Bribery and the Boardroom

Transcription

1 Bribery and the Boardroom November 16, Kilpatrick Townsend

2 Local Enforcement 2

3 Local Anti-Bribery Enforcement Commercial Bribery (N.C. Gen Stat ) Prohibits giving or offering any gift or gratuity with intent to influence an employee s action in relation to his employer s business. Prohibits requesting or accepting any gift or gratuity under an agreement or understanding to act in a particular manner in relation to his employer s business. Punishable as a misdemeanor. Enforcement described as lax. 3

4 Local Anti-Bribery Enforcement Bribery of Public Officials (N.C. Gen. Stat & -218) Prohibits person holding office or a candidate for office from accepting anything of value for an official act. Offering a bribe to a public official prohibited also. Punishable as a felony. 4

5 Enforcement in the U.S. Marketplace 5

6 Illegal Gratuities to U.S. Public Officials Bribery of public officials & witnesses - 18 U.S.C. 201 Anyone who Gives, offers or promises Anything of value To a present or former U.S. public official (or person selected to be a public official For or because of any future or past official act Shall be subject to a fine and imprisoned up to two years. 6

7 Limit On the Value of a Gift 5 CFR Regulatory Guidance The Code of Federal Regulations provides a limit on the value of any gifts that a U.S. government employee may receive. Government employees may accept unsolicited gifts valuing $20.00 or less. However, the annual aggregate value of any gifts provided by one source must be $50.00 or less. 7

8 Real World Examples of Illegal Gratuities A few years ago, a co-founder of a government contracting company pleaded guilty to providing illegal gratuities to two public officials at U.S. Navy Military Sealift Command, including $50,000 in cash. The company received $2.5 million in business with Sealift Command. The co-founder was sentenced to 24 months imprisonment and a $25,000 fine. 8

9 Health Care Kickbacks 42 U.S.C. 1320a-7b(b)(2)(A) Whoever knowingly and willfully offers or pays any remuneration (including any kickback, bribe or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person (A) to refer an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program shall be guilty of a felony. 9

10 Health Care Kickbacks Berkeley HeartLab Inc. Case In April, 2017, Quest Diagnostics agreed to pay $6 million to settle a lawsuit with the U.S. government. According to the government s complaint, Berkeley paid kickbacks to referring physicians disguised as process and handling fees, and to patients by waiving co-payments, resulting in medically unnecessary cardiovascular tests charged to federal healthcare programs. Quest had acquired the company in

11 Health Care Kickbacks Berkeley HeartLab Inc. Case Lawsuit was initially filed by a doctor under the False Claims Act. The U.S. government intervened in the lawsuit in Doctor entitled to receive 15-25% of the recovery. 11

12 Enforcement in the Global Marketplace 12

13 2016 Corruption Perception Index 13

14 2016 Corruption Perception Index Countries are scored on their perceived level of corruption from The lower the score, the higher the corruption perception. Countries are ranked from based on their position relative to the other countries. A higher ranking means a higher perceived risk of corruption. Rank Country 9 Canada 18 USA 60 Italy 75 Turkey 79 China 101 Philippines 123 Mexico 176 Somalia 14

15 Wal-Mart Has Spent $820 Million on an Internal Anti-Corruption Investigation Wal-Mart s investigation of possible FCPA violations all over the world has cost the company more than $820 million in internal compliance and legal fees. 15

16 U.S. Foreign Corrupt Practices Act 16

17 Extra-Territorial Reach The FCPA can apply to U.S. and non-u.s. persons and businesses involved in foreign markets. U.S. authorities aggressively assert extra-territorial jurisdiction for even minimal contacts, for example: involvement by or contact with a U.S. person or entity; use of a U.S. bank; or through a U.S. server. The U.S. government asserts jurisdiction even when the corrupt act takes place mostly or entirely outside the United States. 17

18 1. Anti-Bribery Provisions Two FCPA Provisions The FCPA prohibits offering anything of value, directly or indirectly, to a non-u.s. government official for the purpose of influencing any decision to obtain or retain business or to get an unfair advantage for the company or its employees. 15 U.S.C. 78dd-1, et seq. 2. Books and Records/Accounting Control Provisions Requires companies with securities publicly traded in the U.S. to maintain reasonably complete and accurate books and records and to implement a system of internal controls which satisfies FCPA requirements. 15 U.S.C. 78m 18

19 What is Anything of Value? The definition is very broad. It can be: Cash or cash equivalents, regardless of materiality Travel, transportation, and lodging expenses Meals and entertainment Charitable/political contributions Gifts or favors Invitations to certain events or site visits to company facilities with luxurious travel arrangements Non-standard or unreasonable discounts on goods or services from the company Use of materials, facilities, or equipment Promise of future employment or employment of relatives Employment of or amounts paid to or on behalf of family members 19

20 Providing Jobs Can Be Anything of Value On November 17, 2016, JPMorgan Chase agreed to pay $264 million to the DOJ and SEC to settle charges that it engaged in a foreign bribery scheme by hiring the children of Chinese government leaders to win business. DOJ prosecutors alleged that some of the family members were unqualified and performed unnecessary work. 20

21 Who Are Government Officials? This term is also very broad. It can be: Officers and employees of any national, regional, local, or other governmental entity Any private person acting in an official capacity for or on behalf of a governmental entity Officers and employees of companies or organizations in which a government owns a majority or potentially even minority interest Candidates for political office at any level Political parties and their officials Officers, employees, or official representatives of international organizations Members of royal families 21

22 Examples of Non-U.S. Government Officials Police, customs/immigration agents, tax officials, etc. Judges/Magistrates at any judiciary level Employees of any state-owned business Employees from World Bank, United Nations, Red Cross, etc. Employees of charitable organizations that are stateowned 22

23 Employees of government instrumentalities are government officials Two telecommunications company executives, Joel Esquenazi and Carlos Rodriguez, were convicted of bribing officials of Telecommunications D Haiti ( Haiti Telco ), were ordered to forfeit $3 million, and sentenced to 15 and 7 years imprisonment, respectively. Haiti Telco was the sole provider of landline telephone service in Haiti. The National Bank of Haiti, which is owned by the Haitian government, retains 97% ownership of Haiti Telco. The court found that Haiti Telco is considered a government instrumentality, making the employees foreign officials under the FCPA. Therefore, the executives improper payments to the Haiti Telco employees violated the FCPA. 23

24 A Bribe Does Not Have to Be Completed to Be Illegal A violation of the FCPA occurs when an offer or a promise for a corrupt payment is made: Even if such offer or promise was NOT accepted. Even if the service is NOT delivered by the foreign government official. 24

25 Smith & Wesson Holding Corp. Smith & Wesson allegedly attempted to win a contract to sell firearms to an Indonesian police department by making payments to its third-party agent in Indonesia. On several occasions, Smith & Wesson s third-party agent indicated that the Indonesian police expected Smith & Wesson to pay them additional amounts above the actual cost of testing the guns as an inducement to enter into the contract. Smith & Wesson s Director of International Sales authorized and made the payments, though a deal was never consummated. Smith & Wesson paid $2 million to the U.S. government to resolve the FCPA allegations. 25

26 Liability for a violation of the FCPA can arise if an intermediary or agent of the company offers or pays a bribe to a non-u.s. government official. Examples of Intermediaries: Distributors Partners Intermediary Customers Vendors Consultants Use of Intermediaries and Agents 26

27 Tyco Valves & Controls, Inc. Tyco made payments pursuant to inflated invoices submitted by the company s Egyptian agent. The Egyptian agent wired $282,022 to a former employee s bank account with the understanding that the inflated funds would be used in connection with entertainment expenses for representatives of a company that was majority-owned by the Egyptian government. A portion of the funds was used to pay for lodging, meals, transportation, spending money, and entertainment expenses for that company s officials on two trips to the United Kingdom and the U.S. Tyco paid over $26 million to the DOJ and SEC to resolve the allegations. 27

28 U.S. FCPA Enforcement and Third Parties The activities of third parties are the single biggest challenge to anti-corruption compliance. About 90% of reported FCPA cases involved misconduct by third party intermediaries. 28

29 Charitable Contributions Can Also Create FCPA Risk Charitable donations must be given only to valid organizations and only for proper charitable purposes. Charitable donations must comply with the FCPA, local laws, and company policies. This can be a real hidden danger. 29

30 Top 10 Corporate FCPA Settlements 30

31 Teva Pharmaceuticals In December 2016, Teva Pharmaceuticals, based in Israel, agreed to pay DOJ and SEC to settle criminal and civil FCPA violations related to the company s activities in Ukraine, Russia, and Mexico. In Ukraine, Teva allegedly paid a Ukrainian official over $200,000 in consulting fees. In Russia, Teva allegedly did business with a repackaging company owned by a Russian official. In Mexico, Teva allegedly bribed doctors at government-owned hospitals. DOJ said Teva failed to implement or enforce an effective anti-corruption program. 31

32 VimpelCom Ltd. In February 2016, VimpelCom Ltd., based in the Netherlands, agreed to pay a $397 million criminal fine to resolve FCPA charges stemming from a bribery scheme involving the Uzbek government. VimpelCom funneled at least $114 million to a highranking official inside the Uzbek government in order to procure necessary licenses, frequencies, and channels as it entered the Uzbek telecommunications market. VimpelCom disguised the bribery payments through sham contracts and charitable contributions. 32

33 Och-Ziff Capital Management In October 2016, Och-Ziff, a U.S.-based hedge fund, agreed to pay a $412 million to the DOJ and SEC to settle FCPA charges stemming from a bribery scheme involving several African countries. According to the SEC, Och-Ziff used third-party intermediaries and business partners to pay bribes to high-ranking government officials in Africa. The SEC also filed civil suit against Och-Ziff s sitting CEO and CFO for violating the FCPA books and records provision, a first for the SEC. Och-Ziff s CEO agreed to pay $2.2 million to settle the SEC suit. 33

34 What to Expect from DOJ In 2015, DOJ issued a new policy focused on increasing the prosecution of individuals. In 2016, DOJ expanded its FCPA enforcement unit by doubling the amount of prosecutors and adding new FBI squads dedicated to FCPA investigations and prosecutions. The U.S. politics of white-collar enforcement are complex but may be converging. (See, e.g., Why Corrupt Bankers Avoid Jail, The New Yorker, July 31, 2017.) 34

35 Other Enforcement In 2014, GlaxoSmithKline, was fined $490 million for asserted violations of China s Anti-Corruption Laws based on the hiring of a Shanghai travel agency, China Comfort Travel. In December 2016, Odebrecht, a Brazil-based construction company, and Braksem, its petrochemical subsidiary, agreed to pay $3.5 billion to authorities in the U.S., Brazil, and Switzerland. The U.S. portion is $93 million, reduced from $253 million due to Odebrecht s ability to pay. In March, 2017, South Korea s President Park Geunhye was impeached and removed from office. She was formally charged with bribery on April 17,

36 Diligence in Transactions Be thorough enough that you are comfortable with the DOJ or SEC second-guessing your diligence. Methods: Questionnaires to key personnel Targeted interviews Homework on Corruption Perception Index Score Forensic financial analysis Be sure to document your efforts Source: Rebekah J. Poston and David A. Saltzman, Practical Guidance on How to Conduct FCPA Due Diligence, The State Bar of California Business Law News (2012) 36

37 Due Diligence in Transactions Minimum Items to Cover Countries of operation of the target and any subsidiaries. Industry corruption level. Relations and contacts with foreign officials and state-owned entities. Third party agents, and their contracts. Existence of an anticorruption compliance code, training, enforcement, and auditing of the same. Accuracy of books and records. Source: Rebekah J. Poston and David A. Saltzman, Practical Guidance on How to Conduct FCPA Due Diligence, The State Bar of California Business Law News (2012) 37

38 Due Diligence in Transactions Minimum Items to Cover (continued) Existence of internal controls. Charitable contribution policies. Gifts, travel, and entertainment budgets. Marketing and sales operations and related expense reimbursements. Source: Rebekah J. Poston and David A. Saltzman, Practical Guidance on How to Conduct FCPA Due Diligence, The State Bar of California Business Law News (2012) 38

39 Accounting 15 U.S.C. 78m(b)(2)(A) The books and records provision Issuers must make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. records should reflect transactions in conformity with accepted methods of recording economic events and effectively prevent off-the-books slush funds and payments of bribes. 39

40 Accounting Common Mischaracterizations of Bribes: Commissions or Royalties Consulting Fees Sales and Marketing Expenses Scientific Incentives or Studies Travel and Entertainment Expenses Rebates or Discounts After Sales Service Fees Miscellaneous Expenses Petty Cash Withdrawals Free Goods Intercompany Accounts Supplier / Vendor Payments Write-offs Customs Intervention Payments Source: Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act 40

41 Accounting 15 U.S.C. 78m(b)(2)(B)) - The internal controls provision Issuers must devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management s general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 41

42 Key Takeaways for Corporate Counsel Stay current on developments Develop and revisit (often) your compliance policies Then - teach and reiterate your compliance policies Do your due diligence Effectively address compliance in contracts Expand your policies to cover partners, affiliates, and acquisitions Make sure your procedures facilitate identifying and reporting violations 42

43 Questions? Joe Dowdy Kilpatrick Townsend LLP Clay C. Wheeler Kilpatrick Townsend LLP 43