FPCA: Current Challenges for In-House Counsel

Chambers General Counsel Seminar

Gregory Kehoe Greenberg Traurig

Michael Marinelli Greenberg Traurig

Ernest Edgar Atkins North America

Why is FCPA Important to you?

The Foreign Corrupt Practices Act (the “FCPA”) is aimed at eliminating corruption and bribery in U.S. companies and foreign companies affiliated with U.S. based companies Employees of a company affiliated with a U.S.-based company are required to strictly comply with the anti-corruption provisions of the FCPA

FCPA Governmental Overview

DOJ and SEC enforce the FCPA Congress can launch its own investigations Foreign authorities may launch own investigations The DOJ and the SEC recently issued a guide to FCPA compliance, which is available online at:

www.justice.gov/criminal/fraud/fcpa and at:

www.sec.gov/spotlight/fcpa.shtml

Why the FCPA is Significant to Corporate Clients

•  FCPA enforcement at all time high •  Corporate •  Individuals

•  FCPA issues in M&A transactions •  Due diligence •  Successor liability •  Deals can be scuttled (e.g., Lockheed/Titan)

•  Expansion of business into global markets increases the risk of FCPA violations

•  Recent corporate emphasis on “culture of compliance”

•  ISO Anti-Bribery Management System is under development

FCPA Enforcement Trends

•  Unique convergence of U.S. government’s efforts creates heightened enforcement climate

•  Enhanced DOJ focus on FCPA enforcement – FCPA is “second only to terrorism” on DOJ priority list

•  SEC unit focused solely on FCPA enforcement

•  Liability for conduct of third parties

•  DOJ has 12+ attorneys assigned full-time to FCPA cases

•  Increased cooperation of non-US authorities

•  Significant monetary settlements

•  Industry-focused investigations (aerospace, medical devices, pharmaceuticals, etc.)

Examples of Recent Enforcements

1.  ALCOA World Aluma (2014) - $384 million fine and disgorgement

2.  Total S.A. (2013) $398 million fine

3.  JGC Corp. (2011) – $218.8 million fine

4.  BAE Systems (2010) - $400 million fine to U.S. (£30 million to UK)

5.  Snamprogetti Netherlands B.V. / ENI S.pA. (2010) - $365 million fine

6.  Technip S.A. (2010) - $338 million fine

7.  Kellogg Brown & Root / Halliburton (2009) - $579 million fine (KBR executive pleaded guilty to conspiracy to violate the FCPA; sentenced to 7 years in prison)

8.  Siemens (2008) - $800 million fine to U.S. ($1.6 billion overall to various countries)

Successor Liability in FCPA Context

•  Successor liability = Acquirer that fails to perform adequate due diligence may inherit target’s liability for past FCPA violations

•  Mergers/stock transfer → Liability generally attaches

•  Asset purchase → Liability may attach

•  Purchase agreements may specify which liabilities transfer with the assets

FCPA Overview

The FCPA is comprised of two main provisions

FCPA

Anti-Bribery Provisions

Accounting Provisions

(“Books and Records”)

FCPA Overview

•  The FCPA was enacted in 1977 in the wake of reports that numerous U.S. businesses were making large payments to foreign officials to secure business

•  The Act has two main provisions:

•  Anti-bribery provision: The FCPA prohibits giving or offering anything of value to a foreign government official, political party, or party official in order to improperly obtain or retain business or secure a business advantage

•  Accounting provisions: The FCPA also requires maintenance of accurate books and records and reasonably effective internal controls

Anti-Bribery Provisions - DOJ

Anti-Bribery Provision: The Basics

The FCPA prohibits: •  A U.S. company or its foreign affiliate from paying

bribes to foreign officials to: •  Obtain or retain business •  Obtain an improper advantage •  Influence a government decision

•  Paying money to a third party, knowing it will be used to bribe a foreign official

•  Offering or authorizing a bribe is sufficient to

establish a violation

What is a bribe? Anything of value

•  Cash

•  Gifts

•  Travel

•  Entertainment

•  Favors, such as jobs for relatives

Who is a Foreign Official?

•  All government employees, officials, and staff

•  Party officials and political candidates

•  Officers and employees of public international organizations (like the U.N., World Bank, or other international financial institutions)

•  Every employee of a state-owned enterprise, such as a government-owned or controlled bank, financial institution, hospital or media outlet

•  Family members of officials

Proving Knowledge

•  Positive information that a bribe will be paid

•  Awareness of a high probability that a bribe will be paid

•  Based on the known facts and circumstances, "any reasonable person would have realized” that a bribe would be paid

•  Willful blindness •  Consciously choosing not to ask a question

because you don’t want to know the answer

•  Knowledge is most often established by showing the company ignored “Red Flags”

Examples of Red Flags

•  Often, suspicious circumstances, not direct proof, give notice of corrupt activity

•  Red Flags •  Unusual or indirect payment arrangements

requested

•  Requests by government official for any entertainment/expenses to be paid without reimbursement to company

•  Requests for donations, political contributions, event sponsorships

•  High risk countries

•  Negative information identified through due diligence process

Examples of Red Flags

Third Party-Specific Red Flags •  Unusually high payments, commissions, retainers,

or other fees

•  Payment sought – either in form or amount – is inappropriate for industry/region

•  Lack of transparency in expenses, accounting records or business negotiations for contracts

•  Apparent lack of adequate facilities, ability or expertise to provide services required

•  Evasiveness by agent or partner about its dealings with foreign government (directly or indirectly)

Facilitation Payments: Narrow Exception

•  FCPA may permit limited “facilitation payments” to certain government officials to speed up routine government functions

•  No U.S. Government guidance on permissible size of facilitating payment, but in practice they are disfavored

•  Facilitation payments are typically considered bribes under local law

Affirmative Defenses

•  Lawful payment •  payment lawful under written laws of foreign country •  Everyone does it (“customary” payments) is not a

defense, affirmative or otherwise

•  Reasonable and bona fide expenditure •  Promotion, demonstration or explanation of products

or services •  Execution or performance of a contract with a foreign

government or agency

•  Defendant bears burden of proof

“Willful Blindness” Is Not A Defense

Willful blindness, includes a conscious purpose to avoid learning the truth, especially in light of red flags

Sanctions

•  Criminal Penalties •  Companies: $2 million per violation

•  Individuals: $100,000 fine and/or 5 years in prison

•  Alternative Fines Act: even higher → up to 2 times the amount of gross gains expected from bribe

•  Civil Penalties •  $10,000 per entity/individual •  Disgorgement of profits

•  Other Penalties •  Independent compliance monitors

•  Debarment from contracting with federal government

•  Suspension/debarment from securities industry

•  Civil litigation

Accounting & Internal Controls Provisions – SEC

Accounting & Internal Control Provisions

•  Two requirements apply to issuers only:

•  Record keeping – “books and records” must be complete and accurate

•  Internal controls

•  Applies to all transactions of U.S. issuers – not limited to those involving foreign bribery

•  No scienter required

HOW CAN A COMPANY PROTECT ITSELF?

Significance of an Effective FCPA Compliance Program

•  A comprehensive internal compliance program is the cornerstone of an FCPA risk mitigation strategy

•  Mitigating factor against possible sanctions in event of violation

•  Promotes culture of compliance

•  Tailor program to fit risks specific to company •  Foreign countries of operation •  Industry •  Size of company •  Business model

Key Elements of an Effective FCPA Compliance Program

1. Code of Ethics •  “Tone at the top”

2. Conduct FCPA risk assessment of the company

•  High risk jurisdictions •  Customers •  Third party intermediaries •  Periodic reassessment

3. Establish written compliance policies and procedures

•  Clearly articulated •  Communicated to all relevant employees •  Include third party agents → get written representation

Key Elements of an Effective FCPA Compliance Program (cont’d)

4. Internal accounting controls system •  Books, records, and internal controls •  Implement controls on payments for travel and

entertainment, promotional expenses, lobbying, etc.

5. Companywide training •  Relevant employees •  Overseas •  Certification

Key Elements of an Effective FCPA Compliance Program (cont’d)

6. Monitoring and auditing systems •  Internal audit •  Reporting system

7. Designation of Chief Compliance Officer

•  Reports to board, audit committee

8. Prepared response plan to possible FCPA misconduct •  Outside law firms and consultants •  Data retention