LEGAL & ETHICS: THE LETTER AND SPIRIT OF THE LAW ANTI-CORRUPTION/FCPA: INDUSTRY-WIDE ISSUES

Transcription

1 LEGAL & ETHICS: THE LETTER AND SPIRIT OF THE LAW ANTI-CORRUPTION/FCPA: INDUSTRY-WIDE ISSUES With the continued aggressive nature of FCPA enforcement and anti-corruption laws being passed around the world, just understanding the FCPA is no longer adequate. Companies should strongly consider the inherent anti-corruption risks associated with their industry and address them on a proactive basis. This session will cover some of the important anti-corruption cases and the associated red flags unique to specific industries. SULAKSH R. SHAH, CFE, CPA, CFF Director, Forensics Services PricewaterhouseCoopers McLean, VA Sulaksh Shah is a director in PwC s anti-corruption/fcpa practice, and is based in Washington, DC. He routinely works on anti-corruption/fcpa matters, including but not limited to investigations, compliance, and transactional due diligence. Recently, Sulaksh co-authored a chapter on FCPA in A Guide to Forensic Accounting Investigation, second edition, published by John Wiley & Sons. Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without the prior consent of the author. 2012

2 What Is the FCPA? The Foreign Corrupt Practices Act (FCPA) was created in 1977 as a result of more than 400 U.S. companies admitting to making questionable or illegal payments to foreign government officials, politicians, and political parties. Congress enacted the FCPA in an attempt to stop bribery of foreign officials and restore the integrity of American businesses. The FCPA s scope was expanded in It was amended to mirror language included in the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The new scope prohibited any improper advantage, instead of the previous language prohibiting bribery to obtain or retain business. It also expanded the jurisdictional reach of the FCPA and expanded the definition of a foreign official. The FCPA is violated when an issuer or any of its officers, directors, employees, agents, or shareholders; a domestic concern; or a foreign national pays, offers, promises to pay, or authorizes/approves the payment of money or anything of value to a foreign official, foreign political party, candidate for political office, or official of a public international organization in a corrupt effort to obtain, retain, or direct business to any person or obtain an improper advantage. The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm. Individuals and firms may also be penalized if they order, authorize, or assist someone else to violate the anti-bribery provisions or if they conspire to violate those provisions. Under the FCPA, U.S. jurisdiction over corrupt payments to foreign officials depends upon whether the violator is an issuer, a

3 domestic concern, or a foreign national or business. The anti-bribery provisions state that it is a crime for any U.S. person or company to directly or indirectly pay or promise anything of value to any foreign official to obtain or retain any improper advantage. The accounting requirements are taken from Section 13(b)(2)(A) of the Exchange Act, and they require that the company make and keep books, records and accounts, which in reasonable detail, accurately reflect the transactions and dispositions of assets. In this context, reasonable refers to such level of detail that would satisfy prudent officials in the conduct of their affairs. The internal controls requirements are found in Section 13(b)(2)(B) of the Exchange Act, and they require that the company devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions are recorded appropriately and in accordance with rules and regulations Heightened Enforcement As demonstrated by the graph below, DOJ and SEC enforcement of the FCPA has increased significantly in the past few years. In 2011 alone, 39 actions were taken by these agencies against FCPA violations. In comparison the 2010 actions seem higher due to one Shot Show case that involved 22 individuals. The DOJ and SEC have reiterated their desire to continue to aggressively enforce the FCPA

4 Source: Miller Chevalier FCPA Winter Review 2012: Resolved FCPA Enforcement Actions In the United States, enforcement has been very active in certain industries: oil and gas, telecom, pharmaceutical and medical device companies, fund managers dealing with sovereign wealth funds, and so on. As demonstrated in the diagram below, individual prosecution for FCPA related violations have increased over the past years. The DOJ has indicated that paying large monetary penalties cannot be viewed by the business community as merely the cost of doing business. Source: Miller Chevalier FCPA Winter Review 2012: Individuals Standing Trial on FCPA-Related Counts

5 To illustrate how serious the DOJ is about prosecuting individuals, in 2009 the president of a Florida-based telecommunications company doing business in Haiti faced a 21-count indictment including conspiracy to violate the anti-bribery provisions of the FCPA, money laundering, and other offenses. On October 25, 2011, the president was sentenced to 15 years in prison. In another example, a UK solicitor who acted as an intermediary to allegedly funnel bribes to Nigerian government officials was sentenced to 21 months in prison. Such sentences are not limited to company presidents but involve agents and other company officers. In February 2012, the SEC charged an internal auditor of an oil and gas company for aiding and abetting violating the provisions of the FCPA. Similarly, FIIs such as the World Bank have investigated and barred several companies and individuals from doing work for them as a result of corruption related issues. Defining Foreign Officials The definition of what constitutes a government official (particularly a foreign government instrumentality as mentioned in the statute) was at the center of a few FCPA trials in In one such case, the court ruled that the jury may consider the following list of non-exclusive factors in determining if an entity is state owned and accordingly its employees are foreign government officials: 1. The circumstances surrounding the entity s creation 2. The foreign government s characterization of the entity, and whether the entity is widely perceived and understood to be performing official (i.e., governmental) functions

6 3. The degree of the foreign government s control over the entity, including the foreign government s power to appoint key directors or officers of the entity 4. The purpose of the entity s activities, including whether the entity provides a service to the citizens of the jurisdiction 5. The entity s obligations and privileges under the foreign country s law, including whether the entity exercises exclusive or controlling power to administer its designated functions 6. The status of the employees under the foreign government s law, including whether the employees are considered public employees or civil servants 7. The extent of the foreign government s ownership of the entity, including the level of financial support by the foreign government (e.g., subsidies, special tax treatment, and loans) FCPA vs. UK Bribery Act of 2010 (Highlights) There have been dramatic changes in the international anticorruption regulatory environment. The UK Bribery Act of 2010 that recently came into effect forbids the facilitation of payment exceptions, penalizes the distribution and receipt of bribes (not limited to government officials), mandates unlimited fines against companies and ten years imprisonment for individuals for bribery violations, and requires systems and controls to be put in place to demonstrate compliance within a company. In November 2011, the first sentence under the UK Bribery Act was given to a UK court clerk for accepting bribes from individuals to not record penalties on a person s driving record

7 Global Anti-Corruption Efforts Furthermore, there has been increasing cooperation among global regulators. Regulators from many nations now recognize that bribery and corruption exist on a multinational scale and can only be fought through a united anti-corruption effort. Countries like China, Russia, and India have taken steps to pass similar statutes. Russia recently signed the OECD anti-bribery convention, a comprehensive anti-corruption pact that seeks to ensure that state parties take steps to prevent corruption within their public and private sectors. In 2011, China passed a new anti-corruption amendment that prohibits Chinese citizens from giving any property to any foreign public official or official of an international public organization to obtain any illegitimate commercial benefit. At the same time, China has increased enforcement against commercial bribery in domestic transactions. In 2011, India ratified the UNCAC. Additionally, toward the end of 2011, the lower house of the Indian Parliament passed a domestic anti-corruption bill but it has not yet become a law. Lastly, India is also considering a bill to ban foreign bribery. In Brazil, the president has adopted a zero-tolerance approach toward corruption within her own government. In 2011 this stance resulted in the resignation of six ministers due to corruption allegations. In October 2011, the congress passed a comprehensive Freedom of Information Law, forcing authorities to publish information on spending and forcing them to respond to citizen requests for information

8 Examples of Anti-Corruption Risks in the Oil and Gas Industry There have been approximately 40 publicly known FCPA cases involving oil and gas companies that have resulted in more than $2 billion in fines and penalties. These cases are not limited to enforcement against companies but against agents, consultants, and other third-party intermediaries as well. Additionally, some of these cases have resulted in local anti-corruption enforcement in the foreign country as well. Here are some examples of the anti-corruption risks in the oil and gas industry: Use of agents, consultants, and other third-party intermediaries High involvement of state-owned companies Joint ventures with the state-owned entities Offshore accounts (Gibraltar, Switzerland, etc.) Emphasis on nationalization/local content Student scholarship programs Freight forwarders and logistic service providers involved High profile entertainment (especially overseas) Examples of Anti-Corruption Risks in the Pharmaceutical and Medical Devices Industry There have been approximately 15 publicly known FCPA cases involving pharmaceutical and medical device companies that have resulted in more than $80 million in fines and penalties. Here are some examples of the anticorruption risks in the pharmaceutical and medical device industry: Most HCPs are publicly owned and operated in developing countries Highly regulated business drug trials and approvals Procurement process and potential tender rigging with foreign ministries Gifts, gratuities, travel and entertainment

9 Donations to NGOs sponsored or represented by a government official Clinical research, R&D, physician sponsorships Frequent-flyer programs Rebates, promotions, spiffs Examples of Anti-Corruption Risks in the Telecommunications Industry There have been approximately 15 publicly known FCPA cases involving telecommunication companies that have resulted in more than $200 million in fines and penalties. These cases are not limited to enforcement against companies but against agents, consultants, and other thirdparty intermediaries as well. Here are some examples of the anti-corruption risks in the telecommunications industry: Highly regulated industry makes licenses hard to obtain (e.g., 2G scam in India) Monopoly or oligopoly in certain countries Privatization of state-owned companies Bogus consulting, sham contracts, and fictitious invoices and marketing contracts Gifts, trips, and cash incentives offered to foreign officials Discounted rates for international interconnection Sponsorship of political campaigns Lobbyists hired to make improper payments In one recent FCPA case, the SEC s civil complaint alleged that all of the telecom company s bribes were undocumented or improperly recorded as consulting fees in the books of company s subsidiaries and then consolidated into company financial statements. Additionally, in one example, a company subsidiary hired a consultant who was a perfume distributor with no experience in telecommunications. He was personally selected by the brother of a senior Latin America government official

10 Examples of Anti-Corruption Risks in the Manufacturing Industry There have been approximately 26 publicly known FCPA cases involving manufacturing companies that have resulted in more than $200 million in fines and penalties. Here are some examples of the anti-corruption risks in the manufacturing industry: Distinguish light manufacturing and heavy manufacturing (more susceptible) Joint-ventures with state-owned companies common China, India, and Russia top offshoring destinations Environmental and competition authorities are public officials Work permits and visas Supply chain and logistics Trade restrictions and government subsidies Obtaining licenses or permits Sales to state-owned entities Design institutes and other such quasi-state-owned entities While light manufacturing is relatively less susceptible to corruption, heavy manufacturing does not fare so well in the BRICs. In a recent FCPA case, a manufacturing company orchestrated a scheme in which it paid a 30 percent commission to an intermediary on all the goods and services sold to a Mexican state-owned company knowing that all or part of the money would be used to pay bribes to Mexican officials for awarding the contract. The money was allegedly used to buy the Mexican official a Ferrari and a yacht, as well as pay his credit card bills

11 Examples of Anti-Corruption Risks in the Financial Services Industry There have been a few publicly known FCPA cases involving financial services companies that have resulted in more than $26.3 million in fines and penalties. Additionally, there are six other ongoing regulatory inquiries. Here are some examples of the anti-corruption risks in the financial services industry: Sovereign wealth funds Pay-to-play schemes State-owned banks and investment funds In 2011, the DOJ and the SEC announced FCPA settlements with a one of the world s largest providers of risk management services. According to the charging documents, the subsidiaries made more than $3.6 million in improper payments during a 14-year period to secure insurance and reinsurance contracts in Asia, Africa, and South America. The improper payments allegedly were provided in the form of improper travel and entertainment expenditures and disbursements to third-party representatives with knowledge that the money would be passed on to foreign government officials. To resolve the alleged violations of books and records and internal controls, the company entered into a nonprosecution agreement with the DOJ pursuant to which it will pay approximately $1.75 million in criminal fines and a combined disgorgement and prejudgment interest of $14 million. Anti-Money Laundering Risks DOJ has in recent years routinely included criminal forfeiture counts in its FCPA and money laundering indictments. But particularly noteworthy are the civil forfeiture complaints that the agency s Asset Forfeiture and

12 Money Laundering Section has begun bringing as part of the DOJ s Kleptocracy Asset Recovery Initiative. The DOJ brought at least two such actions in On October 27, 2011, the DOJ announced parallel civil forfeiture complaints unsealed in the U.S. district courts for the District of Columbia and the Central District of California against more than $70 million in real and personal property held by the Minister of Forestry and Agriculture and the son of the president of the Republic of Equatorial Guinea. The property the DOJ seeks to seize includes a Gulfstream jet, a Malibu mansion, a Ferrari automobile, and memorabilia from the estate of the late Michael Jackson. Examples of Anti-Corruption Risks in the Logistics Industry Freight forwarder and logistic service providers face heightened FCPA risk due to their interaction with government officials, including but not limited to customs officials, local law enforcement, and excise and VAT officials. In a recent FCPA case, a global logistics provider allegedly bribed customs officials to avoid local customs duties or inspection requirements. In a landmark settlement, the logistics provider and several of its customers collectively paid $250 million in civil and criminal penalties to U.S. regulators. In another case, a company in Brazil was charged with bribing customs officials to secure a lower customs duty on imported products. Anti-Corruption: What s in Store for 2012? The U.S. Chamber of Commerce is pushing an agenda of pro-business amendments to the FCPA. Its efforts in

13 included retaining a former U.S. Attorney General to lead its lobbying efforts before Congress and include: 1. Adding an affirmative defense for companies with robust compliance programs 2. Adding a willfulness element for the imposition of corporate criminal liability 3. Clarifying the definition of foreign official 4. Limiting a company s liability for acts of its foreign subsidiaries 5. Limiting a company s successor s liability for prior acts of an acquired company Impact of the Dodd-Frank Act, whistleblower bounty program: percent of recovered penalties worth more than $1 million were related to securities violations Eligible parties initially exclude only officers/directors, compliance/legal, investigators, auditors, and those learning of security violations from these people 120 days after internal report, anybody is eligible Original information voluntarily provided In the meantime, the SEC s first report on the whistleblower program, released on November 15, 2011, noted that the SEC received 334 whistleblower tips during the seven-week period following the effective date of the implementing rules. Of these tips, only 4 percent (13) involved FCPA allegations, although the report noted that it is too early to identify any specific trends or conclusions from this limited data set