Compliance: OK, We Have to Observe the FCPA But That s It, Isn t It?

Transcription

1 Compliance: OK, We Have to Observe the FCPA But That s It, Isn t It? Clifford Sosnow Partner Presentation to the ABA 2014 North America Regional Forum November 17-18, 2014

2 Roadmap to Understanding Hypothetical Understanding Canadian anti-bribery and corruption law and key situations creating exposure to liability provide foundation to identify risk issues in hypothetical: I. II. What does Canadian law say? What tools stand out as important risk management strategies? 2

3 Why This Panel Discussion?: Recent Statement From Global Fortune 500 Company One of the Company s most important assets is its reputation. We have seen in recent years that a small number of unethical employees can lead to the destruction of an entire company, the loss of thousands of jobs, and cast a cloud over its employees, just by ruining its reputation. Signed President and Chief Executive Officer; Chairman, Board of Directors 3

4 Corruption Of Foreign Public Officials Act (CFPOA): A Primer CFPOA prohibits bribery of foreign public officials through severe criminal sanction. Offence made out where: A person, to obtain or retain an advantage, Directly or indirectly provides a benefit to a foreign public official, as consideration for an act or omission by the official or to induce the official to use his/her position to influence any acts or decisions of the foreign state. 4

5 Foreign Public Officials Foreign Public Officials include: Person who holds legislative/judicial/ administrative position (elected or appointed); Employees of corporations/government agencies acting on behalf of the foreign country (e.g. State Owned Enterprises); No explicit mention of official of foreign political party or candidate for foreign political office; A prudent approach: assume they are covered. 5

6 Canadian Courts Show No Hesitation To Punish Violations Harshly Canadian courts to date exhibit no hesitation about incarcerating those who bribe foreign public officials to obtain or retain business. Any person who proposes to enter into a sophisticated scheme to bribe foreign public officials to promote the commercial or other interests of a Canadian business abroad must appreciate that they will face a significant sentence of incarceration in a federal penitentiary. Per Mr. Justice Hackland in R. v. Karigar 2014 ONSC

7 Recent Amendments: A Deeper Reach In June, 2013, Canada passed amendments to the CFPOA that significantly toughens the law to plug up serious gaps: Prior to June, 2013, CFPOA applied only when substantial portion of foreign bribe linked to Canadian territory. CFPOA now incorporates nationality jurisdiction - extends to any Canadian even where no territorial link. New accounting offence: (i) set up hidden account to hide bribe to foreign public official; (ii) make payment not recorded in books of account; (iii) record payment not made (e.g., hiding bribe as royalty payment); or (iv) knowingly using false documents (e.g., false invoices). 7

8 Criminal Sanctions Are Severe Criminal Penalties for breach include: Imprisonment up to 14 years Unlimited fines Forfeiture of any and all proceeds obtained by corruption And the by-product of such prosecution: Incalculable reputational harm, loss of investor support and loss of business 8

9 Carefully Circumscribed Defences Under Canadian Law Three defences to CFPOA bribery offence: Payments permitted under local laws of foreign state; Reasonable expenses directly related to: Promotion/demonstration/explanation of products or services, or Performance of contract with foreign official s state; Facilitation payments (But Will Be Prohibited By Canada); Bribe payments part of local culture/need to do to attract business never a defence. 9

10 Tools to Manage Risk: What is an Improper Benefit? What is an improper benefit that attracts investigation? Extravagant gifts, lavish hospitality, governmentlinked charities attract prosecutorial scrutiny: Gift giving acceptable? If nominal value, provided publically and strictly as courtesy or in return for hospitality; Is of a type that is customary in foreign country. 10

11 Tools to Manage Risk: What is an Improper Benefit? Hospitality/entertainment expenses? Must be reasonable, permitted under local law and avoid any appearance expecting something in return. Charitable contributions safe? Not if linked to foreign public official, or done in name of official, or may reasonably be expected to be used by or for benefit of official and not charity. 11

12 Tools to Manage Risk: Why Should I Care About Agents or Intermediaries? The use of agents has proven to be one of the most risk prone areas for companies. [I]ntermediaries are high-risk and therefore need to be properly retained and managed within an effective corporate compliance program. Anti-Corruption Ethics and Compliance Handbook for Business 12

13 Company Liability For Actions of Agents/ Intermediaries In Canada, may be liable for the improper actions of agents or intermediaries. CFPOA applies to anyone acting directly or indirectly : Employees can bind company acting through representatives (Criminal Code of Canada); Includes illicit accounting by agents/intermediaries to hide bribe payment. 13

14 Due Diligence - Selecting Agents/Intermediaries Is an agent/intermediary truly necessary? Legal or compliance group should participate in and supervise due diligence. What is the guiding philosophy in what to look for?: Is agent/intermediary a reliable, trustworthy and transparent business partner? 14

15 Due Diligence - Internal Inquiries Ownership/Management information of agent/intermediary: Government officials?; Political Party officials?; What about immediate family? Key Disclosures: Prior bankruptcies, criminal convictions, debarment from bidding on contracts Agent/Intermediary has robust code of conduct? Does agent/intermediary share same commitment to comply with anti-bribery law; or conversely requests payment in cash, robust commissions, or payment to country other than country of residence. 15

16 Due Diligence - External Inquiries Independent references on agent/intermediary Determine reputational risk (References: embassy, banks); Media search Is an intermediary/agent associated with bribery scandal?; Government databases Check persons and organizations that have violated law or regulations. 16

17 Contractual Protections To Minimize Agent/Intermediary Risk Some important conditions to include in the agent/intermediary contract: Pre-approvals for expenditures. Representations/warranties, as appropriate: Compliance with laws and policies; Allow for spot audits. Automatic termination for violation. 17

18 Tools to Manage Risk: M & A Red Flags Indicating Potential Risk M & A Transaction Red Flags: Target refuses to disclose names of beneficial owners, partners or principals; Target owned by a government entity or uses holding companies to obscure ownership; Target operates in high corruption risk country or countries; Target does not have a robust anti-bribery policy or training; Target pays unusual commissions to agents; Target has significant licenses or contracts with foreign government. 18

19 Tools to Manage Risk: Elements of Effective Compliance Program Develop corporate policy (broad reach and updated) Ensure senior level buy-in Senior level oversight Training Accounting Procedures Protective contractual provisions Due diligence review of potential and current distributors Confidential mechanism to report violations Discipline violations 19

20 Can You Spot Canadian Issues In Hypothetical? Thank You Clifford Sosnow

21 FCPA Melissa Pallett-Vasquez November 2014

22 The FCPA Is Here To Stay Foreign Corrupt Practices Act ( FCPA ) November 16, 2012 speech former U.S. Assistant Attorney General Lanny A. Breuer U.S. Government s expansion of the use of FCPA successor will continue this trend Department of Justice s ( DOJ ) FCPA Unit Since 2009, has entered into over 40 corporate resolutions, nine of the top ten resolutions ever, as measured by the size of the penalty resulting in over $2 billion in fines secured criminal convictions against approximately 36 individuals

23 The FCPA Is Here To Stay Joel Esquenazi, former president of Terra Communications Corp. Convicted by a South Florida federal district court 15 years in federal prison for FCPA violations Stemming from payments from Terra to Haiti Teleco Case now on appeal

24 Globally, Anti-Bribery and Anti-Corruption Legislation On Legislators Radars United Kingdom enacted Anti-Bribery Act in 2010 Reach is broader than FCPA Projeto de Lei 6826/2010 Brazilian federal house of deputies approved Far-reaching anti-bribery and anti-corruption legislation Yet to be enacted as law

25 Globally, Anti-Bribery and Anti-Corruption Legislation On Legislators Radars Cont. Council of the Organisation for Economic Cooperation and Development ( OECD ) Anti-Bribery Convention January 19, 2013 Colombia fifth Latin American country to join along with Argentina, Brazil, Chile, and Mexico (Peru is part of the OECD s Working Group) have committed to enacting anti-bribery legislation similar to the FCPA OECD will monitor these countries progress and evaluate the adequacy of the proposed legislation

26 Globally, Anti-Bribery and Anti-Corruption Legislation Are On Legislators Radars Cont. Organization of American States adopted Inter-American Convention Against Corruption, which requires parties to criminalize both foreign and domestic bribery. Russia recently has enacted anti-bribery legislation that affirmatively requires that companies have anti-bribery compliance programs, and India recently has added anti-bribery legislation to its penal code.

27 FCPA s Anti-Bribery Provisions -- Who is Covered? DOJ and Securities and Exchange Commission ( SEC ) share enforcement authority for FCPA s anti-bribery provisions. The FCPA covers any Issuer as defined in the statute -- briefly, if you are a company with a class of securities listed on the national securities exchange in the U.S., or a company with a class of securities quoted in the over-the-counter market in the U.S. and required to file periodic reports with SEC, you are an issuer under the FCPA. If you are a foreign company with American Depository Receipts, you also are an issuer under FCPA.

28 FCPA s Anti-Bribery Provisions -- Who is Covered? Cont. The FCPA also covers a domestic concern -- defined as any individual who is a citizen, national, or resident of the U.S., or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship that is organized under the laws of the U.S. or any of the states, territories, possessions, etc., or that has a principal place of business in the U.S. The FCPA also may cover foreign nationals or foreign companies that are neither issuers nor domestic concerns if they perform any act in furtherance of an FCPA violation while in the territory of the U.S. Third parties that assist in the effectuation of the illegal payments also are subject to the FCPA.

29 FCPA s Anti-Bribery Provisions -- What Conduct is Illegal? FCPA s anti-bribery provisions cover payments, or the exchange of anything of value that is intended to induce or influence a foreign official to use his position in order to assist... in obtaining or retaining business for or with, or directing business to, any person. business purpose test. Statute of limitations generally is five years conspiracy cases, DOJ and SEC may prosecute violations if one act in furtherance of the conspiracy was performed during the 5-year period allows government to reach back further than the 5 years.

30 FCPA s Anti-Bribery Provisions -- What Conduct is Illegal? Cont. As discussed in the DOJ s FCPA Guide, the following actions are deemed to satisfy the business purpose test: (1) Winning a contract; (2) Influencing the procurement process; (3) Circumventing the rules for importation of products; (4) Gaining access to non-public bid tender information; (5) Evading taxes or penalties; (6) Influencing the adjudication of lawsuits or enforcement actions; (7) Obtaining exceptions from regulations; (8) Avoiding contract termination; (9) Obtaining favorable tax treatment under certain circumstances; and (10) Obtaining favorable customs treatment.

31 FCPA s Anti-Bribery Provisions -- What Constitutes a Payment? Basically, Anything of value -- cash, of course, but also: (1) Lavish entertainment expenses ($10,000 spent on dinner, drinks, and entertainment); (2) Lavish travel expenses ($12,000 birthday trip to government official); and (3) Charitable contributions linked with foreign officials.

32 FCPA s Anti-Bribery Provisions -- Who is a Foreign Official? foreign official Interpreted broadly by DOJ and SEC If company or individual is associated with the government i.e. a physician that is paid, if only in part, by the foreign government under its socialized medicine program foreign government s involvement with the company in question DOJ has a very good list of factors to consider in its FCPA guide (p. 20).

33 FCPA s Anti-Bribery Provisions -- Who is a Foreign Official? Due diligence critical when conducting business with individuals or companies abroad must determine the role, if any, that local, provincial/state, and national government(s) have in transaction or company

34 FCPA s Anti-Bribery Provisions -- What are the Affirmative Defenses? Non-exclusive list Local law defense payment in question is not illegal under the foreign country s laws Reasonable and bona fide expenditures defense costs associated with the promotion of your goods and services, reasonable travel expenses associated with taking foreign officials to your plant, etc. not illicit payments for the purpose of obtaining business

35 FCPA s Anti-Bribery Provisions -- What are the Affirmative Defenses? Facilitating or Expediting Payments Defense tricky but can be done if, in the foreign country in question, payments are made to further routine governmental action that involves non-discretionary acts

36 FCPA s Anti-Bribery Provisions -- Corporate Liability Parent may be liable for subsidiary s violations of FCPA If you acquire or merge with a company that was under the purview of the FCPA, you acquire its FCPA liabilities (if the company you are acquiring was not under the purview of the FCPA, the acquisition, per se, does not create FCPA liability). Any post-acquisition violations, of course, will be actionable. The FCPA covers Issuer as defined in the statute

37 FCPA s Anti-Bribery Provisions -- Corporate Liability Cont. DOJ has criminal FCPA enforcement authority over issuers under the Exchange Act of 1934 (the Exchange Act ). To qualify as an issuer under the FCPA: an entity either must be required to file reports with the SEC under 15(d) of the Exchange Actor must have securities registered with the SEC under 12 of the Exchange Act Most non-u.s. operations of U.S. companies are covered by the FCPA SEC has civil FCPA enforcement authority over issuers Both DOJ and SEC authority extends to the issuers officers, directors, employees, agents, or stockholders

38 FCPA s Books and Records Provisions Companies and individuals must maintain records that show in reasonable detail that the expenditures on their accounting records are not illicit payments under FCPA. DOJ and SEC focus on misreporting of large bribe payments or widespread inaccurate recording of smaller payments made as part of systemic bribery. Having appropriate internal controls is critical to meet the FCPA s books and records provisions.

39 Other Federal Laws to Consider Travel Act -- prohibits interstate or foreign travel, or use of mail, with intent to distribute proceeds of illegal activity or to promote, manage, establish, or carry on any unlawful activity. Money Laundering -- financial transactions surrounding efforts to conceal bribes may be money laundering. Mail and Wire Fraud -- Using instrumentalities to make payments may violate mail and wire fraud statutes. Tax Violations -- classifying that bribe as a business expense on your taxes may land you in hot water with the IRS.

40 Penalties Companies -- for each FCPA anti-bribery violation, fine of up to $2 million. Individuals -- for each FCPA anti-bribery violation, fine of up to $100,000 and up to five years in federal prison. Companies -- for each FCPA books and records violation, fine of up to $25 million. Individuals -- for each FCPA books and records violation, fine of up to $100,000 and up to 20 years in federal prison. Civil penalties. Debarment from doing business with federal government. Cross-debarment with international organizations such as Multilateral Development Banks. Loss of export privileges.

41 Having a Robust Compliance Program is Critical DOJ and SEC will consider, along with other factors, whether the company had a robust and serious FCPA compliance program as they evaluate FCPA prosecution. Existence of compliance program likely will influence whether DOJ or SEC enters into deferred prosecution agreement ( DPA ) or nonprosecution agreement ( NPA ). SEC and DOJ understand that no compliance program can ever prevent all criminal activity by a corporations employees -- but the compliance program must be effective and robust -- having a 30- minute training seminar once a year likely won t cut it.

42 Self-Reporting, Cooperating, & Remedying Situation SEC and DOJ consider, when deciding whether to prosecute FCPA violations, and to what extent company s conduct whether it self-reported the violations whether it is cooperating, and whether it remedied the problem. Ralph Lauren obtained NPAs from both the DOJ and the SEC (the first of its kind for the SEC) regarding FCPA violations involving its Argentine subsidiary SEC noted, in its decision not to prosecute, that it was influenced by Ralph Lauren s timely, voluntary, and complete disclosure, its extensive, thorough, and real-time cooperation, and its early and extensive remedial efforts already undertaken.

43 Self-Reporting, Cooperating, & Remedying Situation Cont. Checking off the self-reporting, cooperation, and remedying situation boxes will not, necessarily, get the DOJ and SEC to decline prosecutions Determination of whether to self-report, etc., is one that is factually and legally intensive and requires close analysis by the company and its internal and external counsel.

44 Commentators Criticisms of November 2012 FCPA Guide Even its authors admit that the November 2012 FCPA Guide will not please everyone. The lavish expense examples that I included above are pretty obvious, and may not even reflect what conduct occurs in real life -- and neither the Guide nor the FCPA define reasonable promotional expenses. DOJ and SEC likely will give the company significant credit if, despite having a robust FCPA compliance, a company employee nevertheless goes rogue and commits a FCPA violation But what if there are more employees involved, and in different regions and subsidiaries? What then? What credit is given, if any?

45 Commentators Criticisms of November 2012 FCPA Guide Cont. Although having a compliance program may earn you a bit of credit with the DOJ and SEC, an official compliance affirmative defense is not available under the FCPA. The U.S. Chamber of Commerce, among other industry groups, and influential commentators such as former Attorney General Alberto Gonzalez, have called for Congress to amend the FCPA to add a compliance affirmative defense. DOJ and SEC worry about a race to the bottom if companies are allowed to interpose a compliance affirmative defense if the FCPA is amended.

46 Siemens Major international engineering and electronics conglomerate. Had allegedly paid more than $1.4 billion in bribes to government officials in Asia, Africa, Europe, the Middle East, and the Americas. Ultimately resulted in an $800 million penalty in the United States. Required to engage a corporate monitor for three years. Hundreds of millions in remediation costs.

47 Panalpina Swiss logistics company, customs clearance and import permitting. Alleged criminal conduct focused on work on behalf of oil industry. Came to light after Panalpina customer charged under FCPA. After other customers caught: $236.5 million in total penalties.

48 UKBA v. FCPA Extends to bribes offered or given to any person, not just foreign officials. Makes it a crime to request, to agree to receive, or to accept a bribe Does not require corrupt intent. Provides no exemption for facilitation payments. Also makes it a crime for a corporation to fail to prevent bribery. Unlimited corporate fines.

49 UKBA -- Applicability Bribery: if an act forming part of the offense takes place in the UK OR if the person who does the act has a close connection with the UK. Failing to Prevent Bribery : applies to any commercial organization, even if all of the acts take place outside the UK.

50 Pushing the Boundaries: The Greens & Juthamas Siriwan Source leads to successful prosecution of Hollywood filmmakers. FCPA was not the exclusive theory of prosecution. Greens prosecution led to Siriwan, a government official. Limited nexus to the United States

51 Going After Individuals: Clarke, Hurtado & Gonzalez de Hernandez Employees of a New York broker dealer. Gonzalez de Hernandez was an executive at government-owned bank. An SEC examination led to an elaborate kick-back scheme. Travel Act added to the mix of FCPA and AML.

52 Continuing to Hunt Down Corporations: Total, S.A. Oil giant doing business around the world. Staggering settlement payments. Preference for deferred prosecution agreements. Cooperation with foreign agencies.

53 Thank You!

54 Hypothetical: EZ Green Corporation ( EZ Green ) is a diversified publicly-held New York-based corporation listed on Nasdaq. EZ Green is conducting due diligence regarding the possible acquisition of Sunthing Good Corporation, a privately held solar panel manufacturer and operator of solar energy farms with corporate headquarters and production facilities in California ( Sunthing Good ). Sunthing Good has subsidiaries in Canada and Mexico. The Canadian and Mexican subsidiaries use agents and distributors in a number of African countries, including Angola, Libya, Morocco, Algeria, and Egypt. EZ Green s management and business development people are convinced that Sunthing Good is a perfect fit for EZ Green because, although Sunthing Good s products are high in demand and Sunthing Good has been able to make great inroads into specific foreign markets, its management is weak. EZ Green is convinced that its own management will be able to take Sunthing Good s solar products and marketing efforts to the next level. During the due diligence phase, EZ Green discovers that the sales force (Sunthing Good s employees as well as the agents and distributors) of Sunthing Good s respective subsidiaries have, since about 2010, been making -- and continue to make -- irregular cash payments not only to local government officials in Canada and Mexico, but the respective agents and distributors are also making payments to local government officials in the above-mentioned African and South American countries. These payments have ranged anywhere from US $5,000 to $50,000. Even though Sunthing Good s subsidiaries and/or agents and distributors entered the cash payments into their books as contributions to local charities, there is real concern on EZ Green s part that the payments were made with the aim of getting solar projects awarded from local governments in each of the countries. To buttress this concern, Sunthing Good was not able to produce any receipts for these charitable contributions. On top of that, there is evidence that Sunthing Good picked up the tab a few times for lavish Caribbean vacations taken by local government officials and their families (Sunthing Good does have a small manufacturing facility in Barbados). Finally, based on interviews conducted by EZ Green of Sunthing Good s sales force, it seems that Sunthing Good has an unwritten policy that smaller payments (i.e., a few hundred dollars at a time up to a couple of thousand dollars) to foreign customs officials to get its product through customs quicker is just a small cost of doing business. EZ Green did not find any evidence that Sunthing Good has an anti-corruption policy in place nor does it provide anti-corruption training to its employees. As a US corporate entity, EZ Green knows this is problematic as it is familiar with the FCPA. EZ Green, however, is not aware of any other FCPA s in other jurisdictions. EZ Green decides that it may be a good idea to get some legal advice.

55 1) The panel will discuss what actions EZ Green should take with respect to the FCPA. 2) The panel will focus on potential penalties, if any, EZ Green faces in Canada and Mexico under their respective FCPA s. 3) The panel will also examine this same fact pattern from the perspective that EZ Green discovered the charitable contributions and vacation payments after the closing, i.e., during the integration stage. 4) Finally, the panel will discuss the business practices that entities such as EZ Green can practically adopt to protect itself against violation of anti-corruption laws in day-to-day operations.