Preventing fraud in overseas construction projects. kpmg.com

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1 Preventing fraud in overseas construction projects kpmg.com

2 1 Preventing fraud in overseas construction projects 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. NDPPS

3 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. NDPPS Preventing fraud in overseas construction projects 2 Tackling bribery and corruption in the engineering & construction industry Trace International, a global anticorruption organization, publishes an annual Global Enforcement Report, which identifies industry sectors that have experienced the most domestic and foreign bribery enforcement activity since In the 2013 report, the engineering and construction (E&C) industry is cited among the top five industry sectors for worldwide domestic/inbound and foreign/outbound Foreign Corrupt Practices Act (FCPA) enforcement activity, 1 with nearly 40 firms under investigation. The level of bribery and corruption in the E&C industry may be attributed to the size and complexity of many E&C projects, the use of third-party intermediaries, and/or the geographic locations where projects are carried out, among others. To broaden geographical presence and become strategically aligned with global demand for construction, multinational E&C firms continue to penetrate emerging markets and acquire firms with an existing presence in potential and actual high-growth markets. Among the E&C firms that responded to KPMG s 2013 Global Construction Survey: Ready for the Next Big Wave?, 47 percent of the surveyed firms have plans to move into new geographies, while 44 percent are prepared to enter new industry sectors. Over the last decade, as E&C companies have increasingly come to recognize the imperative of geographic diversification and international expansion, the appetite for investment in developing economies has followed suit. While there are many benefits to investing in emerging markets, the risk of bribery and corruption that E&C firms face when operating abroad or expanding into unfamiliar countries may be even greater. For example, many target markets are not participants in the Organization for Economic Co-operation and Development (OECD) and many rank high on Transparency International s corruption perception index. For example, based on the 2013 corruption perceptions index as presented in the map below, emerging markets such as Russia and India are perceived as higher risk countries, while Denmark and New Zealand are perceived as lower risks. As a result, E&C firms may become exposed to markets rife with significant levels of risks related to fraud, bribery, and corruption. Establishing a robust compliance program to mitigate these risks throughout the process of entering, operating in, and potentially exiting growth markets is a critical business imperative. 1 TRACE International Global Enforcement Report (GER) 2013, dated March 2014.

4 3 Preventing fraud in overseas construction projects FCPA How does it apply to your projects? The Foreign Corrupt Practices Act was enacted in 1977 after multiyear investigations conducted by the Office of the Watergate Special Prosecutor and the Securities and Exchange Commission (SEC), among others, revealed that several U.S. businesses and executives had made questionable or illegal payments in order to improperly influence foreign government officials, politicians, and political parties. 2 The two main provisions of the FCPA are the antibribery provision and the accounting provision. The antibribery provision prohibits knowingly and corruptly offering, promising, or authorizing the payment of money or anything of value to a foreign government official to obtain or retain business. The FCPA antibribery provision applies to all issuers of securities registered on U.S. stock exchanges; any company organized under the law of the United States or with its principal place of business in the United States; any U.S. citizen, resident, or national; and foreign nationals and entities who violate the FCPA while in the territory of the United States, Furthermore, not only are companies subject to the requirements of the FCPA, but so are officers, directors, employees, agents, and stockholders acting on behalf of an issuer or U.S. company, which can also be held liable under the FCPA. Companies violating this law by paying bribes are subject to civil and criminal actions, which can result in fines, suspensions, government monitoring, and exclusion from government procurement contracts, among other penalties. The FCPA also requires companies to meet an accounting provision, which requires corporations to maintain accurate books and records that fairly reflect the transactions of the corporation, and to devise and implement an adequate system of internal accounting controls. The accounting provision of the FCPA only applies to entities and individuals acting on behalf of those entities with securities listed on a U.S. stock exchange. Rising costs of FCPA violations There has been a recent surge of FCPA enforcement activity, with the SEC bringing enforcement action against 112 companies and individuals from 2004 to early To give some perspective, since enactment of the FCPA in 1977 through 2003, the SEC had only 18 enforcement actions in total. Not only is enforcement activity on the rise, but the amount of fines and settlements related to enforcement actions brought by the SEC and U.S. Department of Justice (DOJ) is increasing as well, with nine out of the 10 largest FCPA settlements occurring from , three of which occurred within the last few years

5 Preventing fraud in overseas construction projects A number of proceedings brought under the FCPA have affected a number of established E&C firms. For instance, of the three largest FCPA settlements totaling $800 million, $579 million, and $400 million, respectively two of these matters involved elaborate schemes to bribe foreign officials for obtaining lucrative construction contracts worth billions of dollars in revenue. Specifically, one of the top three FCPA settlements involved a large multinational E&C firm which, through a joint venture agreement, paid more than $180 million to Nigerian government officials in order to secure a $6 billion construction contract for a natural gas facility on Bonny Island, Nigeria. The amount of criminal fines and disgorgement paid by the parties exceeded $1 billion, while key individuals involved were handed lengthy prison sentences and large fines.5 Fines and settlements are not the only consequence of a potential FCPA violation. The cost of investigating possible FCPA violations are significant, with companies spending hundreds of millions of dollars on professional, legal and related fees associated with global investigations and compliance reviews. For example, in 2013, a global oilfield services provider was fined hundreds of millions of dollars for bribing foreign officials in the Middle East and Africa to win business. The legal and professional fees related to the investigation of this matter have exceeded $100 million dollars, or approximately 50 percent of the settlement amount. Unfortunately, this fails to capture the total cost impact by understating the loss of existing/new business opportunities and reputational damage to the company, and the significant distraction such an investigation causes to management s time and focus. Additional consequences include potential imprisonment for individuals, debarment from 5 United States Department of Justice, Office of Public Affairs government contracting, and civil and criminal suits. For instance, the World Bank announced in 2013 the debarment of a leading E&C firm and 100 of its subsidiaries from bidding on any of the bank s development projects for a period of 10 years following a World Bank investigation into allegations of bribery schemes and misconduct involving officials in Bangladesh.6 These issues, coupled with the relatively new 2010 U.K. Bribery Act and other international anti-bribery laws, make FCPA/AntiBribery and Corruption (ABC) awareness extremely important for E&C firms in today s global marketplace. Active enforcement enhances FCPA awareness and may play a larger role in deterring acts of bribery and corruption, or prompt voluntary disclosure by firms that have become aware of such instances. Evolution of other antibribery laws and regulations There is no international ABC law. Rather, the OECD Anti-Bribery Convention, the UN Convention Against Corruption, and various other international treaties and conventions have each helped to spread ABC laws in countries around the world. However, the ABC laws enacted in various jurisdictions are diverse and complex, and the penalties vary dramatically. For example, in many countries, the relevant offenses carry administrative rather than criminal sanctions. Navigating the ever-evolving landscape of ABC laws on a global level can be difficult. It is not enough to be knowledgeable of the more commonly known ABC laws such as the FCPA and U.K. Bribery Act, but companies must also be aware of the various local laws and regulations concerning ABC in the regions in which they are conducting business.

6 5 Preventing fraud in overseas construction projects ABC risks in the E&C Industry E&C firms often need to interact frequently with foreign government officials when responding to a government contract tender, and again during the regulatory permitting process. In fact, according to KPMG s 2013 Global Construction Survey: Ready for the Next Big Wave?, 66 percent of surveyed E&C firms state that government infrastructure plans are the single most important market driver for success. Essentially, firms are moving with the changing tides as infrastructure investment and government spending patterns shift. Naturally, this frequent and necessary interaction poses higher risk as it relates to potential corruption. Indeed, some of the most high-profile FCPA prosecutions in recent years have involved construction-related activities. For purposes of this article, we have identified six at-risk operations and activities in the E&C industry sector that pose higher ABC risk: Planning, zoning, and construction permits Obtaining planning, zoning, and construction permits can be a tedious process, and in many locales, especially those in developing countries, paying government officials is still part of the common way of doing business. But, as demonstrated from a highly publicized investigation related to a foreign subsidiary of a FORTUNE 500 company, the consequences of such actions can be severe. According to the company s internal investigation, its foreign subsidiary had paid numerous local government officials, via third-party agents, millions of dollars to secure planning, zoning, and construction permits and to overcome other administrative hurdles to erect new facilities. The executives of the subsidiary had allegedly orchestrated these bribes and concealed them from the headquarters in the United States. The company s investigation was expanded to include a number of other countries and, to date, the company has spent hundreds of millions of dollars on its FCPA-related investigation and compliance matters worldwide. 7 In addition, the company expects to spend hundreds of millions more in the next fiscal year on these matters. 8 Government-funded projects Potential corruption risk increases when a construction project is funded, whether partially or wholly, by a government entity, and the perceived corruption risk can be much higher when the government is located in a country with higher corruption risk based on Transparency International s Corruption Perceptions Index. Governmentfunded projects are considered to be a particular risk with regard to corruption because government officials often have the potential to influence the awarding of very large contracts and yet are often paid very modest salaries. For example, a U.S.-based global engineering firm recently admitted that it had paid hundreds of millions of dollars in bribes, via third-party agents, to government officials of various African nations over a period of years to win government contracts worth billions of dollars to build liquefied natural gas facilities. Subsequent enforcement actions have resulted in hundreds of millions of dollars in fines being assessed to the company

7 Preventing fraud in overseas construction projects 6 Travel, gifts, and entertainment Companies often entertain clients/potential clients in order to build long-lasting and meaningful relationships that will be beneficial to both parties. However, this can be tricky when dealing with government officials and politically exposed persons (PEP). One of the most common types of FCPA cases brought by the SEC in 2013 and 2014 was based on improper travel, gifts, and entertainment expenses for foreign government officials. 10 The FCPA prohibits companies from paying for luxurious or questionable travel accommodations, gifts, and entertainment expenses to any government official or PEP as they can be viewed as potential bribes. Additionally, if these expenses are not recorded accurately in the company s books, the company can also be found in violation of the accounting provision of the FCPA. These violations can be costly and often serve as the basis for criminal liability and the amount of fines and penalties imposed. In November 2013, the SEC charged a large international oilfield services company with violating the FCPA for, among other things, authorizing improper travel and entertainment expenses for foreign officials in order to win business. 11 In this example, the company paid for trips to sporting events for several government officials; paid for the honeymoon of an official s daughter; and paid for another trip for an official and his family, which was improperly recorded as a donation in the company s books and records. The company has agreed to a settlement of more than $100 million to be paid to the SEC, DOJ, and other agencies. Joint venture relationships A company may find itself in a situation where it may have little or no visibility as to the activities conducted by its partners or even the joint venture itself, especially if it is a minority owner and relies on its partners to manage the joint venture s operations. In addition, if a company subject to U.S. jurisdiction enters into a joint venture agreement with a non-u.s. company that paid bribes to foreign government officials in the past in order to obtain or retain business for the joint venture, the U.S. company may be held liable under the FCPA for that conduct. Hence, the company should always ask itself the following types of questions: Have we done sufficient ABC due diligence on our potential joint venture partners prior to forming the joint venture? If the joint venture has already been formed, can we trust that our business partners and the joint venture have proper internal controls in place to prevent and detect any corrupt interaction with government officials? How do we manage the risk as it relates to ABC noncompliance going forward?

8 7 Preventing fraud in overseas construction projects Facilitating payments According to the FCPA, a facilitating payment (sometimes referred to as a grease payment ) is a payment to a foreign official for routine governmental action, such as processing papers, issuing permits, approving payments, authorizing contract modifications and other actions of an official, to expedite the performance of duties the foreign official is required to do as part of his/her job. In other words, the payment is only intended to speed up the foreign official s action. Although facilitating payments are allowed by the FCPA under certain circumstances, they are explicitly prohibited by the 2010 U.K. Bribery Act and some of the other statutes in various jurisdictions. The DOJ and the SEC jointly issued a resource guide to the FCPA in November 2012, which confirms the DOJ s and the SEC s narrow interpretation of facilitating payments. Indeed, the FCPA Resource Guide highlights the narrow scope of facilitating payments and strongly discourages companies from making facilitating payments, noting that such payment may also violate applicable foreign ABC laws. 12 Third-party intermediaries As companies reach into new markets, they often have to rely on third-party intermediaries (TPI s) to penetrate local markets and navigate local regulations. The use of subcontractors, consultants, expeditors, and agents is especially prevalent in the E&C industry. In fact, many countries even require that foreign companies retain a local TPI to act as an in-country representative. The use of TPI s poses significant corruption risk due to the fact that a company could be in violation of the FCPA and other ABC laws based on the corrupt conduct of its TPI s, even though the company might not have directed the TPI s to do so or have any specific knowledge of such activities. In fact, the 2010 U.K. Bribery Act does not require any level of knowledge about a TPI s actions, and a company could be held strictly liable if it does not have adequate procedures in place regarding monitoring TPI s. For example, a global logistics company was found guilty of violating the FCPA for paying multimillion-dollar bribes on its customers behalf to foreign officials in several countries to expedite services such as custom clearance and import permits. As a result, the company itself had to pay hundreds of millions of dollars in civil and criminal penalties, while the clients that benefited from its action also had to pay millions of dollars in fines and disgorgement KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. NDPPS

9 Preventing fraud in overseas construction projects 8 What can companies do? There s no shortage of guidance from regulators around the world on what a good ABC compliance program should look like. The U.K. Bribery Act of 2010, for instance, outlines six principles that should form the basis of any company s efforts to prevent bribery and corruption. The U.S. Federal Sentencing Guidelines allocate several pages to the elements it considers essential to an effective FCPA compliance program. In theory, documents such as the FCPA Resource Guide, issued jointly by the SEC and U.S. DOJ, and many others should help compliance departments design robust compliance programs. In practice, however, the abundance of such guidance can sometimes make the job of building appropriately scoped programs difficult to maneuver. Key elements of a successful ABC compliance program for companies in the engineering and construction sector include, but are not limited to: Tone at the top The starting point of any effective compliance program is tone at the top, expressed by seniorlevel executives in various formats. However, in the eyes of regulators, the tone at the bottom and middle of a company will define the effectiveness of the tone at the top. As such, toplevel commitment from management must be reinforced and implemented by middle managers and employees at all levels of the enterprise to create a strong culture of compliance. Risk assessments Before any compliance policies and practices are put into place, an organization must assess the ABC risks the company faces. ABC risk assessments provide management with timely, in-depth, specific, and actionable information regarding the qualitative and quantitative factors that give rise to the risk of bribery and corruption. This information, in turn, enables the company to design and tailor its ABC compliance program in alignment with the company s risk management strategies. A credible risk assessment policy, like any element of an effective compliance program, is not a one-time event. Most companies will want to re-assess their risk profile on a periodic basis, while taking into account changing regulatory expectations, as well as industry leading practices. Companies need to develop a detailed, riskbased, implemented and monitored ABC compliance program that is risk-tailored to the specific business operations, the specific geography, and the specific areas of bribery risk. Policies and procedures After identifying significant ABC-related risks, an organization should develop policies, procedures, and a code of conduct to articulate the company s position that both governmental and commercial bribery on any scale will not be tolerated. The policy should provide operational guidance in order to guide employees actions and to help minimize the risk of bribery and corruption. Communication and training Even the most persuasive policies and procedures can have limited impact unless employees are aware of and understand them. Therefore, frequent communication and training on the application of the organization s policies and procedures are critical. Furthermore, it is imperative for companies to consider creating and deploying instructive and targeted antibribery and corruption training programs in a variety of formats, including instructorled, Web-based, and other interactive formats, to embed a company s ABC compliance program and further communicate tone from the top. Whistle-blower mechanism Mechanisms for employees to report suspected or actual misconduct without the fear of retaliation are an important element for an effective ABC compliance program. Due diligence Conducting risk-based due diligence on TPI s, such as contractors, subcontractors, agents, or joint venture partners, on a global basis can be challenging. In particular, the higher risk areas geographically are typically the ones where online information is limited. As such, companies oftentimes need a combination of local resources with language skills and familiarity with the types and sources of information available in a particular region to conduct effective due diligence KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. NDPPS

10 9 Preventing fraud in overseas construction projects Companies should develop due diligence processes to screen, contract with, and monitor TPI s, including agents and business partners, to mitigate FCPA exposure. Managing third-party risks begins before a TPI is retained and, as importantly, continues throughout the life of the business relationship. As such, companies should conduct risk-based due diligence on potential TPI s to identify potential red flags before problems arise. At the outset, companies should evaluate the risk of increased government interactions and country-specific risks for prospective agents and business partners as part of their due diligence efforts. Continuous monitoring Companies may do well during the design phase of a program; however, many ABC compliance programs are challenged when they are not implemented or monitored properly. Continuous monitoring can include periodic ABC compliance audits/reviews and line of business self-assessments, which can help ensure validity and relevance of compliance program elements. Data analytics can be helpful, particularly with large volumes of data. Having and using data analytics to support continuous monitoring efforts can assist companies with identifying trends and anomalies to aid in identifying risks as it relates to ABC noncompliance. Right to audit Ensuring that there are contracts with third parties which incorporate right to audit clauses, and actually exercising the contractual right are essential elements of an effective ABC compliance program. Response program An ABC compliance program will not be deemed effective unless alleged violations are consistently investigated and culpable parties are disciplined appropriately. As such, companies should seek to adopt a formal protocol to investigate any alleged ABC violations. Further, the company must make certain that it implements appropriate disciplinary standards which demonstrate that violations are not tolerated or condoned.

11 Preventing fraud in overseas construction projects 10 Conclusion As E&C firms continue to expand their operations into more regions and countries, their experiences to date will be helpful, but only to a point. New dynamics, new challenges, and new partnerships present increased levels of fraud, bribery and corruption risks, requiring a proactive, strategic and effective compliance program to assess the company s exposure. Adding to the obstacles companies face in their global business operations is a dramatic rise in U.S. and international regulatory ABC enforcement actions. Consequently, establishing a robust compliance program to mitigate these risks has become an essential area of emphasis for E&C firms seeking to enter into emerging and expanding markets. By effectively identifying crucial ABC issues and risks for key decision-makers, E&C firms can develop a strong ABC compliance program that supports the demands of growth and development, as well as compliance with ABC laws and regulations.

12 Clay Gilge Principal, Major Projects Advisory T: E: Geno Armstrong Global Leader, Engineering & Construction T: E: Kevin Max Managing Director, Major Projects Advisory T: E: kpmg.com 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. NDPPS