The Foreign Corrupt Practices Act: Effective Compliance Strategies ACC In-House Counsel Forum April 28, 2011 T. MARKUS FUNK (Moderator) Partner, Perkins Coie Federal Prosecutor (Chicago) 2000-10 USDOJ Section Chief in Kosovo MICHELLE R. RAFIK (Panelist) Ball Corporation Senior Attorney M. SEAN RADCLIFFE (Panelist) IHS, Inc. VP and Chief Compliance Officer Chief Legal Counsel - Corporate MICHAEL MCGAWN (Panelist) Chipotle Mexican Grill, Inc. Corporate Counsel
The Big Picture: Two Parts of the FCPA 1. The Anti-Bribery Provisions (DOJ) Prohibits giving anything of value to a foreign government official or political party/candidate in order to gain a business advantage (obtain or retain business) Applies to virtually all US businesses ("domestic concerns") 2. The Accounting Provisions ("Books & Records" DOJ & SEC) U.S. companies must: 1. Maintain accurate books and records 2. Report transactions in reasonable detail 3. Have adequate internal controls over accounting records and assets
FCPA Applies to Virtually Every Business Issuers (& their Agents): Companies listed on US stock exchanges or required to file reports with SEC, and their agents. Eg, Snamprogetti (agent of US issuer) "Domestic Concerns": US companies (and their officers, directors, employees, agents and shareholders), citizens, or nationals; US-incorporated subsidiaries of foreign parent companies; employees of those US-based subsidiaries Any Person: Act in furtherance while in the territory of the United States (eg, email sent, US wire transfer, etc.)
For 30 Years, Not Much Happened
And then. FCPA: Comeback Statute of the late 2000s
What the Government Is Saying. "[C]orruption is a national security issue and an impediment to security in combat areas, like Iraq and Afghanistan." Mark Mendelsohn, Deputy Chief, Fraud Section, Criminal Division, DOJ (Feb. 24, 2010) "The Department places a significant and high priority on its FCPA program." Mendelsohn (Mar. 23, 2010) "FCPA Enforcement is stronger than it's ever been and getting stronger... We are in a new era of FCPA enforcement. " Assistant Attorney General Lanny A. Breuer (November 16, 2010)
What the Government Is Doing.. 200 150 100 50 0 2004 2005 2009 2010 Enforcement Actions Enforcement Actions Fines & Disgorgements. 2010 totals smashed 33 years of prior records
More Examples: Top 2010 Enforcement Actions BAE (U.K.) $ 400 million criminal fine Snamprogetti (Holland/Italy) $240 million criminal fine; SEC disgorged $125 million in profits Technip S.A. (France) $240 million criminal fine; SEC disgorged $98 million Panalpina (Switzerland) $70.5 criminal fine; SEC disgorged $11.3 million Pride International, Inc. (USA) $32.6 million criminal fine; SEC disgorged $23.5 million Shell Nigeria (U.K./Holland) $30 million criminal fine; SEC disgorged $18.1 million
Today's Parade of FCPA Horribles Criminal Penalties Anti-Bribery Provisions Corporations: $2 million maximum per violation Individuals: 5 years incarceration; $250,000 per violation Books & Records Provisions Corporation: $25 million Individual: $5 million; 20 years
.... and that is not all.... Substantial civil penalties/disgorgement Debarment from government contracts License termination Conduct serve as basis for a civil RICO case Conduct can lead to a shareholder suit Adverse publicity/damage to reputation Prosecution in foreign jurisdiction Court appointment of monitor
Company Beware: Surveying Key FCPA Pitfalls
Michelle R. Rafik Ball Corporation "Responding To The Growing Threat of Third-Party FCPA Liability What Proactive Steps Should Companies Take?"
Third-Party Liability Make or authorize improper payments to foreign officials, political party, or candidate ("actual knowledge" -- very rare) or Make payment to third party, with a conscious disregard for whether portion of money will be paid directly to foreign officials, political party, or candidate (constructive knowledge more common)
Now On FCPA Hook for Difficult-To- Control Acts of Foreign: Agents Intermediaries Consultants Joint venture partners Suppliers Distributors Outside counsel Private equity portfolio companies Franchisees Translation: Basically anyone with whom company has foreign business relationship!
Some "Red Flags" Countries/industries with history of public corruption Familial or personal government or political connections Disjunction between the work to be performed and qualifications Reliance on political or governmental contracts Reluctance to sign and abide by requirements No or incomplete - written contracts or invoices Refusal or inability to develop a market strategy
Some "Red Flags" (Continued) Interest in keeping the relationship secret History of improper payment practices Poor business reputation Unusually high fees, commissions, or bonus requests Requests for cash payment Payment directed to offshore accounts Requests for unusual advance payments
Successor FCPA Liability: What You Know Can Hurt You Acquire company AND existing liabilities Eg, Allianz & Halliburton/KBR Due Diligence is the key! Government selects cases to prosecute If Due Diligence Uncovers Problem(s). Self report (either party) Allocate potential fees and fines in merger agreement Institute appropriate safeguards (if no current FCPA liability) Or Walk away ALWAYS make sure all disclosures in public filings are accurate
Michael McGawn (Chipotle Mexican Grill, Inc.) "Updating Compliance Policies and Procedures to Reflect Recent Amendments to the Corporate Sentencing Guidelines"
20-Year-Old US Sentencing Guideline's Categorical Bar on Fine Reduction Now History Section 8C2.5(f) Corporate Sentencing Guideline Old Guidelines: No three-level (50% or more) reduction for company in which "high-level personnel" participated in, condoned, or were willfully ignorant of the offense.
New (November 2010) Guidelines: (1) The individual or individuals with operational responsibility for the compliance and ethics program have direct reporting obligations to the company s governing authority or appropriate subgroup thereof; (2) The compliance and ethics program detected the offense before discovery outside the company or before such discovery was reasonably likely; (3) The company promptly reported the offense to the appropriate governmental authorities; and (4) No individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense.
The amendments respond to public concerns that: (1) The categorical bar to the reduction operated too broadly; and (2) Internal and external reporting of criminal conduct is, in appropriate cases, better encouraged by providing an exception to the general prohibition.
How To Avoid Liability In Four Easy Steps: Review, Revise, Hire, and Submit 1. Review compliance and ethics program to ensure the compliance and ethics officers have direct responsibility, set forth in writing, to the board of directors audit committee, or similar subgroup to immediately inform them of suspected non-compliance or criminal conduct; 2. Revise existing compliance policies and procedures to identify and promptly remedy potential internal control and compliance weaknesses; 3. Hire outside counsel to investigate cases of suspected non-compliance, and to suggest appropriate amendments to the company's compliance and ethics program to help stave off questions concerning whether the company took "reasonable steps" upon learning of the suspected criminal conduct; and 4. Submit an annual report assessing the implementation and effectiveness of the company's compliance and ethics program.
M. Sean Radcliffe (IHS, Inc.) "Responding to the Recent Dodd-Frank 'Whistleblower Bounty Incentives' -- The Problem of Supply & Demand"
Government Has Many Sources of Allegations Internal audits Due diligence review during merger/acquisition Voluntary disclosures Whistleblowers/anonymous complaints Foreign law enforcement referrals Competitors Media reports Overseas US embassies/fbi Legal Attaches Industry-wide investigations
2011 Dodd-Frank Whistleblower Provisions.. Requirement: Original violation-related information Promised Award: Minimum of 10 percent, maximum of 30 percent, of all monetary recoveries in successful resolution of settlement exceeding $1 million Enhanced Whistleblower Protections: Anonymity until pay-out Covers subsidiary employees Private retaliation cause of action Right to appeal denial of award
The FCPA Take-Away....
Summary of Trends for 2011 and Beyond Investigative/charging approaches and techniques more proactive and aggressive Third-Party Liability Threat Emphasis on prevention/due diligence (Revised US Sentencing Guidelines) More prosecutions of individuals Whistleblower bounty provisions incentivize tipsters Agent specialization & industry-specific enforcement
Summary of Trends for 2011 and Beyond (Continued) Focus on bribe recipients and middlemen Congressional push to mandate debarment through Overseas Contractor Reform Act Certification of "No FCPA Violation" (HR 5837) No federal contract without certification Consideration to companies with robust compliance and ethics programs Multi-jurisdictional cooperation expanding
So Therefore.. Allegations inevitable and some of those allegations will have merit Violation does not mean "game over" Remember what the Government is doing it is triaging cases, just like you... Just like you, it only wants to devote resources to matters where makes sense to do so
Take the FCPA seriously Pay attention to red flags Get ahead of curve conduct prospective due diligence on potential business partners Review & Revise existing policies No deal is important enough to risk the consequences of an investigation on an indictment
Anti-Bribery Questions? T. Markus Funk Partner, Perkins Coie Bio: www.perkinscoie.com/mfunk Email: mfunk@perkinscoie.com