FCPA, Anti-Corruption, & Bribery: What the Fashion Industry Needs to Know

Transcription

1 FCPA, Anti-Corruption, & Bribery: What the Fashion Industry Needs to Know Hosted by United States Fashion Industry Association (USFIA) & October 27, :00 P.M. ET/11:00 A.M. PT

2 Today s Speakers Troy Bienstock Director Forensic Services New York Marc Filer Manager Forensic Services Washington, DC

3 Do you have a question? During the webinar, all attendees will be assigned to listenonly mode. Please use the Questions box on your dashboard to ask a question during the webinar.

4 Before we turn it over to Mary Jo Just 17 days until the Annual Conference! Pre Conference Event on Tuesday, November 8 th Annual Conference on Wednesday, November 9th

5 Fashion Industry: Anti-Corruption Considerations in Today s Environment Troy Bienstock, Director Forensic Services, New York Marc Filer, Manager Forensic Services, Washington, DC October 27, 2016

6 Agenda 1. FCPA Overview 2. Recent Enforcement Trends 3. Common Corruption Schemes & Red Flags 6

7 Why is this important? 1. Government focus 2. Industry coming under scrutiny 3. Global footprint 4. Use of third parties 7

8 FCPA Overview 8

9 Provisions of the FCPA Anti-bribery Provisions It is a crime for any U.S. person or company to directly or indirectly pay, offer to pay, promise to pay or authorize the payment of money or anything of value to a foreign official in a corrupt effort to secure any other improper advantage in order to obtain or retain business. Books and Records Requirements Section 13(b)(2)(A) of the Exchange Act They require that the company make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the issuer. In this context, reasonable refers to such level of detail that would satisfy prudent officials in the conduct of their affairs. Internal controls requirements Section 13(b)(2)(B) of the Exchange Act 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. 9

10 FCPA: When is it violated? The FCPA is violated when A U.S. person, issuer, domestic concern, or any of their officers, directors, employees, agents or shareholders, or (in certain cases) foreign nationals Pay, offer to pay, promise to pay, or authorize a payment (directly or indirectly) of anything of value To a foreign official (non-us), 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 10

11 Directly or Indirectly Improper direct offers may include: Gifts, travel, entertainment Free / discounted goods or services Improper indirect offers may include: Use of third parties (e.g., brokers, agents, consultants) to generate off-book funds for the purpose of making payments to officials Artificially high margins for distributors or other third parties used to fund payments to officials Use of a particular agents/nominees required by an official Required contributions to political campaigns or charitable organizations Consider the concept of willful blindness 11

12 Potential liability without direct involvement Case Facts: SEC charged a company with widespread violations of the FCPA, stemming from more than six years of improper payments to government officials in three Asian countries. The subsidiaries bribed local government officials in order to obtain favorable decisions in tax and customs disputes, secure tax rebates, and obtain and retain business. SEC alleged that as a result of the company s lax oversight and deficient controls, its subsidiaries routinely used third parties, inflated invoices, and other deceptive devices to disguise the true nature of the payments. Conclusion: The company agreed to cease and desist from further violations and pay $11 million in disgorgement, prejudgment interest of $2 million, and a financial penalty of $3 million. The company also implemented certain remedial measures, including the FCP termination of employees involved in the misconduct and significant enhancements to Settlement: its FCPA compliance program. $2 M Lesson Learned: Corporates may be liable for subsidiaries actions. 12

13 Defining anything of value The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value. For example, Anything of Value may include: Cash Gifts Services Travel Business Opportunities Jobs / Internships Reduced Taxes Even the attempt to influence an official to secure an advantage is punishable. Payment or gift does not have to be completed or successful in achieving the desired outcome. 13

14 Intern hiring practices Case Facts: In 2010 and 2011, a publicly held company hired as interns, family members of government officials in foreign countries. These officials were associated with a Middle Eastern sovereign wealth fund. The family members allegedly did not meet the rigorous criteria yet were hired with the knowledge and approval of senior company employees in order to influence foreign officials and win or retain contracts to manage and service the assets of the sovereign wealth fund. SEC alleged that minimum requirements such as GPA and interviews were ignored in selecting these interns. Human Resource employees were not adequately trained to notice red flags from potentially problematic hires. Conclusion: The company settled the case for $8.3 million of disgorgement, $1.5 million in prejudgment, and a $5 million penalty. Lesson Learned: Anything of value matters. 14

15 Defining foreign official FCPA Guide The FCPA Guide provides the following non-exclusive list of factors to consider when evaluating the risk of FCPA violation: Extent of ownership; Degree of control; Characterization of the entity and its employees; Purpose of the entity s activities; Obligations and privileges; Controlling power vested In the entity; General perception that the entity is performing official or governmental functions; Whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government; Circumstances surrounding the entity s creation. Level of financial support provided by the government; 15

16 Corrupt payments through third parties controlled by a PEP s Case Facts: From 2008 to 2013, a South American subsidiary of a US based apparel company paid bribes to government and customs officials in order to improperly secure the importation of merchandise, which included the importation of products without necessary paperwork, avoiding inspection of prohibited products, and avoiding inspection by customs officials. Its employees disguised the payments by funneling them through a customs clearance agency, which created fake invoices to justify the improper payments. The subsidiary also authorized gifts of perfume, handbags, and dresses. The bribe payments and gifts to government officials totaled $593,000. Conclusion: The company agreed to pay the DOJ an $882,000 penalty and the SEC nearly $735,000 in disgorgement and in prejudgment interest. Lesson Learned: Inappropriate payments could be disguised. 16

17 Recent Enforcement Trends 17

18 Resolved FCPA Enforcement Actions By Year SEC Corporate SEC Individual DOJ Corporate DOJ Individual (to date) Note: Current through July 1, These statistics count each distinct resolution with a company and its affiliates as separate enforcement actions. They also include certain FCPA-related settlements and SEC default judgments. Source: Miller & Chevalier Chartered FCPA Summer Review

19 Countries implicated most frequently in corporate FCPA enforcement actions from 2005 to 2016 (to date) Corporate enforcement actions Note: Updated through July 16, Source: Miller & Chevalier Chartered FCPA Summer Review

20 Corruption in Retail Industry Retail is one of the top 10 industries victimized by fraud Over 30% of schemes in retail industry are corruption related Selected example risks include: Access to sought after real estate and developments (e.g., marquee properties ) Obtaining and renewing licenses and permits Access to cash Number and variety of locations Source: 2016 ACFE Report to the Nations 20

21 Bribery and corruption over the next 24 months Overall, 91% of respondents believe their top management makes it clear that bribery is not a legitimate practice. This was consistent across all regions and all industries. However, we're still seeing a large number of reported incidents and, in many regions, an ever larger number of organisations who expect to experience bribery and corruption in the next 24 months. Source: Global Economic Crime Survey

22 Common Corruption Schemes & Red Flags 22

23 What to look for? - Common Red Flags Common Red Flags Sales Excessive commissions to third parties (e.g. distributors) Unusual Compensation Agreements Free products or services Lack of formal control on pricing Local Business Practices Compliance Sensitive Expenses - Donations - Political & Social Contributions - Gifts - Travel and Entertainment Lack of adequate internal control on petty cash, T&E and gift giving. Third parties Recommended by a government official Consulting Agreements with vague description or no deliverables Consultant in a different line of business Close ties with PEP A shell company incorporated in an offshore jurisdiction or tax haven Treasury Cash Payments Re-directed payments Off the books bank accounts or funds Payroll Non-employees paid through payroll (e.g. third parties) Ghost employees 23

24 Corruption Risks in Fashion Industry Interactions with local regulatory agencies Interactions with local officials for real estate Government Officials Hiring local employees requires local assistance Interactions with customs during shipping and transportation Pressure from local competitors 24

25 Focus on Internal Controls: Jan Jun SEC Actions against 55 Companies with SEC Violations: Mapping of Control Violations Count % 1 Non-Transparent Description of Services/Account Classification Inadequate Third Party Due Diligence and/or Oversight Inadequate Supporting Documentation Inadequate Meals and Entertainment Policy Lack of Cash Management Policy and Procedures Inadequate or Lack of Travel Policy Inadequate Communication and Training on Policies and Procedures Inadequate or Lack of Gift Policy Reoccurrence of Violations after Detection Inadequate Employee Expense Reimbursement Policy Source: Analysis of public SEC Information ( 25

26 What to look for? - Country/culture-specific keywords Russia: otkat dat na lapu China: Huilu Guanxi Mooncakes Haochu Mexico: Gestor Korea: mokjuksaupbi Rice Cakes jeopdae India: Diwali Brazil: Despachante West Africa: Dessous de table" 26

27 Common Pitfalls When Assessing Anti-Corruption Compliance Programs - Business unit selection not based on risks - Potential red flags ignored - Areas not audited: Infrequent payments, payments made to generate business, and travel expenses - Sample selection not proportionate with risk - Finding assumed to be an isolated incident - Check the box approach (form over substance) - Relationships with government officials not fully examined - Language and cultural barriers - Sample selection focused on materiality - Inadequate interviews - Compliance sensitive areas ignored - Focused on control testing/walkthroughs v. substantive testing - Monitoring focused on revenue only 27

28 Cross Functional Responsibility Internal Audit Legal, Affairs & Secretary Supply Chain Human Resources & Talent Core Roles Compliance Finance Marketing International 28

29 Your Success Depends on Management Tone at the Top Systems Risk Assessment Risk Assessment Bus. Model Culture People Control Environment Training Partners Policies/ Procedures Internal Controls Monitoring Evaluate Effectiveness 29

30 Questions? Matthew Shelhorse Partner (646) Sulaksh Shah Partner (202) Troy Bienstock Director (646) Marc Filer Manager (202) PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Please see for further details. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 30