Mitigating AML Risk: Assessing Your Institution s Deficiencies to Achieve Global Compliance. November 2, 2011 San Francisco

Transcription

1 Mitigating AML Risk: Assessing Your Institution s Deficiencies to Achieve Global Compliance November 2, 2011 San Francisco 1

2 Anti-Corruption Enforcement and Risks: The New Threat The FCPA, AML and Fraud Enforcement: Convergence Risks and Compliance 12

3 Understanding the New Era of Corruption Enforcement: How Will Your Institution be Affected? Ryan Morgan World Compliance 13

4 FCPA Penalties Millions

5 FCPA Enforcement at a Glance: Blockbusters Nine of the top ten monetary settlements in FCPA history were reached in the last 2 years. $900 Siemens $800 $700 KBR/Halliburton $ $500 $400 $800 BAE Systems ENI/Snamprogetti Technip $300 $200 $100 $0 $579 $400 $365 $338 Daimler $185 Alcatel-Lucent $218.8 Panalpina $137 $82 JGC Corporation Johnson & Johnson $70 15

6 Overview 1. The Current Enforcement Picture 2. The Elements of the FCPA 3. The Risks, Exceptions and Defenses 4. Compliance Programs 16

7 The Current Enforcement Picture 17

8 FCPA DOJ Priority US FOREIGN CORRUPT PRACTICES ACT As President Obama has said, The struggle against corruption is one of the great struggles of our time.... Corruption is, simply put, a scourge on civil society. We must vigorously enforce our own laws that prohibit bribery of foreign officials, such as... the Foreign Corrupt Practices Act. And we must work together to support our partners in anti-corruption enforcement. Eric Holder, U.S. Attorney General, Nov. 7,

9 Enforcement Trends Aggressive FCPA enforcement has resulted in corporate mega-fines: For 2010, fines total over $1.6 billion - more than half of all federal criminal fines collected. Fueled by voluntary disclosures and industry-wide investigations - oil, pharmaceuticals and medical devices, military and law enforcement equipment, and telecommunications. FBI has dedicated FCPA squad which is using aggressive investigative tactics - consensual recordings, ambush interviews, undercover officers, informants, search warrants and wiretaps. SEC Dodd-Frank whistleblower bounty program will increase number of credible complaints, investigations and prosecutions. 19

10 Enforcement Trends FCPA and Anti-Money Laundering Enforcement FCPA criminal cases are typically tied to money laundering counts (18 USC 1956 and/or 1961). DOJ has launched Kleptocracy initiative to follow corrupt money and prosecute money launderers, and seek criminal and/or civil forfeiture. DOJ s International organized crime initiative is likely to increase prosecutions in this area as companies and individuals cooperate and provide information. DOJ and SEC has launched investigations of financial institutions, investment banks and private equity firms. Increase in FCPA enforcement coincides with aggressive OFAC and AML programs. 20

11 FCPA Enforcement at a Glance: Increase in Actions 2010 witnessed an 85% increase in FCPA enforcement actions over 2009, which itself was a record year DOJ SEC

12 FCPA Enforcement at a Glance: Prison Sentences John Warwick, President Ports Engineering Consultants Corporation (2009) 37 months Robert Antoine, Director Haiti Telco (2010) 48 months Juan Diaz, Owner Third party consultant to Haiti Telco (2010) Douglas Murphy, President American Rice, Inc. (2002) 57 months 63 months Albert Jack Stanley, CEO and Chairman, KBR (2009) Charles Paul Edward Jumet, President, Ports Engineering Consultants Corporation (2009) 84 months 87 months *Joel EsquenaziPresident, TerraTelecommunications Corp. October 25, months

13 FCPA: Whistleblower Bounty Whistleblower Bounty program offers rewards of 10 to 30 percent of any settlement over $1 million. SEC s Whistleblower Office opened on 8/12/2011. SEC regulations have been adopted (pending appeal). SEC estimates it will receive 30,000 complaints a year; 1-2 credible complaints each day. With certain exceptions, whistleblowers must first file complaint internally with company and wait for 120 days before filing with SEC. Companies will increase self-reporting to pre-empt whistleblowers

14 Anti-Corruption Enforcement GLOBAL enforcement is on the rise. In the past three years, US prosecutors have enforced the FCPA to the tune of $3.6 billion In response to international pressure, Canada its increasing enforcement of its anti-corruption law. The UK Bribery Act became effective on July 1, Germany, Spain and other EU countries are increasing enforcement. Asia and Latin American countries have been slower to enact tough, new anti-corruption laws and begin aggressive enforcement programs. China and the US are increasing cooperation and beginning to establish a framework for information sharing and enforcement; China enacted its own foreign bribery law. Risk of anti-corruption multi-jurisdictional, piggy-back actions is growing. 24

15 The Elements Of The FCPA 25 25

16 Anti-Bribery Provisions, 15 U.S.C. 78dd-2 et al. A payment, offer, authorization, or promise to pay money or anything of value to; a foreign government official; or to any person, while knowing that the payment or promise will be passed on to a foreign government official; with a corrupt motive for the purpose of: influencing any act or decision of such foreign government official, inducing such person to do or omit any action in violation of his or her lawful duty, securing an improper advantage, or inducing such person to influence a foreign government (or instrumentality thereof) to affect or influence its acts or decisions, all in order to obtain, retain, or direct business for or to any person. 26

17 Accounting/Record-Keeping Provisions, 15 U.S.C. 78dd-1 et al. Accounting / Recordkeeping Provisions: Books and records must accurately and fairly reflect transactions and dispositions of assets. Internal Controls: 1. Transactions are executed with management s authorizations; 2. Transactions are recorded to allow preparation of a report that conforms with generally accepted accounting principles; 3. Access to assets is permitted only in accordance with management s authorization; and 4. Monitoring to ensure legitimacy of accounting. 27

18 Who is covered? Domestic US issuers US citizens, nationals, or residents Entities organized under U.S. law Entities with U.S. principal place of business Foreign Foreign corporations subject to SEC regulation (e.g., via ADRs) and using instrumentalities of interstate commerce Foreign persons when in US territory, whether or not they use instrumentalities of interstate commerce This includes directors, officers, employees, and agents of entities subject to the statute * Any transaction involving the US banking system 28

19 Criminal Penalties Criminal Penalties for companies: $2mm fine for an anti-bribery violation $25mm fine for a books and records violation Criminal Penalties for individuals: 5 years in jail with a maximum $250,000 fine for an anti-bribery violation up to 20 years in jail with a maximum $5mm fine for a books and records violation Under a federal alternative fine provision, companies and individuals may be fined up to TWICE the benefit sought or received

20 Civil Penalties SEC and DOJ can impose a $10,000 fine per violation upon individuals and companies. SEC may also impose further civil penalties ranging between $7,500 to $150,000 upon individuals and $75,000 to $725,000 upon companies. Alternatively, the SEC may impose a civil penalty equal to the gross pecuniary gain to an individual or company and equitable relief, such as disgorgement of profits

21 What is Prohibited? A covered entity may not pay, promise to pay or authorize the payment of money or anything of value. This covers direct bribery or kickback payment but also includes, gifts, travel, meals or other lavish entertainment. With a corrupt intent to obtain or retain business or to secure a business advantage including: Government contracts Government-issued operating permits and licenses avoiding or reducing inspection reports and certifications tax refunds and reductions customs clearance health inspections beneficial changes to laws and regulations 31

22 Intent to Obtain / Retain Contracts or Any Other Business Advantage Clearly making a payment to obtain or retain a contract violates the law but securing a business advantage qualifies too. This includes: Government-issued operating permits and licenses avoiding or reducing inspection reports and certifications tax refunds and reductions customs clearance health inspections beneficial changes to laws and regulations 32

23 Giving or Promising Anything of Value No cash bribes or kickback payments. Laws also forbid gifts, meals, travel, entertainment, or even charitable donations under certain circumstances. CCI, a components manufacturer, gave a Ferrari, among other items, to a Mexican utility company official. $18.2 million FCPA fine. Veraz Networks, a telecom company, paid a $300,000 FCPA fine and incurred $2.5 million in legal fees to resolve FCPA charges. In the charging documents, the US government specifically mentioned giving $4,500 worth of flowers to a Chinese official s wife. 33

24 Foreign Government Official Under the FCPA: Any officer, employee, or agent of a foreign government or any department, agency, or any instrumentality thereof. This includes any entity that is owned or controlled by a Foreign Government. i.e. all employees of a JV where a state owned or controlled entity is a party to the JV. Factors: percentage of financial ownership, designation under local law, appointment of management, membership on Board, even the company s representations

25 Interactions with Foreign Officials Dealings with foreign representatives can violate FCPA, UK Bribery Act and other anti-corruption laws. In 2008, DOJ warned banks, investment banks, private equity and hedge funds to conduct due diligence of overseas investments to determine foreign government ties. Two district court decisions (Noriega and Carson) have upheld Justice Department position that officials at private companies which is controlled by government entity are foreign officials. 35

26 Interactions with Foreign Officials Representatives of Sovereign Wealth Funds and Foreign Public Institutional Investors are foreign officials under the FCPA and public officials under the UK Bribery Act. In late 2010 and early 2011, SEC initiated industry inquiry into anticorruption compliance by banks, investment banks, private equity and hedge funds and focused on dealings with Sovereign Wealth Funds. SEC inquiry letters issued to at least 10 entities. Investigation later expanded to dealings with foreign public institutional investment funds. 36

27 Case Study: Goldman Sachs and Libyan Sovereign Wealth Fund In August 2011, SEC launched investigation of Goldman Sachs and its dealings with Libyan Sovereign Wealth Fund. SEC officials are interested in a $50 million fee Goldman initially agreed to pay the Libyan sovereign-wealth fund as part of a proposal by the bank to help the fund recoup losses. The Libyan Investment Authority would have passed the $50 million payment to an outside adviser, Palladyne International Asset Management, which was run at the time by the son-in-law of the head of Libya s state-owned oil company. The $50 million payment was never made, but could still have violated FCPA since it was an offer to pay. 37

28 The Risks, Exceptions and Defenses 38 38

29 FCPA Risk: Third Parties A covered entity may not make payments to any other person, knowing that the payment or promise will be passed on to a foreign official. Knowledge means Actual knowledge Awareness or suspicion that an event is likely to occur Avoiding knowledge of corrupt acts through willful blindness A company must investigate all red flags involving agents, joint venture partners, brokers, consultants, distributors, professional service firms, etc. 39

30 FCPA Risk: Third Parties; RED FLAGS Red flags are facts and circumstances that raise serious questions about the possibility of an FCPA violation and which require further investigation. Red flags include (but are not limited to): Transactions in high risk countries Objection to anti-compliance contractual provisions Unusual payment arrangements: request for cash payments, excessive commission rates, payment to offshore accounts Known affiliation with corrupt officials No significant experience relevant to the business 40

31 FCPA Risk: Mergers & Acquisitions Buying an FCPA violation Acquiring company can be held liable for FCPA violations which occurred prior to the acquisition. Corruption risk will also impact M&A considerations: value of a target company; acquisition structure; warranties and indemnification; or in some cases, withdrawal from the deal. 41

32 Risks, Exemptions and Defenses FCPA Risk: Mergers & Acquisitions To limit exposure, the acquiring company must: conduct a due diligence review AND adequately respond to red flags. Due diligence is not a legal defense but it can minimize risk of liability when coupled with compliance commitment. 42

33 FCPA Exception: Facilitation Payments Anti-bribery provisions do not apply to payments made to low level foreign government officials to expedite or secure performance of routine governmental action. Examples: obtaining permits or licenses; processing governmental papers (visas and work orders); scheduling inspections; providing phone service, power, and water supply; loading or unloading cargo; protecting perishable products from deterioration; or actions of a similar nature. Applies only when the foreign government official has no discretion in performing duties. Payment must be for something to which the payor was already entitled. UKBA bars facilitation payments. Best Practices: Prohibit facilitation payments entirely 80% of U.S. companies have banned them. 43

34 FCPA Affirmative Defense Reasonable and Bona Fide Expenditures Reasonable and bona fide expenditures, such as travel and lodging expenses that are legal under local law and are directly related to: the promotion, demonstration, or explanation of products or services, or the execution or performance of a contract with a foreign government or performances of a contract with a foreign government or agency thereof. 44

35 Compliance Programs 45 45

36 Principles for a Successful Compliance Program The key elements of a successful program require: A commitment to compliance from top management and a consistent message throughout the company. A careful weighing of risk, commitment to compliance and business needs so that there is buy-in at every level of the company. A business-practical approach which is flexible to respond to risks, local business operations, and effective compliance needs. Create positive compliance structure which emphasizes common sense, communication and issue identification; solutions to common problems; and recognizes importance of business operations and new opportunities. AML Compliance programs and controls can be leveraged into Anti- Corruption Compliance programs. 46

37 AML Convergence and Compliance Program AML compliance program can be leveraged into anti-corruption compliance: Risk Assessment: AML risk assessment can be expanded to include FCPA issues to create a broader risk profile. Training: AML training programs (including record-keeping) for employees and officers can be expanded to include anti-corruption issues. Compliance Officer: Companies have a designated AML compliance officer, as required by the USA Patriot Act, and this same person could be appointed to lead anti-corruption compliance programs. Corporate Governance: The core compliance functions in an anticorruption compliance program, including policies, procedures and investigation, have significant overlap with AML, and governance and internal reporting and review issues should be handled in a similar way. 47

38 AML Convergence and Compliance AML compliance program can be leveraged into anti-corruption compliance: Financial Investigations Units (FIUs) can be expanded to include: Anti-corruption flags for existing alerts; Transaction monitoring systems can be modified to add new data and new scenarios of concern (e.g. accounts payable and general ledger entries, and gifts, meals and entertainment expenses can be monitored since they are a significant bribery risk); Politically Exposed Persons who are already identified but can be expanded to include government officials who are vendors, agents and third party intermediaries. Internal Audits: Both AML and anti-corruption compliance programs need to be tested and audited. Existing internal auditors can be trained to examine anti-corruption issues, or develop new procedures to ensure adequate auditing and monitoring. 48

39 Designing and Implementing Tone at the Top -- The Company should develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA and a strong commitment from senior management. Risk Assessment -- The Company should develop its compliance standards and procedures using a risk assessment. The risk assessment should be a formal and documented review. 49

40 Designing and Implementing Senior Management Oversight and Reporting -- The Company should assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of its Company's anti-corruption policies. Company should designate a compliance officer in senior management and provide adequate resources to compliance office. FCPA Training -- (a) training for all directors and officers, and, where necessary and appropriate, employees, agents, and business partners; and (b) annual certifications, certifying compliance with the training requirements. 50

41 Designing and Implementing Anti-Corruption Policies and Procedures -- The Company should develop and promulgate compliance standards and procedures for gifts; hospitality, meals, entertainment; customer travel; political contributions; charitable donations and sponsorships; facilitation payments; and solicitation and extortion. Annual Review -- The Company should review its anti-corruption compliance standards and procedures, on no less than an annual basis to ensure they are working. 51

42 Designing and Implementing Internal Guidance and Reporting The company should establish or maintain an effective system for providing guidance, inetrnal reporting of potential violations and responding to internal complaints. Most companies provide an internet-based guidance and reporting system, including hot lines and anonymous reporting. Internal Controls -- The Company should ensure that it has a system of internal controls for the purpose of foreign bribery or concealing bribery

43 Designing and Implementing Due Diligence Screening for Third Party Agents Screen the initial terms of relationship with Third Party: Review the creation of relationship; establish procedure for centralized review of contracts to ensure consistent standards; and Develop a Different Screening Procedures for Review of Individual Transactions. Ongoing Assessment -- The Company should conduct ongoing assessments of its FCPA compliance program. 53

44 Guidelines for Due Diligence Process Do not over-standardize procedure: Need to tailor to individual circumstances in each country based on risk. Need to conduct background check to determine (5-10 year history): Existence of ties to foreign government officials and employees; Existence of any pending or prior investigations of bribery or other criminal conduct or civil violations. Create written package and record of review and approval process to demonstrate compliance

45 Guidelines for Due Diligence Process Existence of relationships with foreign government officials: Purchasing authority; Licensing or other regulatory authorities. Prior history of bribery and other crimes. Nature of services, compensation and payment method. Written contract: Representations and warranties on compliance; Right to inspect and audit third-party books; Right to terminate contract if believe violation has or will occur

46 Due diligence process PEP screening vs Anti Corruption program PEP Screening: Initial and Ongoing (BSA, Patriot Act, etc.) Initial Ongoing Sales Process $ Business Relationship FCPA/UKBA Covers the entire process and not just customers 56

47 Contact Information Ryan Morgan World Compliance (305)