The Foreign Corrupt Practices Act (FCPA): Doing Business Internationally. Washington, DC August 21, 2014

Transcription

1 The Foreign Corrupt Practices Act (FCPA): Doing Business Internationally Washington, DC August 21, 2014

2 Agenda 1. Overview of the FCPA 2. FCPA Enforcement Trends 3. The In-House View and Corruption Red Flags 2

3 Overview of the FCPA 3

4 Overview The FCPA imposes three distinct requirements: Anti-Bribery: Prohibits giving, offering, or promising anything of value, directly or indirectly, to a foreign official for the corrupt purpose of obtaining or retaining business. Books and Records: Public companies must keep books and records in reasonable detail that fairly and accurately reflect the transactions and circumstances of the company. Internal Controls: Public companies must devise and maintain a system of internal controls that provides reasonable assurance of accurate books and records and GAAP compliant financial statements. 4

5 Who is Subject to the FCPA? All U.S. companies All U.S. citizens and residents (anywhere in the world, regardless of employer) All public companies (U.S. and foreign) Foreign companies with a presence in the U.S. Non-resident aliens and foreign entities that act or use U.S. mails or wires while in the United States Officers, directors, employees or agents, in the U.S. or abroad, of any of the above U.S. companies can be liable for the acts of foreign subsidiaries, JV partners, and other parties deemed to be acting as agents 5

6 FCPA Anti-Bribery The Anti-Bribery provisions prohibit: Giving or offering or promising or authorizing Directly or indirectly Anything of value To any foreign official Corruptly In order to obtain or retain business, or otherwise gain an unfair advantage 6

7 FCPA Anti-Bribery Giving, Offering, Promising, or Authorizing: The crime is complete with the corrupt offer A payment does not need to actually occur A benefit does not need to actually be provided Conspiracy/agreement to make a corrupt offer is a crime 7

8 FCPA Anti-Bribery Directly or Indirectly: The FCPA prohibits direct payments to foreign officials The FCPA also prohibits indirect corrupt payments through agents and intermediaries such as consultants, independent contractors, agents, lobbyists, and distributors A company is liable if it: Authorized the payment by the agent; or Knew or consciously disregarded a high probability that the illicit payment would be made by its local agent ( willful blindness ) 8

9 Anything of Value: FCPA Anti-Bribery Covers cash, gifts, or other valuable benefits Includes intangibles: employment, travel, education, and entertainment JP Morgan Chase Investigation (2013): Enforcement authorities are currently investigating whether JP Morgan Chase and other banks hired the children of Chinese officials ( princelings ) to help win business No de minimis exception: potential liability even for very small payments 9

10 FCPA Anti-Bribery Foreign Official Defined very broadly Officers or employees of a foreign government Officers or employees of state-owned or controlled enterprises (e.g., PDVSA, CNOC) Individuals or entities performing government functions (e.g., government contractor performing Customs work) Members of a royal family or military Foreign political parties, their officials, and candidates for foreign political office Officers and employees of public international organizations (e.g., Interpol, IMF, UN) 10

11 Corruptly: FCPA Anti-Bribery Giver had intent/desire to improperly influence the foreign official s exercise of discretion or the performance of his official functions No requirement that the act (e.g., the bribe) succeed in its purpose Obtain or Retain Business: Broadly interpreted requirement Includes all payments intended to win or retain business Also encompasses all payments intended to gain a business advantage, such as Payments to gain favorable tax treatment Payments to circumvent a licensing or permit requirement Payments to prevent competitors from entering a market 11

12 FCPA Anti-Bribery Gifts & Entertainment Reasonable and bona fide expenditures do not violate the FCPA because there is no corrupt intent. Those expenditures can include: travel and lodging expenses, incurred by or on behalf of a foreign official, directly related to: the promotion, demonstration, or explanation of products or services; or the execution or performance of a contract with a foreign government or agency Gifts, so long as the expenditures are reasonable and have a legitimate purpose (e.g., customary in culture; related to demonstration of product) Such expenditures still must be legal in the relevant country, customary to the relevant country, made transparently, and accurately reflected in the company s books and records 12

13 FCPA Anti-Bribery - Facilitating Payments The FCPA exempts any 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 government action Types of activities that may be exempt: Obtaining permits, licenses or other documents to do business Providing phone, power and water services, police protection, etc. Actions of a similar nature Routine government action does not include any decisions related to awarding or continuing business with a particular party. Payments should be modest, although there is no monetary limitation. Payments should be accurately reflected on books and records. 13

14 FCPA Books & Records / Internal Controls Per the SEC, the objectives of these provisions are that assets be safeguarded from unauthorized use, that corporate transactions conform to managerial authorizations and that records are accurate. U.S. public companies must: Keep books in reasonable detail, to accurately and fairly reflect the transactions and dispositions of the assets of the [company]. Securities Exchange Act of 1934, Section 13(b)(2)(A) Not knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account. Securities Exchange Act of 1934, Section 13(b)(5) Devise and maintain a system of internal accounting controls to provide reasonable assurances that the company has accurate books and records and GAAP-compliant financial statements. Securities Exchange Act of 1934, Section 13(b)(2)(B) All transactions must be accurately recorded. There is no materiality requirement. Different requirements for majority and minority-owned subsidiaries 14

15 FCPA Penalties Criminal Penalties (DOJ) Each violation of the anti-bribery provision can result in a maximum fine of $2 million for a company and $100, years imprisonment for individuals. Each violation of accounting provisions can result in maximum fine of $25 million for a company and $5 million + 20 years imprisonment for individuals. In certain circumstances, the Alternative Fines Act allows courts to impose higher fines, up to twice the benefit sought by making the corrupt payment, but only in cases where jury criminally convicts defendant or guilt is admitted in a plea. Civil Penalties (SEC) Injunctive relief, cease-and-desist orders, penalties, and disgorgement. No scienter requirement for public company liability 15

16 FCPA Collateral Consequences Criminal and civil fines / imposition of an independent monitor Parallel law enforcement and regulatory actions (e.g., OFAC, IRS) Criminal actions against executives and employees Civil litigation (e.g., Wal-Mart shareholder class action; Alcoa Bahrain suit by competitor alleging contract awarded on corrupt basis) Reputational damage (e.g., Siemens, Avon, Glaxo) Disclosure of possible violation and enforcement action in public filings Decline in stock price Legal fees (e.g., Avon, Wal-Mart) 16

17 Other Anti-Corruption Laws UK Bribery Act (2010) Criminalizes bribery by UK firms, whether committed directly or indirectly, in the UK or overseas Creates strict liability offense for a company s failure to prevent bribery Broad jurisdictional reach covers non-uk companies that carry on any part of their business in the UK Criminalizes commercial bribery, as well as government corruption (unlike FCPA) No exception for facilitation payments (unlike FCPA) Canada Corruption of Foreign Public Officials Act (1999) Criminalizes bribery of foreign public officials when the offense is committed in whole or in part in Canadian territory Recently has been more actively enforced (e.g., Griffiths Energy Intl.) China Various Anti-Corruption Laws Increased enforcement actions (e.g., GlaxoSmithKline China) OECD Convention on Combating Bribery of Foreign Public Officials (1997) 39 Signatories, including Canada, Switzerland, Japan, Turkey All signatories have enacted domestic laws similar to the FCPA 17

18 FCPA Enforcement Trends 18

19 FCPA Enforcement Trends There were more enforcement actions in 2012 than in any other year in the FCPA s 36 year-history. This high level of enforcement activity has continued through 2013 and "As Attorney General, I have made combating corruption one of the highest priorities of the Department of Justice. [O]ur FCPA prosecutions have resulted in remedial efforts by many companies, such as enhanced compliance programs to detect and deter foreign bribery. The way those companies do business has changed permanently and for the better." - Attorney General Eric Holder 19

20 FCPA Enforcement Trends Criminal enforcement by the DOJ FCPA enforcement is a core priority of the DOJ DOJ is committing significant resources, including dedicated FBI agents, to FCPA enforcement Civil enforcement by the SEC Chairman Mary Jo White has promised bold and unrelenting enforcement of securities laws and regulations, including the FCPA Enforcement authorities are committing more resources to FCPA enforcement. The DOJ and the SEC have ~60 lawyers dedicated to FCPA enforcement with ability to draw on substantial additional resources 20

21 FCPA Enforcement Trends Prosecuting senior company executives is a priority Multi-jurisdictional investigations are on the rise (e.g., GlaxoSmithKline China investigation) Informal international cooperation will continue to improve, together with increased mutual legal assistance The DOJ will coordinate, where appropriate, sector-wide investigations, as it has in the oil & gas, pharma / device and freight forwarding industries The high pace of voluntary disclosures is likely to continue, particularly in light of Dodd-Frank Whistleblower provisions, raising the risk that employees will report possible violations. Increased enforcement of other crimes, alongside FCPA violations, is expected, including sanctions, money-laundering, tax violations, mail/wire fraud, and Travel Act violations 21

22 Enforcement Trends and Voluntary Disclosures Potential Disclosure Scenarios Internal Investigations Whistleblower Allegations (Dodd-Frank) M&A Due Diligence DOJ / SEC Encourage Voluntary Disclosures Potentially reduced penalties (even a declination) Enforcement efforts potentially limited to acquired company But Are There Real Benefits for Disclosing? Are There Real Risks in Not Disclosing? 22

23 FCPA: The In-House View and Corruption Red Flags 23

24 The In-House View: Corruption Red Flags Situations meriting increased attention Use of agents and intermediaries Oil & Gas / Freight Forwarder Cases : customs agents and freight forwarders paid bribes to obtain customs clearances Pharma Cases : distributors used to funnel bribes to government doctors Entry into high-risk markets Wal-Mart Mexico : payments to acquire zoning approvals, reductions in environmental impact fees Avon China : payments to influence legislation permitting entry into Chinese markets Acquisitions, especially involving high-risk markets Rapid expansion overseas Joint ventures Interaction with government-owned or governmentcontrolled entities 24

25 The In-House View: Corruption Red Flags Accounting issues Travel, gifts and entertainment Regular use of petty cash Lack of back-up documentation for services provided Unexplained profit margins in high-risk market Lack of awareness by employees Employees unfamiliar with anti-bribery policies No recent FCPA training No recent FCPA audit, especially in high-risk countries No FCPA questions or inquiries from high-risk countries 25

26 The In-House View: Corruption Red Flags DOJ/SEC Guidance: Third Party Red Flags Excessive commissions (or other excessive compensation) Contracts that only vaguely describe the services to be provided Third party operates in a different line of business Third party has ties to foreign officials Third party became involved in the transactions at request of a foreign official Third party is a shell company and/or incorporated in an offshore jurisdiction Third party requests payment to offshore accounts or accounts in another party s name 26

27 The In-House View: Corruption Red Flags Other Third Party Red Flags Business in a country known for bribery problems Request that other third parties or intermediaries be paid or retained Request for reimbursement of expenses with incomplete documentation Emphasis on connections Request for advance payments Lack of qualifications Cash payments Payments in round number amounts Refusal to cooperate with due diligence or to agree to standard terms Third party makes promises its competitors cannot make 27

28 The In-House View: Lessons from FCPA Enforcement Actions Foreign sales agents and distributors must be carefully selected, trained and monitored. Diligence and controls are necessary when retaining and paying agents and consultants, and to ensure that those payments are properly recorded. Executives / Employees can be liable for failure to act; not only for authorization of payments. Heightened controls are necessary in high-risk jurisdictions. Enhanced procedures and controls should be used when doing business with state-owned entities. 28

29 Kenneth L. Wainstein Joe D. Whitley Steven Durham Bret A. Campbell