Anti-Corruption Enforcement Trends and Compliance in Latin America

Transcription

1 1 For audio participation, dial and enter conference ID Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL Anti-Corruption Enforcement Trends and Compliance in Latin America July 30, :00 p.m. 1:00 p.m. CST 1

2 3 Housekeeping Items Call for technology assistance Dial *0 (star/zero) for audio assistance If you have any questions following the Web conference, please contact your Foley attorney directly. Click on the Full Screen button located above the presentation slides to maximize the presentation for full screen viewing. Click on the Download Files button located to the right of the presentation slides to get a copy of the slides. Foley will apply for CLE credit after the Web conference. If you did not supply your CLE information upon registration, please it to jpolson@foley.com. NOTE: Those seeking Kansas, New York and New Jersey CLE credit are required to complete the Attorney Affirmation Form. A 4-digit code will be announced during the presentation. the code to jpolson@foley.com to get a copy of the form. Immediately fill it out and return it after the program. 4 Today s Speakers Francisco J. Cerezo Jaime B. Guerrero 2

3 5 Outline 1. FCPA Enforcement Activity 2. FCPA Basics Prohibitions and Essential Elements Jurisdiction Common Issues and Traps 3. Other Anti-Corruption Regimes 4. Anti-Corruption Compliance Assess FCPA Risk Key Compliance Touchstones Best Practices 6 FCPA ENFORCEMENT ACTIVITY 2013 (thru 6-30) SEC Actions DOJ Actions

4 TOP 10 FCPA-RELATED MONETARY SETTLEMENTS 7 in Millions $900 $800 $700 $600 $500 $400 $800 Largest FCPA Settlements (Combined Penalties/Disgorgement) $579 $400 $338 $ $300 $200 $100 $137 $185 $95.1 $149 $218.8 $0 Siemens (2008) Halliburton / KBR (2009) Alcatel- Lucent (2010) Daimler (2010) Technip (2010) Snamprogetti / ENI (2010) BAE (FCPArelated) (2010) Deutsche Telekom (2011) Jeffrey Tesler (2011) JGC (2011) 8 Where the FCPA Enforcement Action Is: Countries Implicated Most Frequently in Enforcement Actions vs. 2012* Country Totals 2012 TOTAL Argentina Brazil China Costa Rica 7-7 Croatia Greece Honduras 9-9 India Indonesia Iraq Kazakhstan Kyrgyzstan 8-8 Mexico Nigeria Poland Russia Saudi Arabia Serbia Thailand U.A.E Vietnam 9-9 *Approximate numbers 4

5 08/13/2013 CORRUPTION PERCEPTION INDEX (CPI) (2012) CPI Scores and Rankings of Sample Latin American Countries 9 10 Venezuela score 19, rank 165/174 Honduras score 28, rank 133/174 Ecuador score 32, rank 118/174 Dominican Republic score 32, rank 118/174 Mexico score 34, rank 105/174 Argentina score 35, rank 102/175 Colombia score 36, rank 94/174 Peru score 38, rank 83/174 Brazil score 43, rank 69/174 Costa Rica score 54, rank 48/174 Chile score 72, rank 20/174 5

6 11 FCPA ENFORCEMENT ACTIVITY Enforcement in Latin America Number of FCPA prosecutions with a Latin America component is increasing. Indications that government regulators are taking a hard look at alleged violations of the FCPA in Latin America. In 2010 and 2011, the DOJ disclosed approximately 44 FCPA and related enforcement actions. Of the 44 actions, 14 (32%) had a Latin America component, with affected countries including but not limited to Argentina, Brazil, Costa Rica, Honduras, Mexico, and Nicaragua. RECENT FCPA ENFORCEMENT IN LATIN AMERICA 12 BizJet International Charged in 2012 with bribing Mexican, Panamanian, and Brazilian government officials from to obtain aircraft maintenance contracts. The officials demanded the bribes (including cash payments of $30,000-40,000) as commissions for awarding of the contracts. Many bribes paid through a shell company. Bizjet paid $11.8 million criminal penalty in exchange for deferred prosecution agreement ( DPA ). Voluntary disclosure and cooperation noted in reducing penalty. Bizjet executives were also charged sentenced to eight months home detention in exchange for cooperation. 6

7 RECENT FCPA ENFORCEMENT IN LATIN AMERICA 13 Wal-Mart Stores, Inc. In 2012 disclosed internal FCPA investigation in Mexico re procurement of licenses and permits. Alleged bribes included approximately $8.5 million in cash payments to third party agents, who purportedly kept a percentage and passed the remainder on to government officials. On February 2013 Form 10-K, Wal-mart reported $157 million spent in prior fiscal year in professional fees and expenses related to the FCPA investigation. Investigation is ongoing and has expanded to Brazil, India and China. RECENT FCPA ENFORCEMENT IN LATIN AMERICA 14 Ralph Lauren From , Argentinean subsidiary paid customs broker approximately $568,000, which was used to bribe customs officials. Also gave customs officials gifts (perfume, handbags, dresses, etc.). Bribes to facilitate the importation of prohibited merchandise into Argentina without inspection. Bribes were invoiced as Loading and Delivery Expenses, and thus were considered a books and records issue. Paid fines of approx. $1.6 million as part of non-prosecution agreements with DOJ and SEC. Agreements noted extensive cooperation and assistance in the investigation, and increased compliance programs on global level. 7

8 RECENT FCPA ENFORCEMENT IN LATIN AMERICA 15 Orthofix International N.V. From approx , Mexican sub. bribed Mexican officials to obtain and retain sales contracts with Instituto Mexicano del Seguro Social (total bribes were approximately $317,000). Resolved in 2012, with total fines and penalties in the DOJ and SEC actions of approximately $7.4 million. 16 FCPA - THE BASICS: The FCPA s Prohibitions and Essential Elements 8

9 17 TWO MAIN COMPONENTS: Anti-Bribery Provisions Books and Records and Internal Control Provisions 18 Apply to: ANTI-BRIBERY PROVISIONS Domestic concerns ( private companies, LLC s, etc., and U.S. citizens); Issuers (basically, public companies); and Any person who, while in the U.S., commits an improper act Including non-u.s. citizens Covers payments made by third parties with knowledge that the payment would be used to fund FCPA-illegal activity Extra-territorial jurisdiction 9

10 19 WHAT IS PROHIBITED? Paying or offering to pay anything of value Directly or indirectly To a foreign official, or to any other person while knowing that all or part of the thing of value will be paid or offered to a foreign official Corruptly For the purpose of influencing the official in some official act or to secure any improper advantage In order to obtain or retain business 20 Examples: ANYTHING OF VALUE Cash or a cash equivalent Gifts Travel expenses and/or payment of personal expenses Services Golf outings or other entertainment Charitable donations Medical treatment Loans Jobs for relatives 10

11 21 FOREIGN OFFICIAL? 22 FOREIGN OFFICIAL Any officer or employee of a foreign government or any department, agency, or instrumentality thereof DOJ interprets instrumentality to include employees of state owned or controlled enterprises ( SOEs ) No distinction made as to rank or title U.S. v. Esquinazi foreign official challenge pending before 11 th Circuit Court of Appeals Conviction premised on bribes paid to employees of Haiti Teleco, a state-owned telephone utility 11

12 23 OBTAIN OR RETAIN BUSINESS Business Purpose Test Includes payments related to the renewal of contracts, the execution or performance of contracts, or the retention of existing business Examples from DOJ/SEC: Winning a contact Influencing procurement process Circumventing import rules Gaining access to non-public bid tender Evading taxes or penalties Influencing enforcement actions or litigation Obtaining exceptions to regulations Avoiding contract termination 24 Jurisdiction DOJ and SEC have taken an expansive view of jurisdiction under the FCPA Parties subject to the FCPA include: Domestic concerns and U.S. persons Including U.S. subsidiaries of foreign corporations Issuers Officers, directors, employees, or agents of an Issuer or domestic concern Any person that violates the FCPA within the territory of the United States 12

13 Jurisdiction Based on Acts Committed on U.S. Soil 25 Based on illegal acts that take place on U.S. soil Relevant parts of conspiracy take place on U.S. soil SHOT Show Based on making payments to foreign officials that make use of U.S. financial institutions or mails Make use of U.S. banks or wire transfers Panalpina Halliburton/KBR 26 EXCEPTIONS & AFFIRMATIVE DEFENSES Affirmative Defenses Written local law Custom is not the same as written laws and regulations Facilitating payments Emerging best practice prohibition of facilitating payments except where the health and safety of an employee is involved 13

14 EXCEPTIONS & AFFIRMATIVE DEFENSES 27 Reasonable and bona fide expenditures Directly related to The promotion or demonstration of product or services or The negotiation, execution or performance of a contract Examples: Travel and expenses to visit company facilities Travel and expenses for training Travel and expenses for meetings PENALTIES FOR VIOLATING ANTI-BRIBERY PROVISIONS 28 Criminal Penalties (Knowing/Willful Blindness) Business Entities: Up to $2 million per violation. Individuals: Up to $ and/or receive prison sentences of up to 5 years. Alternative Fines: U.S. law authorizes alternative maximum fines equal to the greater of twice the gross gain or twice the gross loss to the extent a criminal offense causes a pecuniary gain or loss. Civil Penalties Business Entities & Individuals: Up to $ Additional Fines: In an SEC enforcement action the court may impose an additional fine not to exceed the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation or (ii) a specified dollar limit ranging from $5 000 to $ for a natural person and $ to $ for business entities. Disgorgement 14

15 OVERVIEW OF ACCOUNTING AND INTERNAL CONTROLS PROVISIONS 29 Only apply to issuers (publicly traded companies or companies which have reporting requirements with the SEC). Must maintain accurate books and records that reflect in reasonable detail accurately and completely transactions and asset dispositions. Must establish effective systems of internal accounting controls. GAAP standard. Accounting controls apply to foreign affiliates and JV partners depending on the issuer's voting power (discussed below). You don t need any evidence of a bribe in order for a books and records violation to occur. Unrecorded facilitating payment will violate the books and records provisions of the FCPA even though they qualify under an exemption in the anti-bribery section of the FCPA. PENALTIES FOR ACCOUNTING AND INTERNAL CONTROLS VIOLATIONS 30 Criminal Penalties (Knowing/Willful) Business Entities: Fines up to $25 million per willful violation. Individuals: Fines up to $5 million and/or prison sentences of up to 20 years for willful violations. Additional Fines: In an SEC enforcement action the court may impose an additional fine not to exceed the greater of (i) the gross amount of the pecuniary gain to the defendant as a result of the violation or (ii) a specified dollar limitation ranging from $5 000 to $ for a natural person and $ to $ for business entities. Civil Penalties Business Entities: Penalties of up to $ Individuals: Penalties of up to $

16 COMMON ISSUES: THE PERILS OF HOSTING CUSTOMER VISITS 31 COMMON ISSUES: GIFTS, MEALS & ENTERTAINMENT 32 Companies may provide meals and entertainment, if in good faith, without corrupt intent, and with no expectation of a favor Must be directly related to legitimate business purpose Must be reasonable in value Best practices: Should be in accordance with generally accepted business standards No cash or equivalents Company personnel should be in attendance Should be properly documented 16

17 COMMON ISSUES: GIFTS, MEALS & ENTERTAINMENT 33 A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate gift giving are when the gift is given openly and transparently, properly recorded in the giver s books and records, provided only to reflect esteem or gratitude, and permitted under local law. -- U.S. SEC and U.S. DOJ FCPA Resource Guide 34 Questions to Ask: CUSTOMER VISITS Are any of the visitors foreign officials under the FCPA s broad definition of that term? Is the entire trip for the purpose of promoting the company s products or services or in connection with the execution or performance of a contract? Are the proposed expenses proportionate and reasonable in relation to the company s business purpose for inviting the foreign officials? How are the foreign official s expenses being paid? Who within the company is approving the trip? Is that person sensitive to FCPA issues? Are the expenses accurately described and recorded on the company s books and records? 17

18 35 THIRD-PARTY INTERMEDIARIES Willful Blindness = Knowledge COMMON ISSUES: THIRD-PARTY INTERMEDIARIES 36 FCPA expressly prohibits improper payments made through third parties The majority of recent enforcement actions have involved improper payments made through thirdparties Regulators do not need to prove that the third-party acted on the company s direct orders or even that a company actually knew the intermediary engaged in prohibited conduct Most enforcement actions have involved allegations of actual knowledge, however Willful blindness constitutes knowledge 18

19 37 THIRD-PARTY INTERMEDIARIES Eli Lilly (2012) $29 million SEC settlement Various payments made by agents and distributors in China, Russia, Brazil, Poland According to SEC: Eli Lilly and its subsidiaries possessed a check the box mentality when it came to third-party due diligence. Companies can t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official s pocket. 38 Oracle (2012) THIRD-PARTY INTERMEDIARIES $2 million SEC settlement India subsidiary and distributors NO ALLEGATION OF BRIBES ACTUALLY PAID Just a claim that slush fund could have been used to pay bribes 19

20 COMMON ISSUES: ENGAGING THIRD PARTIES Appropriate due diligence inquiry to expose any potential red flags Suggested due diligence Risk-based Relationship should be memorialized in writing and contract should include: Anticorruption reps and warranties Audit rights Payment mechanism should be transparent and traceable no cash Commission/payment should be reasonable and customary 39 COMMON ISSUES: DUE DILIGENCE FOR ENGAGING THIRD PARTIES 40 The following due diligence is advised: A background check. That third parties take FCPA training, and that they certify that they have taken the training. That third parties sign a certificate that they will comply with anticorruption and FCPA laws. That there be an FCPA provision in the third parties contracts. That they fill out questionnaires attached to the FCPA policy, including providing references and detailed information about their business. Representations and warranties that foreign agent is not owned or controlled by a foreign government and that no foreign official holds an ownership interest in it. Annual certification of compliance with FCPA by foreign agent. The Compliance Representatives will decide what paperwork should or needs to be filled out and whether or not that vendor is a risk. 20

21 41 THIRD-PARTY RED FLAGS Excessive commissions Unreasonably large discounts Consulting agreements that include only vaguely described services Third-party in different line of business than that for which it was engaged Third-party related to or closely tied to government official 42 THIRD-PARTY RED FLAGS Third-party became involved at the express request of the foreign official Third-party is a shell corporation incorporated in an offshore jurisdiction Third-party requests payment to offshore bank accounts 21

22 43 COMMON ISSUES: M&A Many recent FCPA enforcement actions arose in context of M&A due diligence Pfizer (2012) Importance of pre-acquisition due diligence Pharmacia vs. Wyeth: no attribution to Pfizer for Wyeth s conduct versus full attribution for Pharmacia s (entirely preacquisition) conduct The difference: Pfizer s extensive review and its efforts to integrate Wyeth into Pfizer s internal controls Use of a risk-based approach to due diligence (from the Wyeth transaction) DOJ s apparent recognition that companies have limited resources and that extensive due diligence might not always be appropriate Reemphasizes the importance of a basic FCPA risk assessment 44 COMMON ISSUES: M&A Due diligence should include: Evaluation of target s compliance program Evaluation of contractual arrangements with third parties Evaluation of contracts Evaluation of distributor and joint venture arrangements Red flag follow up Plans to integrate compliance programs 22

23 45 COMMON ISSUES: M&A Look beyond the target s financial statements The existence of an improper payment even prior to the effective date of the agreement can expose the acquiring or partnering company to an enforcement action based upon knowledge and benefit from past payments DOJ FCPA Opinion Procedure Release No (Jan. 15, 2008) establishes best practice due diligence steps COMMON ISSUES: JOINT VENTURE 46 If an issuer owns more than 50% of the voting power of an affiliate or JV entity it must cause such affiliate/jv entity to maintain internal accounting controls. If an issuer owns 50% or less of the voting power of an affiliate or JV entity it must make a good-faith effort to cause such affiliate/jv entity to maintain internal accounting controls. Note: If an issuer has effective control via management structure of a joint venture it is treated as if it owns more than 50% of the voting power. 23

24 47 UK BRIBERY ACT OF 2010 Prohibits: Active bribery (paying bribes) Passive bribery (accepting bribes) Failure of commercial organizations to prevent bribery by associated persons Relevant commercial organisation Incorporated in the UK or under UK law Corporate entities that carries on a business or part of a business in the UK Affirmative defense: Adequate procedures 48 UK BRIBERY ACT OF 2010 Key Differences with FCPA Bribery Act explicitly prohibits commercial bribery No facilitating payments exception No reasonable promotions exception Adequate procedures as affirmative defense, as opposed to mitigating factor No whistleblower incentives Scope of indirect knowledge: associated persons versus knowledge standard No books and records provision 24

25 Global Anti-Corruption Enforcement: Parallel Actions 49 Global law enforcement agencies working together to investigate and prosecute bribery and corruption charges. U.S. DOJ recently announced 56 new extradition and mutual legal assistance treaties to bolster international cooperation. Recent U.S FCPA investigations have included parallel investigations in numerous foreign jurisdictions, including: Brazil (Gtech); China (Siemens); Costa Rica (Alcatel Lucent); France (Halliburton, Total SA); Germany (Bristol Myers, DaimlerChrysler, Siemens); Indonesia (Freeport, Monsanto, Siemens); Italy (Immucor, UDI, Siemens); Korea (IBM); and Nigeria (Halliburton, Siemens). 50 ASSESS FCPA RISK Major point of emphasis by DOJ/SEC: DOJ and SEC will give meaningful credit to a company that implements in good faith a comprehensive, risk-based compliance program, even if that program does not prevent an infraction in a low risk area because greater attention and resources have been devoted to a higher risk area FCPA compliance risk is a combination of Who (public vs. private customers) What (large public projects vs. producing widgets) Where (the country s corruption reputation) How (use of third parties) Focus on all variables Recent FCPA enforcement actions instruct that while compliance efforts should focus on high-risk situations, business leaders must be alert to the risks present in all countries in all situations 25

26 FCPA COMPLIANCE KEY COMPLIANCE TOUCHSTONES 51 Know your customers (any government agencies, any private entities owned or controlled by the state). Marketing initiatives (what sort of entertainment or marketing expenses are being incurred). Go to market strategies (any use of third-party agents, distributors). Logistical issues (import/export issues, permits, licenses, certifications). FCPA COMPLIANCE BEST PRACTICES 52 In light of ever increasing government enforcement, companies need to implement and monitor anti-corruption compliance programs. Anti-corruption compliance programs can mitigate exposure. Effective compliance programs can also act as a defense under the UK Bribery Act and as a mitigating factor for purposes of sentencing under the U.S. sentencing guidelines. 26

27 53 Takeaway Our Offer 1. Review existing Compliance Program 2. If no program in place, assist company to prepare and implement Compliance Program 3. Provide training to employees 54 Contact Information Jaime B. Guerrero (213) Francisco J. Cerezo (305)

28 55 Thank You! A copy of the PowerPoint presentation and a multimedia recording will be available on Foley s website within 24 to 48 hours: We welcome your feedback. Please take a few moments before you leave the web conference today to provide us with your feedback. 28