of all FCPA enforcement actions have involved Asian corporations. The recent investigations and enforcement actions under the FCPA make it clear that there is increasingly greater focus on Asia, especially China. The US government may provide a huge windfall to a whistleblower providing the SEC with original information concerning an FCPA violation under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The bounty ranges from 10 to 30 percent in the event the SEC recovers more than $1 million as a result of the information provided by a whistleblower. Needless to say, such strong incentives provide a great deal of motivation to corporate employees, as well as any others who may be privy to information about the FCPA violations, to come forward and report such violations. Therefore, the threat of being caught red-handed is real and not theoretical. Given the substantial exposure a company and its executives face for violations of the FCPA, your focus should be ensuring that your company and your business affiliates, agents and subsidiaries strictly comply with its terms. Such compliance is one of the most challenging tasks for the risk managers, especially for companies with operations in Asia. This article will discuss essential provisions of the FCPA and what you can and should do to ensure that your company and the individuals running the company comply with the requirements of the FCPA and stay out of trouble. Key provisions of the FCPA The FCPA is a US federal law enacted in 1977, prohibiting companies from paying bribes to foreign government officials and political figures. Some of the key operative provisions of the FCPA are as follows: Basic provisions The FCPA generally prohibits US companies and citizens, as well as any foreign companies listed on a US stock exchange from corruptly paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business. The FCPA also requires companies traded on a US stock exchange to file periodic reports with the SEC and to keep books and records that accurately reflect business transactions and to maintain effective internal controls. The DOJ is responsible for criminal enforcement of the provisions of the FCPA. By contrast, the SEC is a civil law enforcement agency and it has jurisdiction over issuers and can bring civil charges for violations of the anti-bribery provisions, as well as the books and records and internal controls provisions. Typically, both the DOJ and the SEC are involved in any investigation and enforcement action. FCPA s broad territorial reach The reach of the FCPA is very broad: It applies to practically any US company and any foreign company doing substantial business in the United States. It covers any company required to file reports under the Securities Exchange Act, including foreign companies whose stock a special supplement of ACC Docket 3

4 is traded on US exchanges, any US citizen or any business entity organized under the laws of a state in the United States or having a principal place of business in the United States. The DOJ and SEC have adopted an increasingly expansive view of their mandate. The recent enforcement actions make it clear that they assert territorial jurisdiction over foreign entities and individuals for conduct that occurred overseas on the basis of only minimal or tenuous US contacts. It is very easy to fall within the territorial jurisdiction of the United States. A foreign entity and individual can be subject to the FCPA liability if they engage in any act in furtherance of a corrupt payment while in the United States, or if they aid and abet, conspire with, or act as an agent of an issuer or US citizen, national, resident or entity, regardless of whether the foreign entity or individual itself took any action while in the United States. Indeed, even fleeting contact with US territory may constitute a sufficient US nexus to assert territorial jurisdiction over foreign entities and individuals for conduct that occurred outside the United States. Two recent examples of this include an enforcement action against JGC Corp., a Japanese engineering and construction firm accused of making corrupt payments to Nigerian government officials. The United States asserted that wire transfers through correspondent bank accounts in the United States in furtherance of a bribery scheme was sufficient to satisfy territorial jurisdiction. Similarly, an enforcement action against Magyar Telekom, Plc., a Hungarian subsidiary of Deutsche Telekom and an issuer of American depository receipts on the New York Stock Exchange, asserted territorial jurisdiction based solely on the transmission and storage of two s on a US server. While it is debatable whether the United States is justified in such sweeping and broad assertion of its territorial jurisdiction, most entities with any type of business relationship with a US entity find it economically advantageous to settle the FCPA charges. They almost never challenge the aggressive jurisdiction stance of the US agencies. That is a practical reality which should be kept in mind. The United States is not the only nation that prohibits overseas bribery, although it is the most aggressive in prosecuting such cases. Many other countries, such as the UK, Russia, China and India, prohibit overseas bribery. In addition, the laws passed by signatories to the Organization for Economic Co-operation and Development (OECD) Anti-Bribery Convention have served to proactively strengthen a growing international consensus against foreign bribery. The US agencies have formed alliances with various enforcement agencies in other jurisdictions to expedite their investigations. Therefore, you have to assume that in all likelihood US enforcement will find a way to reach your company and the individuals who work for your company in the case of a suspected violation of the FCPA. Bribery prohibition provision The FCPA Anti-Bribery Provision prohibits corruptly paying or offering to pay anything of value [no de minimis exception] to a foreign official in his official capacity, and also prohibits [a]ny officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization... and government employees, party officials, state-controlled enterprises, military, candidates directly or indirectly through third parties to do any of the following: Secure an improper advantage; Influence a foreign official in his official capacity; Induce him to violate the law; or Induce him to use influence to assist in obtaining or retaining business, including obtaining government contracts or any improper advantage, such as avoiding duties or reducing tariffs, reducing taxes or obtaining money owed, obtaining regulatory approval or other business. 4 ASIAN BRIEFINGS NOVEMBER 2014 Association of Corporate Counsel

5 Books and records, and internal control provisions The books and records provision of the FCPA requires those governed by it to make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets.... The internal controls provision requires that those governed by the FCPA to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are executed in accordance with management s general or specific authorization; access to assets is permitted only in accordance with management s general or specific authorization; and transactions are recorded as necessary to permit a preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets. These provisions, often referred to as the accounting provisions, were enacted because, often, payments of foreign bribes were concealed or improperly recorded as something else, such as miscellaneous expenses. These provisions typically become implicated in virtually every FCPA investigation and prosecution on the theory that no such payments could have been made if the company had implemented internal control provisions. What is important to recognize here is that even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency. Penalties for violating the FCPA Companies violating this law by paying bribes are subject to criminal and civil actions, which can result in fines, suspension and exclusion from government procurement contracts, while the employees and directors can be subject to prison sentences. Executives who indirectly control a person liable may be subject to prosecution under the FCPA. A company may be criminally fined up to $2 million per violation of the Anti-Bribery Provisions. Culpable individuals can be subject to a criminal fine of up to $250,000 for each violation and imprisonment of up to five years. a special supplement of ACC Docket 5

6 Willful violations of the FCPA books and records and internal control provisions can result in criminal fines of up to $25 million per violation for a company and criminal fines of up to $5 million per violation and imprisonment of up to 20 years for culpable individuals. The SEC may also seek civil penalties and disgorgement of profits made as a result of improper payments. Other adverse consequences include termination of government licenses and disbarment from government contracting provisions and possible liability in a civil shareholder s derivative lawsuit resulting from the FCPA violations. Limited exceptions Payments made to expedite or secure routine government action are permitted. The FCPA s legislative history states that the law was deliberately cast in terms which differentiate between [corrupt payments] and facilitating payments and that the FCPA would not reach payments made to secure permits, licenses, or the expeditious performance of similar duties of an essentially ministerial or clerical nature. A defendant may offer as an affirmative defense that the otherwise prohibited activity was legal under local written law. The FCPA provides a narrow defense for bona fide expenditures related to the promotion or demonstration of goods or services or to the execution or performance of a contract with a government or government agency, such as travel and lodging expenses if certain conditions are met. Examples of fines and prison terms under the FCPA The criminal sentences for individuals have ranged from probation to 15 years in prison. A few years ago, the former president of Terra Telecommunications Corp. was sentenced to 15 years in prison for his role in a scheme to pay bribes to Haitian government officials at Telecommunications D Haiti S.A.M., a stateowned telecommunications company, by a federal court in Miami. That is the longest prison term in an FCPA case. On May 29, 2013, DOJ and the SEC announced a joint FCPA settlement with French oil and gas company Total, S.A. In one of the largest combined 6 ASIAN BRIEFINGS NOVEMBER 2014 Association of Corporate Counsel

7 monetary resolutions in the statute s history, Total, S.A., an ADR-issuer in the United States, agreed to pay a $245.2 million fine to DOJ and to disgorge $153 million in profits to the SEC, for a total payment of more than $398 million. Other large fines include the following: $800 million (Siemens, Germany), $579 million (KBR/Halliburton, United States), $400 million (BAE, UK), $365 million (Snamprogetti, Holland/Italy) and $338 million (Technip S.A., France). Some of the key cases involving alleged corrupt payments in Asia include the following: Japanese-based JGC Corp. agreed to pay a $218.8 million criminal penalty to resolve FCPA charges for its alleged participation in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement and construction. Japanese-based trading company Marubeni Corp. entered a guilty plea and agreed to pay a criminal fine of $88 million in connection with violations of the FCPA. Marubeni participated in a seven-year scheme to pay and conceal bribes to high-ranking government officials in Indonesia in order to obtain a $118 million power project. Tyco International and its subsidiaries located in various jurisdictions in Asia settled criminal charges and agreed to pay $26 million in criminal penalties, disgorgement of profits and prejudgment interest. The alleged conduct included gifts and cash to government officials through agents to procure contracts. German-based insurance and asset management company Allianz agreed to pay a total of $12.4 million in civil penalties, disgorgement of profits and prejudgment interest for allegedly obtaining hundreds of insurance contracts issued on Indonesian government projects through its joint venture partner to employees of state-owned agencies. The US-based pharmaceutical company Eli Lilly agreed to pay close to $30 million including civil penalties, disgorgement of profits and prejudgment interest for its bribery scheme in China and three other countries, whereby the employees of its subsidiaries falsified expense reports to make payments to governmentemployed physicians. The former managing director of Morgan Stanley s real estate practice in China pleaded guilty to violation of the internal control provisions of the FCPA and was sentenced to nine months in prison and ordered to disgorge profits of $254,589 and forfeit his interest in property worth $3.4 million. Diebold, the US-based manufacturer of ATMs, settled charges that it provided overseas leisure trips to Chinese employees of government-owned banks in the amount of $1.6 million in return for $265 million in sales contracts. Diebold agreed to a deferred prosecution and $25.2 million in criminal penalties and required to disgorge an additional $22.9 million in profits and prejudgment interest. Compliance with the FCPA In the intensely competitive global environment, there are ever-increasing pressures on corporations to maximize shareholder value. These pressures are naturally passed onto the executives of the corporation who must ensure survival and growth in such a market place. In some countries, especially Asian jurisdictions, it is very challenging to obtain government business without bribing the officials who make the decisions to award such contracts. Needless to say, the corporate executives find it very tempting to simply play along. While the problem of bribery is perhaps worst in Asia, few companies have effectively adopted and implemented provisions to prevent such bribery. Many others have adopted the right policies and controls but are lax on implementation. Therefore, you need to be even more vigilant in ensuring that those who work for your company and its subsidiaries, partners, contractors, agents and affiliates comply with the provisions of the FCPA and similar laws of other jurisdictions. Needless to say, it is no easy task in many Asian jurisdictions, where it is difficult to get anything done without greasing some palms. Having stringent polices that are properly a special supplement of ACC Docket 7

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9 implemented will go a long way in eliminating or minimizing exposure to the FCPA. While a detailed discussion of each and every step that you may take is beyond the scope of this article, here are some basic recommendations: Appointing a compliance officer One of the most important things a corporation can do is to appoint a compliance officer for the FCPA and other similar anti-corruption laws. This person should ideally report directly to the CEO of the company. It is the job of the compliance officer to implement and enforce compliance with all the requirements of the FCPA and investigate each suspected violation. Such an officer could be the general counsel of your corporation. Develop specific written policies and guidelines for the FCPA It is critical to develop written policies and guidelines that are rigorously implemented. At the minimum, the written policies must set forth a summary of the FCPA in an easy-tounderstand language, the purpose for which the policy is being established, state the policy itself, require reporting of any suspected payments or demands for payments, make supervisors and managers responsible for ensuring the compliance of those who report to them, delineate potential adverse employment consequences for failure to comply, and provide single person contact information for reporting such suspected violations. Very few companies would have internal expertise to develop such policies. Therefore, it is recommended that an outside law firm with experience in such matters be used. Ongoing education and training All the employees of the company who may be in a position to bribe a foreign official must undergo a mandatory training about the various aspects of the FCPA. Once again, the employees need to understand how easy it is to be in violation of the FCPA and the dire consequences that follow for the corporation and for them personally if there is any violation of the FCPA. Make sure that the policies expressly prohibit even facilitating payments. It is a slippery slope, and an employee of the company may not understand the distinction between what constitutes facilitating payment and a bribe. You should insist that all your subsidiaries, partners, contractors, agents and affiliates train their employees in similar fashion. Again, if your company lacks the expertise to do so, contact an outside law firm to help you with it. Supervision of agents, subsidiaries, joint venture partners, intermediaries and contractors Most corporations have established subsidiaries in every jurisdiction in which they do business. They also may engage in joint ventures, alliances and partnerships with other corporations in that jurisdiction, which are mainly staffed by individuals from that country. That is where the biggest problem lies. The individuals employed by such organizations consider bribing the government officials in that jurisdiction as a necessary evil, without which they may lose out to their competition. They don t even give second thought to it since it is ingrained in their systems. Indeed, the individuals employed by such entities are responsible for a majority of the FCPA prosecutions. You should do your diligence before entering into relationships with any foreign entities, and those with questionable ethics should be avoided. It should be clear to them that compliance with your policies and guidelines is absolutely a requisite condition to their doing business with your company. While it may be difficult to obtain business without giving bribes, it is certainly not impossible, as is convincingly established by many companies that are successfully operating in Asian jurisdictions without paying bribes. The consequences for any violation of such guidelines should be dire with the immediate termination of the business relationship and full indemnity provisions that should be part of each and every contract with such entities. Such provisions in contracts are common these days, as they should be. a special supplement of ACC Docket 9

10 Accounting provisions As noted above, the accounting provisions of the FCPA have certain requirements for maintaining books and records, as well as establishing internal control provisions. Strict adherence to these requirements is absolutely essential because their absence may itself lead to severe penalties and criminal prosecution. Indeed, the CEO and the CFO of the company may be held personally responsible for simply failing to adopt and implement appropriate proper procedures, including a system of controls. It is in your best interest to insist on a process by which every expense is accounted for with appropriate receipts. The expense reports from those in a position to bribe a foreign official should be carefully scrutinized because that s where some of these payments may be hidden. Any large expense (over a predetermined amount) for which reimbursement is sought should automatically be subjected to audit. Use of forensic technology to monitor accounting and other suspected activity The technology exists today to monitor digital data within the company to flag any suspected activity. It could be used to detect bribery, kickbacks, conflicts of interest and inappropriate gifts. Such technology can detect unusual activity or anomalies that may be signs of illegal activity. Some of the sophisticated technologies can also use prior behavior in the form of information to look for similar patterns to detect activity that requires closer examination. The mere presence of such technology in your computer servers will likely have a deterrent effect on potential perpetrators. This technology may also be used to uncover evidence of data that has been hidden or deleted by the perpetrators. Use of such technology may go a long way in minimizing such malfeasance. Internal investigations If you spot a suspected activity, it should be immediately investigated with the assistance of outside counsel, if indicated. Once again, use of available forensic technology should be at the forefront of any such effort. In case the signals are overlooked and an FCPA violation does occur, organizations need to be prepared and have a robust system in place to handle the investigations, once again with the assistance of outside counsel if necessary. Concluding thoughts Bribing foreign officials to obtain short-term gains is not a good long-term corporate policy. It does no good for your company or those who work with your company, or indeed anyone in any type of business relationship with the company. While the United States has been the most aggressive jurisdiction in terms of investigating such crimes, similar laws have been or will be enacted all over Asia. All the government agencies are cooperating with one another, and it will become increasingly difficult for those bribing foreign officials to avoid liability. Given the amount of money a whistleblower can make by bringing such violations to the attention of prosecuting agencies, the threat of such prosecutions is very real. Even ignoring the obvious potential legal consequences, it is bad for business. Most cases are high profile, and their investigation can bring a great deal of negative publicity, which is not good for a company s public image or its relationship with governmental agencies or even its business relationship with other companies. If your company develops a bad reputation, it may lose business relationships with important ethical corporations. While it may be difficult to comply with the terms of the FCPA in some jurisdictions where you must act through intermediaries, it is not impossible. Take the assistance of outside counsel to the extent where expertise is lacking in-house and use outside vendors and technology to assist with such matters as monitoring and investigating suspected activity before it becomes a problem. AB 10 ASIAN BRIEFINGS NOVEMBER 2014 Association of Corporate Counsel