FCPA Panel - Directors and Officers Conference - 2011

Foreign Corrupt Practices Act – Yes, This is Something Directors and Officers Need to Brush Up On!

Summit 2011 Directors & Officers Training ConferenceDecember 1, 2011

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© 2011 Protiviti Inc. An Equal Opportunity Employer. This document is for your company's internal use only and may not be distributed to any other third party.

This is What Your Business Sees

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This is What the Prosecutor Sees

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Today's Discussion Topics

What is the Foreign Corrupt Practices Act?

FCPA Basics

Hot Issues in FCPA Compliance

Monitoring Considerations and Best Practices

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FCPA – Overall Summary

ANTI-BRIBERY PROVISIONS

BOOKS & RECORDS PROVISIONS

Prohibits bribery of foreign government or political officials for the purpose of obtaining or retaining business or

securing any improper business advantage

Requires SEC-registered or reporting issuers to

make and maintain accurate books and

records and to implement adequate internal

accounting controls

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What is the Foreign Corrupt Practices Act?

An anti-bribery statute

• Federal statute passed by post-Watergate Congress in 1977 to prohibit bribery of foreign government officials for the purpose of obtaining or retaining business

DOJ and SEC have jurisdiction; either or both may investigate and charge

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Continued Robust Enforcement

Department of Justice – Enforcement Action Overview

2004 2005 2006 2007 2008 2009 2010 As of Oct2011

45

8

18

21

3230

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Number of DOJ Enforcement Actions

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Headline Risk

Former Officer and Director of a Halliburton Subsidiary Pleaded Guilty to Foreign Bribery and Kickback Charges

Sept. 3, 2008 (DOJ) - WASHINGTON – Albert Stanley pleaded guilty to conspiring to violate the Foreign Corrupt Practices Act (FCPA) by participating in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement and construction (EPC) contracts. The EPC contracts were valued at more than $6 billion.

Stanley admitted that he authorized the hiring of two agents to pay bribes to a range of Nigerian government officials to assist the joint venture in obtaining contracts. Stanley also admitted that, at crucial junctures before the award of the contracts, he and others met with three successive former holders of a top-level office in the executive branch of the Nigerian government to ask the office holder to designate a representative with whom the joint venture should negotiate bribes to Nigerian government officials. The joint venture paid approximately $132 million to one consulting company and more than $50 million to the other during the course of the bribery scheme. Stanley admitted that he had intended for the agents' fees to be used, in part, for bribes to Nigerian government officials.

In a related civil action, the Securities and Exchange Commission (SEC) today charged Stanley with violating the anti-bribery provisions of the FCPA and related provisions of the federal securities laws. On the two conspiracy counts, Stanley faces a maximum penalty of 10 years in prison and a $500,000 fine. Under his plea agreement, which the court accepted at today's guilty plea hearing, Stanley faces a sentence of seven years in prison and the payment of $10.8 million in restitution. A sentencing date has not been set.

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Headline Risk (continued)

Willbros. Group Inc. Enters Deferred Prosecution Agreement and Agrees to Pay $22 Million Penalty for FCPA Violations

May 14, 2008 (DOJ) - WASHINGTON – Willbros Group Inc. (Willbros Group), a publicly-traded company that provides construction, engineering and other services in the oil and gas industry, and Willbros International Inc. (Willbros International), the wholly owned subsidiary through which it conducts international operations, have agreed to pay a $22 million criminal penalty in connection with corrupt payments to Nigerian and Ecuadoran government officials in violation of the Foreign Corrupt Practices Act (FCPA).

In a related matter, Willbros Group reached a settlement today with the Securities and Exchange Commission (SEC) in which the company agreed to pay $10.3 million in disgorgement of all profits and pre-judgment interest in connection with the corrupt payments to the Nigerian government officials. In total, Willbros agreed to pay more than $32 million in penalties, disgorgement and interest in the criminal and SEC cases.

In recognition of Willbros' thorough review of the improper payments, the companies' exemplary cooperation, the companies' implementation of enhanced compliance policies and procedures, and the companies' engagement of an independent corporate monitor, the Department has agreed to defer prosecution of these companies for three years. If Willbros Group and Willbros International abide by the terms of the agreement, the Department will dismiss the criminal information when the term of the agreement ends.

FCPA BasicsDavid Rudd, Partner, Ballard Spahr, LLP

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FCPA Basics: Anti-Bribery Provision

It is unlawful for:

an issuer, domestic concern, or anyone acting within the jurisdiction of the United States

with "corrupt intent"

to directly or indirectly

offer, pay, promise to pay, or authorize payment

of "anything of value"

to a "foreign official"

for the purpose of obtaining or retaining or securing any improper advantage

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FCPA Basics: Who is Covered

U.S. citizens and nationals

Businesses organized in the United States (including overseas branches)

Officers, directors, employees, agents and stockholders acting on behalf of such businesses

U.S. residents

Businesses organized outside the U.S. with principal place of business in the U.S.

Non-U.S. issuers of U.S. securities

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FCPA Basics: Impermissible Actions

Some act in furtherance of an:

• Offer

• Gift

• Promise

• Authorization of an offer, gift or promise

Of anything of value

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FCPA Basics: "Corrupt" Purpose

Knowledge

Deliberate recklessness

Includes willful blindness

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FCPA Basics: To a Foreign Government Official

Officials at all levels of government (national, regional, etc.)

Officials of public international organizations

Political parties, party officials and candidates

Officers and employees of state-owned or controlled companies

Any agent or other intermediary acting in an official capacity on behalf of any of the foregoing

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FCPA Basics: To Gain an Unfair Business Advantage

To violate the FCPA, the payment or gift must be to:

• Influence an official act or decision of a foreign official or

• Induce the official to use influence or

• Secure an improper advantage

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FCPA Basics: Exception

The FCPA allows facilitating or "grease" payments to foreign government officials for routine, non-discretionary actions, such as:

• Obtaining permits or licenses to qualify to do business

• Processing governmental papers (e.g., visas)

• Providing police protection

• Providing mail delivery, phone service, power and water supply, loading and unloading cargo

• Scheduling inspections associated with contract performance or transit of goods across country

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FCPA Basics: Books and Records Provision

The FCPA also contains internal accounting control and record keeping requirements

• Objective is to ensure that a company maintains reasonable control over its assets and all transactions involving its assets

• Payments made in connection with foreign sales transactions, including T&E, payroll, and commissions, must be accurately recorded

• Often, the internal controls and books and records requirements are where the DOJ or SEC have the strongest case for enforcement

Hot IssuesSusan Muck, Partner, Fenwick & West

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Hot Issues In FCPA Compliance: Third-Parties

Illegal if:

• Made under circumstances that indicate payment would be passed along to a prohibited recipient

• Intended to reach a prohibited recipient

Distinguish between payments for services rendered by the intermediary vs. those intended to reach government officials

The SEC has noted that a payment is suspicious if it is "substantially in excess of the going rates" for services rendered

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Hot Issues In FCPA Compliance: "Red Flags"

"Red Flags" are situations or circumstances in which extra scrutiny should be applied

If employees or consultants have knowledge of improper or unethical business conduct, the employer may be held responsible for the conduct

Knowledge includes ignoring "Red Flags" or information or circumstances that a prudent person would investigate

"Red Flags" do not necessarily mean that business cannot be conducted

Making payments in a country with a history of FCPA violations or corruption (some Middle Eastern, African and Asian countries)

Making payments to persons or entities in third world countries

Customer suggests bid be made through a specific representative

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Hot Issues In FCPA Compliance: "Red Flags"

A proposed representative or distributor that:

• Has reputation for or been accused of improper business practices

• Has influence on buying decision

• Has relationship with the government or a government official

• Asks for unusually large commission, profit or other payments compared with the going rate

• Requests unusual bonuses for operational managers or others

• Insists on receiving commission or other payment before award decision

• Requests that commissions or other payments be made in an unusual manner

• Refuses to make representations about FCPA compliance

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Hot Issues In FCPA Compliance: Gifts

Gift:

Modest / nominal in costRoutinely givenNot money (e.g., food or flowers)

Items:

SmallWith company logoNot related to order

To foster goodwill generally

Bribe:

ExtravagantExtraordinaryMoney (anytime)

Items:

Large (color TV, refrigerator)

Specified by recipientRelated to an order

To get an order or reward placement of an order

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Hot Issues In FCPA Compliance: Entertainment

Entertainment:

Very reasonable

Customary (e.g., golf or dinner)

In your presence

Decision maker and primary participants

To foster goodwill generally

Bribe:

Extravagant

Not customary (e.g., all expense trip to resort)

You are not present

Extra "troops" (other individuals)

To get an order or reward placement of an order

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Hot Issues In FCPA Compliance: Travel

Business Travel:

Reasonable accommodations

Narrowly limited to business purpose (e.g., product demonstration or testing)

Length limited to business purpose

Officials Only

Bribe:

Extravagant accommodations

Unrelated stops on itinerary not related to business purpose(e.g., trip includes stop at Orlando Disney World)

Extra days for vacationing or sightseeing

Many family members

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What Does FCPA Non-Compliance Cost You?

Criminal Companies fined $2 million per violation

Individuals fined $100,000 per violation and/or five (5) years in prison

Fines may be higher under Alternative Fines Act

• Up to twice the benefit sought by the action

Company cannot pay fines on employees' behalf

Civil $10,000 per violation for companies and individuals

In SEC enforcement action, court may impose an additional fine not to exceed the greater of:

• Gross amount of the pecuniary gain or

• Specified dollar limitation based on the egregiousness of the violation

– $5,000 to $100,000 for a "natural person"

– $50,000 to $500,000 for any other person

Attorney General or SEC may exercise civil injuncture and subpoena power

Source: Lay-Person's Guide to FCPA – US Department of Justice

27Other Hot Issues: UK Bribery Act v. FCPA

Covers bribery by an associated person of private persons (as well as an associated person of governmental persons)

Covers bribes paid to associated persons of a company Associated persons defined as anyone who performs services for or on

behalf of the company Does not require that the payments are made with corrupt intent No exception for facilitation payments Commercial organizations strictly liable for the offense of “failure to prevent

bribery”• Affirmative defense for organizations based on “adequate procedures”

• No affirmative defense for bona fide reasonable expenditure

Violation may cause enforcement under Proceeds of Crime Act 2002• Proceeds derived from bribery may be considered money laundering

• Directors and company may be liable

Monitoring ConsiderationsJamon Jarvis, General Counsel

Nature’s Sunshine ProductsJohn Springer, Assistant Corporate Controller

Cadence Design Systems

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Best Practices

Know your business partners, agents and consultants

• Are they state-owned?

• Are any employees government officials?

Know your exposure to or contacts with foreign government officials (including employees of state-owned businesses)

Understand the services to be provided and how the payments will be made

Conduct a "red flag" analysis

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FCPA Compliance Audit Sample Scope

Policies and procedures

• FCPA

• Code of conduct / business ethics

• Affirmation / confirmation

Distributor, agent / sub-agent and representative due diligence

• Due diligence questionnaire

• Completed background check

• Agreements

• Affirmation / confirmation

• Sponsor form

• Bank information

Training

Foreign bank accounts and bank reconciliations

Payments and gifts

• Distributors, agents and representatives

• Foreign government officials

• Travel and expenses

• Consulting fees

Foreign financial statements

Petty cash funds and disbursements

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Business Partner Due Diligence Analysis

Factors to consider in evaluating FCPA risk:

• Territory's reputation for corruption

• Industry's reputation for corruption

• Competence of business partner

• Integrity of business partner

• Business partner's relationship to foreign government officials

• Certification of compliance

• Reasonableness and method of payment

• Ensure compliance with local law

• Integrate FCPA safeguards into the contracts

• Continuing oversight of business partner's activities

• Maintenance of accurate books and records

• Consistent standards

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Lessons Learned

Understand the context in which you do business locally

• Compliance programs that are successful in the U.S. may experience challenges in foreign subsidiaries

Internal control should be proactive, not reactive

• Devise and maintain internal control

Due diligence and oversight of agents

Due diligence on potential business partners

Reinforce compliance efforts in high-risk countries

Business culture – set tone at the top about what is acceptable and what is not

Competition – highly competitive market creates incentives for bribery – be alert for these situations

Accounting controls – document payments and other key processes

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FCPA – Key Part of Risk Management

Skimming

Fraudulent Financial Reporting

Bribery

Corruption

Kickbacks

IP Theft

Tax Schemes Conflicts of Interest

Employee Theft

Payroll schemes

Fraudulent Invoicing

Ghost Employees

Fictitious Sales

Misleading Revenue Bookings Misdirection of Funds

Inappropriate stock transfers

Inventory Theft

Inappropriate Use of Customer Data

Concealed Liabilities

Fictitious Revenues

Scrap Theft

Ongoing Risk Management & Key “Take-Aways”Jason Roberts, Director, Protiviti

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What You Did Five Years Ago is Not Enough Today

Review FCPA policies and procedures

Review FCPA training program

Review current agents / consultants and due diligence files for each

Review last FCPA audit results

Conduct yearly audits and compliance reviews

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FCPA Risk Monitoring

Follow-up on non-compliance with certification / affirmation of Code and related training

FCPA compliance audits

FCPA risk assessment considerations

Extended "in-country" internal audit procedures

Quarterly review of payments

• Agents

• Vendors

"Vendor-right-to-audit" clause

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FCPA – Key "Take-aways"

No longer an option for U.S. companies doing business abroad

Liability risks are too great

Costs of investigations are significant

Legal advisers will recommend assurances and due diligence because. .. .

• The presence of certifications and comprehensive due diligence will limit the risk of prosecution by the U.S. government

• Identifying corruption risks will enable clients to evaluate the true value of the transaction

• It is important for the parties to understand and to agree how business will be conducted

FCPA Panel - Directors and Officers Conference - 2011

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Transcript of FCPA Panel - Directors and Officers Conference - 2011