Compliance Comments and FCPA Review

New York

January 9, 2013 Copyright © 2013 Jon Fee All Rights Reserved

ALSTON&BIRD LLP

The unfortunate tension

• Preference programs like

CAFTA are great; but they

come at a compliance cost

• The challenge to the U.S.

policymakers is to enhance

trade with its partners

without making compliance

so difficult that it offsets the

benefits

Noncompliance isn’t fair

• U.S. and CAFTA companies work hard to comply – and it is an expensive, time consuming enterprise

• When someone is reckless, or cheats, and doesn’t get caught, he gets an unfair competitive advantage

• Worse still, the infractions of reckless companies cause CBP to become suspicious of the industry and to increase intrusive enforcement activity

Compliance comparison

Asia

• Commercial invoice

• Bill of lading

CAFTA

• Commercial invoice

• Bill of lading

• FTA certificate of origin

• Fabric affidavit

• Yarn affidavit

• Thread affidavit

• Pocketing affidavit

• Invoices and transit documents for fabric and other inputs

• Production records

• Information requests

• Notices of action

• Factory visits

• Etc., etc.

So what should we do?

• Have an individual or individuals, supported by senior management, whose job is compliance

• Establish reliable practices and procedures, including checklists and written guidelines ensuring compliance

• Use standardized compliance forms: certificates of origin, affidavits, invoices, etc.

Commercial invoice

• The invoice should describe the

apparel with sufficient detail to

classify it

• Type of garment (e.g., shirt,

trousers, etc.)

• Sex and age group of intended

wearer (e.g., men’s, women’s,

boys’ or girls’)

• Whether woven or knit

• Fiber content (e.g., 60 percent

cotton, 40 percent polyester)

Commercial invoice

• Other descriptive information, where applicable, necessary for tariff classification (e.g., “water resistant,” “with two or more colors in the warp and/or the filling”)

• For short supply garments, the commercial invoice should also include the specifications of the fabric or yarn called for by the short supply designation

Certificate of origin

• This isn’t an entry document

• It must be prepared and signed by the importer, exporter or producer and must be in the importer’s possession at the time the CAFTA claim is made

• The importer must submit it to CBP upon request

• No required form as long as it contains the necessary information

• See 19 CFR 10.584

“Guidance”

• TBT-07-019 (October 10, 2007)

• TBT-11-004 (March 31, 2011)

• TBT-12-003 (March 22, 2012)

• Where to find them: http://www.cbp.gov/xp/cgov/trade/priority_trade/textiles/tbts/

• Hard to use, because they make cumulative changes

Highlights of the 3rd TBT

• Issued March 22, 2012

• Responded to lots of complaints

that CBP was interpreting the

rules too rigidly

• TBTs are guidance, not law

• CBP is “aware of

inconsistencies” in the

application of the TBTs

• TBTs are not exhaustive and

should not be interpreted rigidly

Highlights of the 3rd TBT

• Where correlation is not

apparent, importers should

supplement documents with

information showing how

they are connected to one

another, possibly by

numbering them

• If documents cover materials

that weren’t used to make the

goods in question, the

importer should include a

note that explains this

Highlights of the 3rd TBT

• If there are omissions through oversight or the result of inaccurate translations, CBP import specialists should seek clarification

• When an affidavit doesn’t provide confirming details, the importer should supply more support, like purchase orders, invoices and proofs of payment

• CBP denial solely on the basis of information it did not request is not appropriate

Highlights of the 3rd TBT

• “Will be sold” or “to be sold” on an affidavit is ambiguous – if an affidavit says this, CBP expects records showing when the sale took place

• Affidavits are expected to but need not be signed, nor do they need to be originals – import specialists can call issuers to verify

• The use of letterheads is not required – a letterhead’s implication that the company produces other merchandise does not preclude use of the letterhead

FCPA Perceptions

• We tend to associate the

FCPA with defense

contractors, oil companies and

other big multinationals

• FCPA was passed in the

Carter administration in the

wake of a 1970s Lockheed

scandal involving bribes for

foreign defense contracts and

“Bananagate,” where Chiquita

bribed the president of

Honduras to lower taxes

Reality

• In April 2012, the New York Times

said the SEC asked some Hollywood

studios (including 20th Century Fox,

Disney and Dreamworks) about

payments to government officials in

China to gain the right to film and

show movies there

• The 2010 annual report of Kraft

Foods said it had been subpoenaed

by the SEC for FCPA reasons in

connection with an Indian company

that was part of its acquisition of

Cadbury

Reality

• In a November 2012 SEC filing,

Beam, Inc. said it started an

investigation into whether its

business in India was in compliance

with the FCPA and other US laws

• In 2010, gunmaker Smith &

Western came under FCPA

investigation after a sales executive

was charged with allegedly offering

a bribe to an FBI agent posing as a

government official of an African

country

Reality

• Since 2008, Avon has conducted an internal FCPA investigation after an employee wrote to the CEO about improper spending related to travel with Chinese government officials

• Avon has taken “certain personnel actions, including termination of employment of certain senior members of management,” according to its Form 10-Q filed with the SEC in November 2012

Avon’s problems expand

• The 10-Q says the case involves “travel, entertainment, gifts, use of third-party vendors and consultants, joint ventures and acquisitions, and payments to third-party agents, in connection with our business dealings with foreign governments and their employees”

• “The Company believes that it is probable that the Company will incur a loss related to the government investigations [and] such loss could be material”

And then there’s Walmart

• In December 2011, Walmart

disclosed that it might have

violated the FCPA, that it

started an internal

investigation and that it

alerted the SEC and DOJ

• It said, the investigation

involves “certain matters,

including permitting,

licensing and inspections”

and “discrete incidents in

specific areas”

Walmart story grows

• In April 2012, the NYT

reported that Walmart paid

bribes of $24 to officials in

Mexico to facilitate its rapid

growth there (about one-fifth of

all Walmart stores are in

Mexico)

• After discovering the bribes in

2005, according to the NYT,

Walmart’s leaders engaged in a

“massive cover up” until its

disclosure in 2011

Later Walmart disclosure

• The case could lead to “judgments, settlements, fines, penalties, injunctions, cease and desist orders or other relief, criminal convictions and/or penalties”

• “Could impact the perception among certain audiences of its role as a corporate citizen”

• “The Company can provide no assurance that these matters will not be material to its business in the future”

• Also mentions class action based on claims that the case affected stock value and eleven derivative suits against certain officers and directors who allegedly condoned or participated in illegal activity

Legal cost

• Walmart’s company filings say

that it spent $51 million in legal

fees in 2012

• Avon has spent $280 million in

legal fees

• Siemens, a German

conglomerate, conducted a two-

year internal investigation

following its disclosure of FCPA

violations in 2008 and spent

more than $100 million to law

firms for document review

Top ten FCPA settlements

1. Siemens (Germany): $800 million in 2008

2. KBR / Halliburton (USA): $579 million in 2009

3. BAE (UK): $400 million in 2010

4. Snamprogetti Netherlands B.V. / ENI S.p.A (Holland/Italy): $365 million in 2010

5. Technip S.A. (France): $338 million in 2010

6. JGC Corporation (Japan) $218.8 million in 2011

7. Daimler AG (Germany): $185 million in 2010

8. Alcatel-Lucent (France): $137 million in 2010

9. Magyar Telekom / Deutsche Telekom (Hungary /Germany): $95 million in 2011

10. Panalpina (Switzerland): $81.8 million in 2010

Who’s subject to the FCPA

• Any “issuer” (US or foreign) that

has securities registered, or which is

required to file reports, under the

Securities and Exchange Act of 1934

• Any “domestic concern,” including

any individual who is a US citizen,

national or resident, and any

corporation or partnership that has a

US principal place of business or

that is organized under the laws of a

US state

Who’s subject to the FCPA

• Any other person or entity,

other than an issuer or

domestic concern, “while in

the United States”

• Each of the foregoing

includes any officer,

director, employee, or agent

of such person or any

stockholder acting on behalf

of such person

Extraterritorial reach

• Notice that foreign companies

can be prosecuted under the

FCPA if they violate the Act

anywhere in the world “while

in” the United States

• Similarly, foreign companies

can be prosecuted under the

similar UK Bribery Act if they

violate the Act anywhere in the

world “and carry on a business

or part of a business in the

United Kingdom”

FCPA violations

• “Corruptly” (i.e., with corrupt

intent) to make a “payment”

• To a “foreign official” or

“foreign political party” or “party

official” or “candidate for foreign

political office” or “any person”

while knowing the payment will

be given to such an official, party

or candidate

• For the purpose of obtaining or

retaining business for or with, or

directing business to, any person

Comments

• Foreign officials can be minor officials,

officials of state-owned businesses,

members of royal families and other

non-obvious persons

• Third party payments are sensitive; the

US Justice Department warns to exercise

due diligence and be wary of unusually

high commissions, lack of transparency

in expenses, lack of qualifications of

joint venturers, a history of corruption

in the country where business is

conducted and other “red flags”

Exception – “grease payments”

No violation for payments for “routine governmental action,” such as:

• permits, licenses or other documents to qualify a person to do business in a country

• visas or work orders

• police protection, mail delivery, scheduling of inspections

• phone, power or water services, loading cargo, protecting perishables

• similar nondiscretionary actions

Affirmative defenses

• The payment was lawful under the written laws of the foreign official’s or political party’s country

• The payment was a reasonable and bona fide expenditure, such as travel or lodging, related to (a) promotion, demonstration or explanation of a product or service, or (b) the execution or performance of a contract with a foreign government or agency

FCPA accounting provisions

• A company with listed

securities must keep

books and records that

accurately and fairly

reflect the transactions of

the company and must

maintain adequate

internal controls

• Intended to complement

the anti-bribery

provisions

Penalties under the FCPA

• $2 million criminal penalty for

corporations and other business

entities

• $100,000 and five years

imprisonment for officers,

directors, employees and agents

• The Alternative Fines Act

provides a criminal fine of twice

the benefit that the defendant

sought to obtain by the corrupt

payment (this is the part that

yields such big settlements)

Penalties under the FCPA

• Civil penalties assessed

by the SEC can be as

large as the greater of a

specified amount or the

amount of pecuniary gain

to the violator as a result

of the violation

• The specified amount is

$100,000 for natural

persons and $500,000 for

other persons

Other FCPA sanctions

• Bar from government

contracts

• Ineligibility for export licenses

• Suspension from CFTA,

OPIC and other agency

programs

• Loss of IRS tax deductions

for the expense of unlawful

payments

• Private right of action (e.g., by

a competitor) under RICO

Opinion

• DOJ will issue a written opinion

upon request by any US company

or national as to its enforcement

intentions regarding proposed

business conduct

• DOJ will issue the opinion within

30 days

• Conduct for which DOJ has issued

an opinion stating that conduct

conforms with current enforcement

policy will be entitled to a

presumption of conformity with

the FCPA

November 14, 2012 Resource Guide

A Resource Guide to the U.S.

Foreign Corrupt Practices Act;

available at

http://www.justice.gov/crimi

nal/fraud/fcpa/guidance/

Self Reporting, Cooperation, Remedial Efforts

• Many expected helpful commentary

in the Guide on these topics; but the

Guide is disappointing

• For criminal matters, the Guide

merely makes cross references to

existing, general materials in

Principals of Federal Prosecution of

Business Organizations and the U.S.

Sentencing Guidelines

• No safe harbor and no special rules

for cooperation or remedial effort

Guide on best practices

• Commitment from senior

management

• Codes of conduct and

policies and procedures

• Oversight, autonomy,

resources

• Risk assessment

• Training and continuing

advice

Guide on best practices

• Incentives and disciplinary measures

• Third party due diligence and payments

• Confidential reporting and internal investigation

• Continuous improvement: periodic testing and review

• Pre-acquisition due diligence and post-acquisition integration

Jon Fee

Alston & Bird LLP

950 F Street, N.W.

Washington, D.C. 20004

202 239 3387

jon.fee@alston.com