Paying for the Sins of Others FCPA Risks in Institutional Investments

Transcription

1 2008 ANNUAL MEETING AND EDUCATION CONFERENCE American College of Investment Counsel New York, NY Paying for the Sins of Others FCPA Risks in Institutional Investments 4:15 p.m. - 5:30 p.m. October 23, 2008 MODERATOR: Robert J. Meyer Willkie Farr & Gallagher LLP PANELISTS: Jeffrey Harwin Merrill Lynch Mark F. Mendelsohn U.S. Department of Justice

2 Foreign Corrupt Practices Act Risks in Investment Transactions 2008 ACIC Annual Meeting and Education Conference 2 Agenda FCPA Overview Preventing Violations by Third-Party Agents and Consultants Due Diligence on Non-U.S. Investments Special Responsibilities of Employees Serving on Boards of Directors or Advisory Boards of Portfolio Companies Mitigating Risk with an Effective Anticorruption Compliance Program Q & A

3 3 FCPA Overview FCPA Overview 4 The FCPA governs: Your interactions with foreign officials when doing business outside the U.S.; and Your conduct in the context of your non-u.s. investments. Numerous other international anticorruption initiatives govern your conduct outside the U.S.: OECD Convention Domestic antibribery laws

4 5 FCPA Overview (cont d) Two main components: Antibribery Recordkeeping and Accounting Who is covered by the antibribery provisions? Issuers; Domestic concerns; and Any person who, while in the U.S., commits an act in furtherance of an illegal bribe to an official outside the U.S. 6 Elements of an Antibribery Violation The FCPA antibribery provisions prohibit covered persons and entities from: paying, offering, or authorizing; anything of value; to a foreign official, political party, party official, or candidate for political office, OR to a third party while knowing that the thing of value will be offered or paid to one of the foregoing; corruptly for the purpose of influencing the official or securing an improper advantage; in order assist the payor in obtaining or retaining business.

5 Elements Are Broadly Construed 7 Anything of Value is broadly defined to include: Cash or a cash equivalent Gifts Travel and entertainment Business opportunities Jobs for relatives of officials Foreign Official is also defined broadly: Any officer or employee of a government or any department, agency, or instrumentality thereof. Includes officers and employees of state-owned or -controlled enterprises. Any political party, party official, or candidate for political office. Officials or employees of public international organizations - such as the World Bank, IMF, and the United Nations. Any person acting in an official capacity for or on behalf of a foreign government or anyone who exercises official authority. Exception for Facilitating Payments 8 The FCPA permits grease payments for routine governmental action if The payment is small; It is given solely to encourage performance or more expeditious performance of functions which the foreign official is ordinarily and commonly obligated to perform; and The payment is accurately recorded on the company s books and records.

6 Affirmative Defenses 9 Reasonable and bona fide expenditures, such as travel and lodging, are permissible if they are directly related to either (a) the promotion, demonstration, or explanation of products or services, or (b) the execution of a contract with a foreign government or governmental agency. Payments that are lawful under the written laws and regulations of the foreign country. Payment must be expressly lawful, not merely allowable or customary. Hypothetical: Entertainment 10 InvestCo is contemplating a significant commitment of debt funds to a state-owned enterprise in Azerbaijan. InvestCo wants to fly the CEO of the state-owned enterprise (and her husband) to New York, via first class airfare, and pay for their lodging in a suite at The Waldorf Astoria Hotel for three nights. InvestCo also plans to send the CEO back to Azerbaijan via San Francisco and Hawaii.

7 11 Hypothetical: Questions for Discussion Can InvestCo provide travel and hotel accommodations for the CEO? Can InvestCo provide travel and hotel accommodations for the CEO s husband? If the CEO paid for her husband s travel expenses would it change your answer? Can InvestCo send the CEO back via San Francisco and Hawaii? If the return flights via San Francisco and Hawaii did not increase the cost, and the CEO agreed to pay her own expenses during the stopovers, would it change your answer? 12 What Does Knowing Mean? As mentioned above, the FCPA not only prohibits direct payments or things of value to a foreign official, but also giving anything of value to a third party while knowing that the thing of value will be offered or passed on to a foreign official. Thus, the FCPA is implicated whenever you: Hire a third-party agent or consultant; or, Make an investment outside the U.S. Under the FCPA, knowing includes: Having actual knowledge; Being aware or having a firm belief that an improper payment may occur; or Consciously disregarding or being willfully blind to facts creating a high probability that a third party may make an improper payment. Thus, liability can be based on the failure to address or investigate suspicious facts or red flags arising in connection with engaging third parties or making investments.

8 13 FCPA Red Flags FCPA red flags may include: Activities being performed in a country with a reputation for corruption. Connections to an industry that has a history of FCPA violations. Close ties between the transaction in question and a government entity or particular government official. Requests for cash payment by an employee or a third-party representative or consultant. Transactions that do not reflect the actual payee or that go unrecorded. Expense account reports or invoices that are false or misleading. Payment descriptions that do not correspond to the appropriate account. Documents that conceal or misrepresent the identity of a party to a transaction or any employee or agent of a party. Vague payment descriptions, such as service fee to agent. 14 Recordkeeping and Accounting Provisions Under the Recordkeeping and Accounting provisions of the FCPA, public companies and their subsidiaries are required to: keep books, records and accounts in reasonable detail to accurately and fairly reflect transactions and dispositions of assets, and devise and maintain internal accounting controls (such as those requiring management authorization of transactions). Public companies holding a minority interest in a foreign or domestic affiliate are required to make good faith efforts to cause the subsidiary to comply with these provisions.

9 15 Consequences of an FCPA Violation Significant civil and criminal penalties Significant defense costs Reputational harm to the Firm 16 Preventing Violations by Third-Party Agents and Consultants

10 17 Prevention Third Parties When dealing with third-party agents, consultants, or representatives, remember Under the FCPA you may be held liable for improper payments made by third parties even if you did not actually know of or authorize the payments. Protecting against liability requires showing that you were not willfully blind or did not disregard a risk that the agent or consultant might violate the law. How? Perform due diligence prior to hiring the agent or consultant; Have a written contract with appropriate contractual terms and covenants; and Actively monitor the relationship. Suggested Due Diligence on Third-Party Agents and Consultants 18 Due diligence on third parties that may have dealings with foreign officials should include inquiring about the following: The individual or company s nationality or place of formation. The third party s business experience and qualifications. The third party s affiliates and any individuals, companies, or entities that would receive a portion of the payment for the third party s services and the nationality or location of each. The third party s reputation within the industry. How and why the third party was chosen to provide services to you. Business, banking and credit references. The third party s relationship with governments, including: Any government officials affiliated with or having an ownership interest in the third party, and Any individuals at the third party with a business or familial relationship with a government or government official.

11 Suggested Reps and Warranties for Third-Party Agents and Consultants 19 Once you have decided to engage a particular third party that may have dealings with foreign officials on your behalf, you should obtain appropriate FCPA contractual safeguards (including representations and warranties): Representation that the third party is not a foreign official or affiliated with/related to a foreign official. Representation that the third party has not previously engaged in conduct that would violate the FCPA if the third party were subject to it. Covenant that the third party will keep complete and accurate books and records. Right to reasonable review of the third party s books and records ( audit rights ). Representation that the third party understands, and covenant that it will abide by, all applicable local laws and the FCPA, even if not subject to it, and will not make improper payments or otherwise do anything that would cause your company to be in violation of the FCPA. Right to terminate based on good faith belief that a violation of FCPA representations and warranties has occurred. 20 Monitoring Third Parties The responsibility to monitor third-party relationships is ongoing, and may include: Regular informal reporting. Annual anticorruption certifications. Periodic exercise of audit rights. You should pay attention to any red flags suggesting that a third party may be contemplating or making improper payments to a foreign official. If you observe any red flags, you should make further inquiries to determine whether there is cause for concern.

12 21 Due Diligence on Potential Non-U.S. Investments 22 Non-U.S. Investments Undiscovered FCPA problems can affect the value of an investment and/or subject you to FCPA liability. Avoid FCPA liability by performing due diligence before committing to a non-u.s. transaction; and, obtaining appropriate FCPA covenants and contractual safeguards.

13 23 Non-U.S. Investments Due diligence should start early in the investment process. Explain the reason for the due diligence to the investment target. Use a due diligence checklist as a guide. Take note of any areas where the target resists providing requested information this in itself can constitute a red flag. Covenants and contractual safeguards will include representations about past conduct (and thus backstop due diligence) and will also include undertakings and other safeguards that regulate future compliance. 24 Transaction Due Diligence Checklist An appropriate due diligence review would include examination of the following areas: Corporate structure and ownership of the investment target. The target s anticorruption policies and procedures. The target s sales and marketing organizational structure, including any thirdparty sales or marketing arrangements. The target s interaction with governmental departments, agencies or enterprises. Local joint ventures and strategic partners. The background, reputation, and methods of third-party agents, consultants and distributors. Accounting processes and financial controls. Certain types of high risk payments made by target (e.g., payments to governmental entities, third-party agents, travel or entertainment of government officials, facilitation payments, political or charitable contributions, petty cash).

14 Suggested Covenants and Contractual Safeguards for Non-U.S. Investments 25 Target represents and warrants that it is familiar with the U.S. Foreign Corrupt Practices Act ( FCPA ) and its purposes, including its prohibition against the corrupt payment, offer, promise, or authorization of the payment or transfer of anything of value, directly or indirectly, to any government official or employee (including employees of government owned or controlled companies or public international organizations) or to any political party, party official, or candidate for public office (hereinafter Government Official ). Target represents and warrants that it has not engaged in conduct in violation of the FCPA or the anticorruption laws of any other country and that it is currently in compliance with all applicable anticorruption laws and the FCPA, even if Target is not actually subject to the FCPA. Target represents and warrants that it will at all times conduct its business and transactions in conformity with, and will not engage in any actions that would constitute a violation of, the prohibitions of the FCPA, even if Target is not actually subject to the FCPA, or of any other anticorruption laws applicable to its business activities. Suggested Covenants and Contractual Safeguards for Non-U.S. Investments 26 Target will adopt appropriate policies and procedures specifically to ensure compliance with the FCPA and other anticorruption laws applicable to its business activities. Target represents and warrants that it has not been found by a government agency or court to have violated the FCPA or any bribery, fraud, kickback or similar anticorruption law of any country. Target represents and warrants that none of its partners, owners, or principals is a Government Official and agrees that if any of its partners, owners, or principals becomes a Government Official prior to the closing of the transaction, then Target shall promptly notify Investor in writing. In the event of any potential FCPA concern being identified, discovered, or disclosed prior to the closing of this transaction, the Parties will promptly meet. If, after consultation between the Parties, any such FCPA concerns cannot be resolved in the good faith and reasonable judgment of Investor in its sole discretion, then Investor, on written notice to Target, may withdraw from or terminate this Agreement.

15 27 Special Responsibilities of Employees Serving on Boards of Directors Employees Who Serve on Boards of Directors 28 Individuals who serve on the Boards of Directors or Advisory Boards of non-u.s. portfolio companies can subject themselves and their U.S. employer to liability under the FCPA for the portfolio company s activities, even if the portfolio company itself is not covered by the Act. The potential for liability arises when the individual knew of, or was willfully blind to, facts suggesting improper conduct.

16 Employees Who Serve on Boards of Directors (cont d) 29 Avoid liability by Encouraging portfolio companies to adopt anticorruption policies and accounting practices aimed at preventing improper payments. Paying attention to red flags suggesting the possibility of improper payments. Making further inquiries to determine whether there is cause for concern. Always object to payments or other measures that you believe may be improper, even if you do not believe the objection will affect the outcome. 30 Mitigating Risk with an Effective Anticorruption Compliance Program

17 Why Adopt an Anticorruption Compliance Program? 31 Investment risk Reputational risk In the event of a violation, the existence of an effective compliance program, as defined by the U.S. Sentencing Guidelines for Organizations, is a substantial mitigating factor in determining penalties. More importantly, the Department of Justice will consider the existence and adequacy of [an entity s] pre-existing compliance program (emphasis in original) in determining whether to bring charges against an organization for a violation committed by an officer, employee, or agent. Seven Elements of an Effective Anticorruption Compliance Program 32 The seven elements of an effective compliance program are: Compliance Standards and Procedures High-level Leadership of Compliance Program Responsible Authority Delegation Steps to Communicate Standards and Procedures Monitoring and Auditing Discipline, Incentives, and Enforcement to Promote Compliance Active Organizational Responses to Misconduct In sum, you want to devise and implement a program that embodies standards and procedures addressing the risks we just discussed, appropriate leadership, training, auditing, and appropriate organizational responses to potential violations.

18 Questions? 33