An Update on FCPA Enforcement & Benchmarking Your Third-Party Anti-Bribery Program November 27, 2014, Hong Kong

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1 BEIJING BOSTON BRUSSELS CHICAGO DALLAS GENEVA HONG KONG HOUSTON LONDON LOS ANGELES NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. An Update on FCPA Enforcement & Benchmarking Your Third-Party Anti-Bribery Program November 27, 2014, Hong Kong Yuet Ming Tham Partner, Sidley Austin

2 Facts and Figures As of June 30, 2014, 106 companies are the subject of ongoing/unresolved FCPA investigations (courtesy of the FCPA Blog) Countries mentioned for the 106 companies: China mentioned 39 times (more than 4 times the next two countries guess which are the two countries?) India 7 Indonesia 2 Australia, Bangladesh, Pakistan, Hong Kong 1 each First half 2014, the DOJ initiated 13 FCPA actions and the SEC 2 2

3 Facts and Figures The Top Ten: 1. Siemens (Germany): $800 mil, KBR / Halliburton (USA): $579 mil, BAE (UK): $400 mil, Total (France) $398 mil, Alcoa (U.S.) $384 mil, Snamprogetti Netherlands / ENI (Holland/Italy): $365 mil, Technip (France): $338 mil, JGC (Japan) $218.8 mil, Daimler (Germany): $185 mil, Weatherford (Switzerland): $152.6 mil,

4 OECD There are 41 Parties to the OECD Anti-Bribery Convention - the 34 OECD Members, plus Argentina, Brazil, Bulgaria, Colombia, Latvia, the Russian Federation, and South Africa. October 23, 2014 Transparency International Report on the enforcement of the OECD Anti-Bribery Convention: Active Enforcement US, Germany, UK and Switzerland Moderate Enforcement Italy, Canada, Australia, Austria and Finland Limited Enforcement France, Sweden, Norway, Hungary, South Africa, Argentina, Portugal, and New Zealand Little/No Enforcement Japan, Netherlands, South Korea, Russia, Spain, Belgium, Mexico, Brazil, Ireland, Poland, Turkey, Denmark, Czech Republic, Luxembourg, Chile, Israel, Slovak Republic, Colombia, Greece, Slovenia, Bulgaria and Estonia 4

5 Whistleblowers Since Aug. 2011, 10,193 whistleblower tips have been received. In 2014, 3,620 tips were received. Out of 3,620 tips, 159 related to the FCPA, 174 were from Asia-Pacific. China 32 Malaysia 12 South Korea 2 Hong Kong 5 Philippines 7 Taiwan 1 India 69 Singapore 9 Thailand 6 Indonesia - 1 Australia - 29 New Zealand - 1 5

6 Whistleblowers Since 2011, the SEC has rewarded 14 whistleblowers, 9 awards were made in FY 2014 alone. To date, 6 of the individuals who received whistleblower awards were current/former employees and 3 were third-parties (contractors/consultants). Of the 6 individuals who were/are employees, 4 reported internally first and only later to the SEC after they understood that the company was not taking action. August 29, 2014 the SEC awarded more than USD 300K to an audit/compliance employee. The employee first reported internally but the co. failed to take action. Sept 22, 2014 the SEC awarded USD 30 million to a whistleblower who provided key information on an ongoing fraud that led to a successful enforcement action. This is the fourth award going to a whistleblower living in a foreign country. 6

7 Foreign Official In recent years, there have been a number of challenges to the definition of foreign official U.S. v. Esquenazi, U.S. v. Noriega, and U.S. v. Carson. May 2014 Eleventh Circuit affirmed a broad definition of instrumentality in Esquenazi. Entity controlled by a foreign government Entity serves a government function Joseph Sigelman, former co-ceo of PetroTiger Ltd., charged in May 2014 with bribing officials of a state-controlled oil company in Colombia and for receiving kickbacks. He has appealed the FCPA conviction asserting that the definition of "foreign official" is vague. The oil company is owned by the Colombian government, but in 2003 the company was transformed into an entirely commercial enterprise and stripped of subsidies and special access to Colombia s oil field. 7

8 Recent Enforcement FLIR Systems: Nov Bona fide business trip to Boston became a world tour and expensive watches were provided to employees of the Saudi Arabia Ministry of Interior. FLIR employees used third-parties to cover-up the payments. Bio-Rad: Nov Local intermediaries in Vietnam and Thailand were used to funnel bribes to foreign officials for business. Also acquired a Thai co. and did not uncover a bribery scheme where Thai agents received inflated commissions that were used for improper payments. Alcoa: Jan For 20 plus years, Alcoa supplied alumina to Alba through shell companies owned by a middle man that Alcoa was instructed to use by various members of the Bahraini royal family. Corrupt payments to members of the Bahraini royal family were made using profits from price mark-ups. Marubeni: Mar Japanese trading company pleaded guilty to FCPA violations for using intermediaries to pay bribes to Indonesian officials to obtain a power contract for itself and Alstom Power, a U.S. company. 8 Japan Transportation Consultants (JTC): Jul JTC and three of its current/former executives were indicted in Tokyo for paying bribes to foreign officials in Vietnam.

9 Privilege US ex rel. Barko v. Halliburton March US District Court for DC ordered defendants to produce to the plaintiff the results of an internal investigation conducted by non-lawyers and reported to lawyers. The court held that the documents were not protected by privilege because the investigation was taken pursuant to regulatory law and corp. policy, not for legal advice. June 2014 D.C. Circuit overruled the District Court. Was obtaining legal advice a primary purpose of the investigation? More than one primary purposes is possible (i.e. both a business and legal purpose). Investigators are not required to expressly inform interviewed employees that the purpose of the interview is to assist the co. with obtaining legal advice. Fact that non-attorneys conducted the investigation is not dispositive. What matters is that the investigation was conducted at the direction of the company s legal department. 9

10 Privilege Involve lawyers (in-house or outside counsel) at the earliest stages of an investigation. Counsel should oversee the investigation. Non-attorneys carrying out an investigation should regularly report to lawyers. Reports should be drafted by counsel. The purpose of the investigation, including the fact that it will assist the company in responding to any potential litigation and that it is being undertaken for the purpose of providing legal advice, should be clearly documented. Advise interviewees that the investigation is being conducted for legal counsel with the purpose of obtaining legal advice. As always, provide Upjohn warnings at the beginning of the interview. All documents should be clearly labeled as being part of the investigation and with the attorney-client privilege stamp. 10

11 Successor Liability Opinion Procedure Release issued November 7, Consumer Products Company US Issuer Acquire foreign company and its wholly owned sub. which are incorp. in foreign country. Business largely confined to foreign country with negligible business contacts with the US. Pre-acquisition DD improper payments, substantial weaknesses in accounting and recordkeeping, no code of conduct. None of the improper payments occurred in the US or made by or through US persons/issuers. Requestor took steps to begin remediation before closing in Anticipates full integration of target into Requestor s compliance and reporting structure within a year of closing. Integration schedule risk mitigation, dissemination and training on compliance policies and procedures, standardization of business relationships with third-parties, and formalization of books and records per Requestor s policies and law. 11

12 Successor Liability DOJ does not intend to take enforcement action with respect to pre-acquisition bribery the seller or target committed. Successor liability does not create liability where none existed before. None of the pre-acquisition payments were subject to US jurisdiction. No contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requestor would derive financial benefit following the acquisition. DOJ expressed no view on the adequacy or reasonableness of the integration. DOJ urges companies engaging in M&A to: conduct risk-based FCPA/anti-corruption due diligence; implement acquiring company s code of conduct and anti-corruption policies as soon as possible; conduct FCPA-specific audit of acquired entity as soon as practicable; and disclose to the DOJ any corrupt payments discovered during due diligence. 12

13 Why Is Due Diligence Important? Because Congress anticipated the use of third-party agents in bribery schemes for example to avoid actual knowledge of a bribe it defined the term knowing in a way that prevents individuals and businesses from avoiding liability by putting any person between themselves and the foreign officials. DOJ Resource Guide to the FCPA [the] head-in-the-sand problem... should be covered so that management officials could not take refuge from the [FCPA s] prohibitions by their unwarranted obliviousness to any action (or inaction), language or other signaling device that should reasonably alert them of the high probability of an FCPA violation. US Congress 13

14 Why Is Due Diligence Important? DOJ s and SEC s FCPA enforcement actions demonstrate that third-parties, including agents, consultants, and distributors, are commonly used to conceal the payment of bribes to foreign officials in international business. DOJ Resource Guide to the FCPA More than 60 percent of the SEC s FCPA cases in the last two years involved third-party intermediaries. Kara N. Brockmeyer, Chief of SEC FCPA Unit,

15 Types of Third-Parties Consultants Distributors, wholesalers, resellers, co-promoters Formalities agents to help process work-permits, residence permits (e.g. Indonesia) Coffee money, cigarettes, O/T payments to manpower officials Customs brokers, import/export agents Travel agents Joint-ventures partners Law firms 15

16 Due Diligence Process Performing identical due diligence on all third-party agents, irrespective of risk factors, is often counterproductive, diverting attention and resources away from those third-parties that pose the most significant risk. DOJ Resource Guide to the FCPA Risk-Based Due Diligence Country - CPI Nature of services to be performed Business rationale for using the third-party Amount of government regulation/interactions with government officials Transaction size, payment terms History of working with the third-party What about fact that other MNCs use this third-party? Should it be centralized (for consistency in standards) or localized? 16

17 Benchmarking What due diligence program is in place? Done locally or by HQ? Done by the business or compliance or legal? How to conduct a thorough DD interview bearing in mind commercial sensitivities Training your third party on compliance requirements and expectations How to customize internal controls for effective third-party oversight? Compliance audits of your third party management program Determining when such audits are necessary Determining which entities to audit Assessing the results and recognizing when a problem exists Terminating a relationship - when to end the relationship 17

18 Yuet Ming Tham Partner Sidley Austin Sidley Austin Hong Kong Singapore Practices Compliance & Investigations Privacy & Data Security 18

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