FCPA, UKBA and Other Four-Letter Words: Anti-Corruption Laws in a Global Economy

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1 International In-house Counsel Journal Vol. 5, No. 18, Winter 2012, 1 FCPA, UKBA and Other Four-Letter Words: Anti-Corruption Laws in a Global Economy M. MACHUA MILLETT General Partner Liability Product Leader, a Claims Advocate and an FCPA Corporate Response Team Leader, USA & SUSAN F. FRIEDMAN Senior Vice President, Claims Advocate, Employed Lawyers Practice Leader, and FCPA Corporate Response Team Leader for the financial products division of Marsh, USA Introduction Few subjects receive as much attention in legal, compliance and accounting circles these days as the United States Foreign Corrupt Practices Act (the FCPA ), the United Kingdom Bribery Act (the UKBA ) and other foreign and international anti-corruption laws. However, while familiarity may breed contempt, presumed familiarity with anticorruption laws is more likely to breed a regulatory investigation, subsequent regulatory proceeding, follow-on class action and derivative suits, and uninsured legal, accounting, consulting and settlement bills in the tens of millions to billions of dollars. The amount of attention paid to FCPA compliance and investigation defense issues is necessary because the incidence of anti-corruption issues and the costs of developing policies and procedures, conducting investigations and resolving regulatory inquiries and related court actions continues to escalate. The number of investigations brought by U.S. regulators nearly doubled from 2009 to 2010, with more than 250 investigations currently under way. 1 In 2010 alone, 8 of the 10 largest settlements of all time were consummated, and U.S. regulators collected more than $1.7 billion in fines, penalties and disgorgement to resolve FCPA violations. The number of such investigations is only expected to increase going forward, as the U.S. regulators gain larger budgets and staffs and the Dodd-Frank whistleblower bounties create additional and significant incentives to report issues externally rather than to a company s internal compliance function. Scrutiny from non-u.s. authorities also continues to increase. The passage of the UKBA certainly indicates that the United Kingdom authorities intend to take a greater role in policing corrupt activity, although the Serious Fraud Office s humble budget likely remains an impediment to anything like the level of activity in the United States. Meanwhile, countries around the world have passed anti-corruption laws loosely based off of the U.S. FCPA in order to remain in compliance with their obligation under OECD and UN treaties and accords. While such countries taking a lead role in any significant number of investigations may be years if not decades away, cooperative investigations between U.S. and foreign regulators is becoming increasingly commonplace as 1 All statistics in this article are taken or derived from the websites of the U.S. Securities and Exchange Commission and/or the U.S. Department of Justice. International In-house Counsel Journal ISSN print/issn online

2 2 M. Machua Millett and Susan F. Friedman developing countries look for their own piece of the anti-corruption fines and penalties pie. At the same time, nearly every regulatory settlement seems to be accompanied by multimillion dollar class action and shareholder derivative suits. The publicized settlement costs represent only part of the overall cost of anti-corruption investigations and proceedings. Companies are frequently required to spend tens to hundreds of millions of dollars responding to regulators inquiries, defending shareholder suits, compensating monitors and funding remediation. Finally, anti-corruption inquiries cause additional costs that are far more difficult to quantify: lowered employee productivity, reputational damage, lost business due to blacklisting and decreased employee morale. Anti-corruption risk should be a particular focus for companies with any relationship with the United States or the United Kingdom and any manufacturing, supply chain, sales force or other presence outside of the United States. Such companies must concern themselves not only with avoiding government bribery problems in their own direct dealings, but also avoiding acquiring subsidiaries or doing business with partners, agents or other companies or individuals that have engaged or may potentially engage in making corrupt payments. Best practices include a robust and frequently updated set of internal anti-corruption compliance policies and procedures, extensive training programs, protocols surrounding any acquisitions and relationships with third party agents or consultants and well-developed methods for internal reporting of anti-corruption issues, and consideration of the potential for insurance related to FCPA risks. Background The field of anti-corruption laws and regulations includes not only the FCPA, but also a series of international conventions and local anti-corruption laws put in place in both developed and developing countries. Each of these laws has its own complexities, but all local anti-corruption initiatives have been based around a central prohibition against corrupt payments to a government official in order to obtain or retain business. The difficulty of complying with this core principle arises out of the specific and oftencountervailing regulations under the various laws, the enormity of trying to ensure compliance from a workforce and foreign agents incentivized to obtain business and often steeped in the local customs of a bribery-based economy, doing business in countries where the division between public institutions and private commercial actors is fuzzy at best, the general absence of any de minimum exceptions, and the current zealous enforcement environment. The FCPA itself is an easy example of potential complexities, but each new anticorruption statute comes with its own peculiarities: 1) The FCPA contains not only a set of anti-bribery provisions (specific and complex enough in their own right), but also a set of accounting provisions (the books and records requirements) that can lead to an FCPA violation even if there is no underlying act of bribery. 15 U.S.C. 78m(b)(5) and (2)(B). 2) The FCPA defines a foreign official as any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality. 15 U.S.C. 78dd-2(h)(2). 3) The FCPA s prohibitions do not extend to facilitation payments (i.e., payments made to expedite a ministerial or otherwise standard process); 15 U.S.C. 78dd-1(b), (f)(3)(a) and (f)(3)(b); but there is no de minimus exception to the size of payment or gift that may constitute an FCPA violation.

3 Anti-Corruption Laws 3 4) The FCPA contains two affirmative defenses -- (a) legality of the payment under local law (15 U.S.C. 78dd-2(c)(1); and (b) reasonable and bona fide expenditures that are directly related to promotion, demonstration or explanation of products or services. 15 U.S.C. 78dd-2(c)(2). 5) While discussions and lobbying efforts continue, the FCPA currently contains no provision for and the U.S. regulators continue to maintain an approach under which a violator receives no consideration for self-reporting or a robust compliance program in determining the appropriate fines and penalties for a violation. As if dealing with one regulatory scheme such as the FCPA were not difficult enough, companies find themselves subject to multiple anti-corruption schemes, each slightly different in the conduct that is prohibited, the exceptions to such prohibitions, and the potential defenses available to a company in the event of an investigation or regulatory proceeding. Take, for example, the UKBA, which is materially different from the FCPA in a number of ways, including the following: 1) Prohibits not only making a bribe, but also accepting a bribe, an issue that is dealt with under separate U.S. civil and criminal laws. 2) Prohibits not only bribery of a government official, but also commercial bribery, an issue that is again dealt with in the U.S. under separate laws. 3) Contains no exemption for facilitation payments, a limitation at least theoretically available under the U.S. FCPA. 4) Contains an affirmative defense for companies that can show that they had adequate procedures in place to prevent corrupt activity, a consideration according to U.S. regulators, but certainly not an affirmative defense. 5) Contains different definitions and constructs than the FCPA as to what persons or entities a company can be responsible for, as well as what determines whether a company is subject to the jurisdiction of the United Kingdom under the UKBA. 6) Contains no requirement of a showing that a payment was made corruptly, a cornerstone of the FCPA, creating the potential for strict liability under UK law. Taken together, the different anti-corruption statutes to which a multinational company may be subject creates a legal and compliance quandary that is unparalleled in its complexity and potential severity in the event of a violation at even the lowest levels of a company. Recent Anti-Corruption Actions of Note The January 2011 SEC Inquiry -- The Financial Industry Joins the FCPA Party Commentators had long opined that the banking industry faced anti-corruption issues that extended beyond a company s own policies and procedures to prevent direct violations of the statute to creating policies and procedures to avoid facilitation of corrupt payments by its customers. While certain previous regulatory actions had informed these concerns (e.g., the U.S. Congress s investigation surrounding fund transfers by the son of Equatorial Guinea s president, the Kleptocracy Asset Recovery Initiative, the Bourke and Nature s Sunshine willful blindness -based FCPA inquiries), the broader industry-based inquiry by the SEC in January 2011 was the clearest confirmation yet of the truly distinctive risks faced by the banking industry.

4 4 M. Machua Millett and Susan F. Friedman The SEC sent letters to a number of banks and private equity funds, including some of the most prominent firms in both industries, directing them to retain all documents concerning their dealings with sovereign wealth funds. The SEC has not made any allegations of bribery against the financial institutions. Instead, although the SEC has cautioned that the investigation is in the early stages, the primary focus of the investigation appears to be on whether appropriate policies and procedures were in place to ensure that the institutions were not facilitating the making of bribes by others. In particular, the private equity inquiry likely revolves around portfolio company control person issues and relationships with and due diligence concerning limited partners, while bank issues likely revolve around due diligence concerning their customers and fund sources. Such an approach by regulators poses significant issues both to financial institutions core FCPA compliance program and to their approach to compliance in other related areas such as acquisition due diligence, portfolio company oversight, know-yourcustomer, anti-money laundering, etc. Siemens, A.G. (2008) In what is still the largest investigation and settlement to date, Siemens paid $950 million dollars in investigation costs and then another $1.6 billion in total penalties. The settlement was paid out not only to U.S. authorities, but also German authorities operating a legal and accounting system that until very recently had permitted German companies deduct as an expense bribery payments made to foreign government officials. The authorities alleged that Siemens maintained off-books slush funds with third parties by entering into sham consulting agreements that failed to specify the nature of services purportedly provided and contained no accountability for expense reimbursements or provisions prohibiting improper payments. The regulators further stated that bribery was tolerated and even rewarded at the highest levels of the Company. Bonny Island LNG Project ( ) Approximately $1.5 billion in penalties were assessed against KBR/Halliburton, ENI, Technip and JGC for alleged bribes paid to Nigerian officials. Individual enforcement and extradition proceedings were also initiated against agents who allegedly made payments. In a growing trend, the local Nigerian authorities also reached settlements with certain consortium members. Panalpina and Related Settlements (2010) Authorities imposed more than $230 million in fines and penalties against freight forwarder Panalpina and six of its customers resulting from over $50 million in alleged improper payments made to customs officials and tax officials. Reinforcing concerns about potential derivative liability under the FCPA, Panalpina was charged by the United States SEC as an agent of U.S. issuers. Alcatel-Lucent (2010) Regulators obtained a $137 million settlement after alleging that the company used thirdparty agents to pay more than $8 million in bribes for telecom contracts in Costa Rica, Taiwan and Kenya. Investigation and subsequent court proceedings resulted in a rare guilty plea to criminal internal controls charges. Johnson & Johnson (2011) U.S., UK and Greek authorities ended a 6-year investigation by agreeing to a $77 million with the company, which included a nearly $22 million criminal fine paid to the U.S. DOJ and SEC, $49 million in disgorgement and interest, 4.8 million paid to the UK authorities, and seized by Greek authorities. Depending upon the commentator,

5 Anti-Corruption Laws 5 the investigation and settlement is held as either an example of how a company can help itself by self-reporting or how investigators are unimpressed with self-reporting and dedicated to conducting a long and costly investigation. Terra Telecommunications (2011) In the longest criminal sentence imposed to date, the former president of the company pleaded guilty under the FCPA and was sentenced to 15 years in prison for an alleged scheme to bribe officials at the government-owned Haitian telecom company. Another executive was sentenced to seven years in prison. The company was also required to forfeit $3.09 million. Anti-Corruption Risk-Profile How can a company decide whether it has significant FCPA or other anti-corruption risk? A recent presentation by PriceWaterhouse Coopers identified the following factors: Do you conduct any business (either through subsidiaries, agents, other intermediaries or via subcontractors/outsourcing service providers) in foreign locations considered as higher risk with respect to reputation for corruption? Do you conduct any business (directly or indirectly) with foreign governments, government owned or controlled entities (including companies from recently privatized industries where the government continue to hold significant role, e.g. Russia), public international organizations, political parties etc.? Do you make any payments to foreign representatives, such as agents, consultants, distributors or other intermediaries? If so, do you know what the economic substance of the transaction is, what the money is used for (e.g. bidding fee deposit) and/or if foreign representatives can exercise discretion/influence over the process? Does your company have contracts for general consulting services, market research, design services, etc. with little to no specification? Is there a clear and consistent method for determination of commissions paid to intermediaries? For example, unusually high commission may indicate red flags of potential bribes. Do you allow for cash advances to your own sales force or other employees? If so, how do you monitor these cash disbursements? Is your company making any contributions to political parties or charitable foundations with connections to foreign official decision makers? Does your company allow giving gifts, providing entertainment or other hospitalities to your clients or prospective clients in foreign countries? If so, how do you identify whether the recipient is acting for or on behalf of the foreign government? Do you organize factory tours or make other goodwill gestures for your government related clients? If so, are family members allowed to co-travel at your expense? Do you cover costs of any side trips that are purely entertainment in nature? Are these costs incurred always directly related to promotion or demonstration of company s products or services? Do you have policies and procedures in place ensure that gifts, entertainment and hospitalities recorded in your books properly reflect the true nature of the expense, i.e. complying with books and records provision? (Note: the SEC / DOJ will often use the book and records provisions of the FCPA as a fall-back where bribery claims cannot be sufficiently supported).

6 6 M. Machua Millett and Susan F. Friedman FCPA and Anti-Corruption Compliance Program Leading Practices, November 2, 2011 (PriceWaterhouse Coopers). If considering any of the questions raised above left you less than entirely comfortable, you might want to keep reading. Best Practices in Anti-Corruption Risk Management In an environment of ever-increasing violations (a 2009 Deloitte LLP poll found that nearly 75% of corporate officers expected that FCPA violations will increase in the next few years), ever greater regulatory scrutiny, ever-increasing incentives for whistleblower activity (such as the Dodd-Frank whistleblower provisions) and ever-growing investigation and resolution costs, it is clear that public and private need both robust FCPA compliance programs and a well-developed approach should such programs fail and an investigation ensue. There is no substitute for a well-designed compliance program. The components of a robust FCPA compliance program seem to be well-established: (1) a clearly-stated ethics policy specifically prohibiting enumerated actions that violate the FCPA and other applicable anti-corruption laws (with appropriate consequences for violations and failure to appropriately monitor); (2) senior oversight of the FCPA compliance program, carefully structured and vetted to avoid involvement by personnel with incentives or propensity to condone violations; (3) accounting measures to comply with books and records and internal controls requirements; (4) extensive vetting and memorializing of foreign agent relationships to avoid improper behavior by business partners; (5) senior management review of agent relationships; (6) frequent training of employees, officers and agents concerning the obligations and prohibitions of the FCPA and other applicable anti-corruption laws: (6) internal reporting mechanisms permitting secure referral of corruption issues; (7) more frequent audits of operations in problematic jurisdictions or sectors of a business; (8) frequent review and revamping of all FCPA-related policies and procedures. I1 Business Law Monographs: Complying with the Foreign Corrupt Practices Act, (Matthew Bender 2010). The foregoing is an extremely brief presentation of the core parts of a comprehensive set of anti-corruption policies and procedures. Every company with anti-corruption exposure should bring in experienced outside advisors to assist with putting such a program in place, and should periodically revisit the adequacy of its policies and procedures. Managing and Responding to a Bribery Issue Even the best compliance program is not foolproof. Rather than wait until a failure occurs, companies should be prepared in advance to deal with the ultimately inevitable internal investigation, regulatory investigation defense and follow-on civil suit defense that will come with an anti-corruption issues. A company s general counsel should not be meeting its outside FCPA counsel and other advisors for the first time only after a corruption issue has already been identified. Instead, a strong relationship between the company compliance and legal personnel and experienced FCPA advisors and investigation defense providers is a must, thereby allowing for a prompt and effective response when an issue is detected.

7 Anti-Corruption Laws 7 As to the immediate steps necessary once a corruption issue is detected, a recent K&L Gates presentation identified them as follows: Stop any improper conduct from occurring or continuing; Develop an investigative work plan; Identify the investigative team; Review insurance coverage options; Notify the Audit Committee of the Board of Directors, if necessary; and Plan for possible outcomes (disclosure to authorities, disciplinary actions, remediation). While this is clearly an oversimplification of a company s considerations at this early stage in an anti-corruption crisis, an early focus on these issues between a company and its outside advisors can significantly reduce the costs incurred and resulting damage suffered by a company due to such issues. Insurance Products in the Anti-Corruption Area One potential means of risk mitigation in the anti-corruption area that had been fairly limited until recently was the potential for purchasing insurance to cover any of the costs associated with FCPA and other anti-corruption investigations and proceedings. In the past, even a well-crafted Director and Officer Liability insurance policy could only provide some limited measure of protection to insured individuals (not the company itself) for the costs of defending themselves against corruption investigations. During 2011, however, certain additional insurance products have been introduced to the market that provide FCPA investigation costs coverage for the insured entity, as well as greater protection for the insured individual insureds. An analysis of the costs and potential benefits of such insurance is increasingly becoming a part of companies consideration of how to deal with the proliferating expenses associated with anti-corruption investigations. Conclusion The current regulatory environment surrounding anti-corruption and the complexities of interlocking and often countervailing laws and regulations make a foolproof approach to anti-corruption compliance nearly impossible. However, regulators in the United States and the United Kingdom expect companies to have well-developed anti-corruption compliance programs in place, and appear committed to punishing more severely those companies that fail to do so. Therefore, a robust compliance program combined with a proactive approach to investigation defense providers and cost mitigation through insurance appears to be the best, indeed perhaps the only, defense to the risk of a potential anti-corruption investigation. *** Susan F. Friedman serves as a Senior Vice President, Claims Advocate, Employed Lawyers Practice Leader, and FCPA Corporate Response Team Leader for the financial products division of Marsh. She is a Contributing Writer to The New York Law Journal, The Legal Times, the International In-House Counsel Journal and related legal publications. She has been interviewed by Forbes.com, Law360 and other notable internet publications. She speaks publicly and writes on a variety of insurance topics germane to all financial insurance product lines. She is a graduate of Cornell University and is admitted to practice law in New York.

8 8 M. Machua Millett and Susan F. Friedman M. Machua Millett is the General Partner Liability Product Leader, a Claims Advocate and an FCPA Corporate Response Team Leader. He is a technical expert in insurance products relative to private equity, venture capital and alternative investment funds. Mr. Millett has over a decade of experience as an attorney for Skadden Arps, Bingham McCutchen and Edwards Angell Palmer & Dodge. He has been acknowledged as a "Rising Star in Insurance" by Reactions Magazine; a "Boston Future Leader" by the Greater Boston Chamber of Commerce; and a "Rising Star" by Massachusetts Super Lawyers Magazine. He is a graduate of Harvard Law School and is admitted to practice law in Massachusetts, Washington, D.C., and the Puerto Rico Federal District Court. Marsh is the world's leading insurance broker and risk advisor. It teams with its clients to define, design, and deliver innovative industry-specific solutions that enable them to protect their futures and thrive. Marsh has over 24,000 colleagues who collaborate to provide guidance to clients in over 100 countries. It is a member of Marsh & McLennan Companies, a global professional services firm with 52,000 employees worldwide.