Foreign Corrupt Practices Act - Dorsey & Whitney...

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© Dorsey & Whitney LLP. All Rights Reserved.

Foreign Corrupt Practices Act:A Guide to U.S. Anti-Bribery Law

Roger J. Magnuson

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Guide to U.S. Anti-Bribery LawForeign Corrupt Practices Act

Three Components to this Presentation:

• Overview of the Law

• Summary of Effective Strategies for Managing Risks of FCPA-Related Liabilities

• Discussion of What Dorsey Offers to Clients in FCPA-Related Matters

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What is the Foreign Corrupt Practices Act

• The Short Definition: A U.S. law that prohibits companies engaged in business in foreign jurisdictions from payments to governmental representatives.

• Two Components of the FCPA:– The Prohibitions on Improper Payments– The Accounting Regulations

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Why Congress Passed theForeign Corrupt Practices Act

Who Said This?: “I am NOT a Crook.”

The FCPA was enacted by Congress in the wake of the Watergate scandal.Congress passed the FCPA in response to a Securities & Exchange Commission study. The study revealed that over 400 U.S. companies admitted making questionable or illegal payments (in excess of $300M) to foreign government officials, politicians and political parties.The mentality during that era was: “When in Rome, do as the Romans.” Bribery is an accepted business practice in some foreign jurisdictions. So, it is fine for U.S. companies to adapt to that business culture.Current regulatory regimes did not apply or faced jurisdictionallimitations—most conduct outside of U.S. borders is not within jurisdiction of U.S. courts.

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The Basics of the Bribery Prohibition• Four Questions in Assessing Liabilities

under the FCPA:– WHO is potentially liable?

– Was an IMPROPER PAYMENT made?

– Who was the RECIPIENT of the payment?

– Did the violator have CORRUPT INTENT?

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The Basics of the Bribery Prohibition

Question Number 1: WHO is potentially liable? An issuer, domestic concern, or a foreign national or business. – Issuer: A corporation that has issued securities that have been registered in

the United States or who is required to file periodic reports with the SEC. – Domestic Concern: Any individual who is a citizen, national, or resident of

the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States.

– Foreign National or Business: The 1998 amendments expanded the FCPA to assert territorial jurisdiction over foreign companies and nationals. A foreign company or person is now subject to the FCPA if it causes, directly or through agents, an act in furtherance of the corrupt payment to take place within the territory of the United States. There is, however, no requirement that such act make use of the U.S. mail or other means or instrumentalities of interstate commerce.

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The Basics of the Bribery ProhibitionQuestion Number 2: Was an IMPROPER PAYMENT made?– The FCPA prohibits paying, offering, promising to pay (or authorizing to

pay or offer) money or anything of value.– The FCPA prohibits payments made in order to assist the firm in obtaining

or retaining business for or with, or directing business to, any person. This includes any payment intended to influence any act or decision of a foreign official in his or her official capacity, to induce the official to do or omit to do any act in violation of his or her lawful duty, to obtain any improper advantage, or to induce a foreign official to use his or her influence improperly to affect or influence any act or decision.

– The Department of Justice interprets “obtaining or retaining business”broadly. The term encompasses more than the mere award or renewal of a contract. It should be noted that the business to be obtained or retained does not need to be with a foreign government or foreign government instrumentality.

– There are exceptions to the anti-bribery provision for “facilitating payments for routine governmental action.” But many foreign countries now ban these “grease payments” under their own law – China, for example.

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The Basics of the Bribery ProhibitionQuestion Number 3: Who was the RECIPIENT of the payment?

– The FCPA applies to payments to any public official, regardless of rank or position.

– The prohibition extends only to corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office.

– A “foreign official” means any officer or employee of a foreign government, a public international organization, or any department or agency thereof, or any person acting in an official capacity.

– Questions arise with respect to a member of royal family, or a member of a legislative body. An official of a state-owned business enterprise is generally a “foreign official.”

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The Basics of the Bribery Prohibition

Question Number 4: Did the violator have CORRUPT INTENT?– The person making or authorizing the payment must have a

corrupt intent, and the payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person.

– The FCPA does not require that a corrupt act succeed in its purpose. The offer or promise of a corrupt payment can constitute a violation of the statute.

– This intent can be proved by circumstantial evidence. Proceeding in the face of “red flags” waving can be evidence of corrupt intent.

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Accounting ProvisionsWhat the Law Requires:

• Purpose is to Complement the Anti-Bribery Aspects of the Law: If accounting procedures are followed, it will be more difficult for violators to go undetected.

• Practical Compliance: All transactions should be recorded. No “off the books” transactions. No cash transactions.

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Effective Strategies“An ounce of prevention is worth a pound of cure.”

--Benjamin Franklin

• Why the FCPA Presents Unique and Seemingly Insurmountable Challenges.– Conduct is usually covert by nature– Conduct is typically at a remote location far from the

physical location of the compliance officers– The temptations are sometimes compelling– The rewards for the wrongdoers can be lucrative and far

exceed their normal remuneration

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Effective Strategies: Ten Ways to Ensure Compliance and Mitigate Risks

“Best Practices” No. 1: A Basic FCPA Policy: The first step to mitigating risks of an FCPA violation is to ensure that the company has written policies that expressly state what is prohibited. • A recent survey by PwC revealed that 80% of companies

surveyed had some type of compliance program. Only 22% stated that they were “very confident” that the program identifies and mitigates the risk of corruption.*

• Must be tailored, not “one size fits all.”

*Confronting Corruption: The Business Case for an Effective Anti-Corruption Program (PricewaterhouseCoopers, 2008)

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“Best Practices” No. 1: A Basic FCPA Policy (cont’d)

• Essential components in any program should include general prohibition and corporate philosophy articulation of underlying principles; specific guidelines; appropriate examples; helplines for guidance and reporting; and whistleblower protection.

• Relevant compliance policies and communications about the policies should, where practical, be translated into a foreign language where appropriate.

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“Best Practices” No. 2: Training and Testing of Management and Sales Staff:

After the policy is in final form, it should be rolled out to the relevant sales staff and other employees.

• The Goal: Participants should be provided with an educational overview of the law, designed to inform, entertain and terrify.

• The Content: It should give illustrations, anecdotes and practical calamities that come with ignoring the law, or being blissfully ignorant of it.

• Examples of Horrific Results of Non-Compliance: Titan Case—Record Breaking Fine and Illustration of Other Costs.

• Interactive Testing is Probative of Serious Compliance Intent.

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“Best Practices” No. 2: Training (cont’d)– Story: Lockheed announced intent to acquire Titan. During due

diligence, Titan discovered violations of the FCPA. The violations, which were reported to the SEC, resulted in Lockheed Martin first dropping its offering price by $200 million and eventually abandoning the deal. The U.S. government then launched its investigation.

– The Result: The Record Penalties • $13 million criminal fine.• $15.4 million judgment for disgorgement of profits and prejudgment

interest.• The combination of the civil and criminal penalties was over $28

million, the largest FCPA penalty to date for a public company.• The $28 million fine is particularly staggering given the fact that the

improper payments were only $2 million.– A Further Result: Cost of Investigation and Prosecution

• 115 lawyers• 1,600 boxes of e-mails and documents• 165 interviews in 21 countries

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“Best Practices” No. 2: Training (cont’d)• The Audience: The participants in the training program, of course,

must include anyone involved in sales, finance and all members of management. Specialized training for employees involved in purchasing should also be provided for the reasons outlined above. An additional reason to include purchasing personnel in the training is that purchases are sometimes used to disguise improper payments by inflating the prices for goods or services to disguise a kickback.

• The company should maintain records with respect to the materials used in the training, who participated and who successfully completed proficiency testing. Employees should also confirm in writing their commitment to adherence.

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“Best Practices” No. 3:Statement of Compliance and Commitments:

It is advisable for the company’s key executives and management, particularly those involved in sales, to certify that they will adhere to and execute the policy and all applicable laws at the outset.

Serves at least two purposes: (1) re-enforces the message for all employees; (2) will be favorably perceived in the event of a violation (the officer or manager breached his or her express promises to the company).

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“Best Practices” No. 4: Review of Contracts:

Similar controls and certifications should be implemented with respect to contracts with distributors, agents and manufacturer representatives. – Contracts concerning these types of relationships should

be reviewed to ensure that the distributor is affirming that its principals and representatives have knowledge of the Code of Conduct and intend to comply with all applicable anti-bribery laws.

– Controls relating to payment of commissions and other compensation to agents should mirror the controls applicable to commissions and compensation paid to employees.

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“Best Practices” No. 5: Review of HR Issues:

As part of the review and enhancement of the compliance program, the company should consider whether and how HR policies and compensation guidelines can indirectly advance compliance objectives.

Policies such as reasonable mechanisms to oversee discretionary bonuses and commission payments and other compensation controls can be implemented to mitigate a risk that a legitimate form of compensation provides undue motivation to engage in illegal behaviors—i.e., means of facilitating an improper payment.

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“Best Practices” No. 6: Consultants Should be ScrutinizedA typical and permissible practice that is often abused by the FCPA violator is retention of well-connected consultants. • The policy should reflect what consultants may be paid to do and what they

cannot be paid to do. • Due diligence and analysis should be performed to determine if there are any

current consultants who should be displaced. Those consultants who remain and will be used on a regular basis should receive training tailored to their role in the process so that they also understand the policies.

• Due diligence and analysis should also be conducted on all prospective consultants. Concerns should be raised if a consultant is paid an exorbitant amount of money in any given period. If the consideration is truly limited to permissible services the payments should reflect the value of those services.

• In light of these concerns, consideration should be given to a policy and practice that requires consultants to sign a statement of compliance in any written agreement with the company, certifying that they know and understand the subsidiary and parent company’s Code of Conduct and that they will not violate any other applicable anti-bribery laws.

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“Best Practices” No. 7: Recordkeeping

Because the FCPA not only prohibits improper payments but also mandates adequate recordkeeping, a review of the subsidiary’s accounting controls should be completed. – The “cardinal rule” of an FCPA-compliant accounting program is

documentation of expenditures. Thus, at a minimum, every marketing expense should be documented.

– The paper trail can discourage some improper payments. At the same time, particularly cunning violators use receipts and documentation as a means to facilitate improper payments by creating phony receipts for services or goods that were never provided.

– Efforts should be made to retain documents reflecting that the goods or services were in fact provided.

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“Best Practices” No. 8: Subsidiaries Report

We would also recommend that the subsidiary make a direct report to the parent corporation each month or quarter in connection with the preparation of regular financial reports. • The report must be certified by the officers and directors of the

subsidiaries (similar to Sarbanes-Oxley requirements) as to the following: (1) the books and records are accurate; (2) there are no hidden funds or other company accounts not reflected in the report; (3) based on due diligence performed by the subsidiary, there have been no improper payments made during the period; and (4) no ongoing investigations are underway unless otherwise reported.

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“Best Practices” No. 9: Marketing Expenses

Because marketing expenses are frequently used to mask improper payments, particular controls and processes should be established for all such expenses. • A system should be established whereby the greater the marketing

expense, the more management approvals will be required. • Ordinary marketing expenses under a certain amount require

documentation that might be expected—e.g., receipts for a dinner accompanied by a form which indicates who attended the dinner, the amount, etc.

• More significant documentation should be required for greater expenses. Any written proposal for an extraordinary marketing expense above a certain threshold should include a statement of FCPA and local law compliance to be signed by the individual requesting the expenditure approval.

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“Best Practices” No. 10:Use of Outside Expertise and Periodic Updates

Self-policing requires knowing when to seek an independent audit or review.• Law firms• Accounting firms• Forensic IT services• Background checks• Periodic review and updates underscore that program is real and

effective

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The Contexts in which FCPA Issues Arise

• Compliance Programs

• Business Conduct Training

• Analysis of Particular Transactions

• Internal Investigations

• Responding to Governmental Investigations

• Litigation by Shareholders

• M&A and IPO Due Diligence

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