Foreign Corrupt Practices Act in the Middle East...

Foreign Corrupt Practices Act

in the Middle East 2012 Compliance Strategies Given the Region's Unique Cultural and Governmental Intricacies

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WEDNESDAY, DECEMBER 5, 2012

Presenting a live 90-minute webinar with interactive Q&A

Kevin T. Connor, Partner, Squire Sanders, Riyadh, Saudi Arabia

Gabriel Colwell, Senior Associate, Squire Sanders, Los Angeles

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37 Offices in 18 Countries

Foreign Corrupt

Practices Act in the

Middle East

Gabriel Colwell

5 December 2012

Compliance Strategies

5

What is the FCPA?

• An anti-bribery statute

• A public company accounting statute

• Adopted in 1977 to prohibit bribery of foreign government

officials

• Enforceable by the US Department of Justice (DOJ) and the

Securities and Exchange Commission (SEC)

• Recent FCPA resource guide issued by DOJ/SEC

6

FCPA Overview

• The FCPA applies to:

Any U.S. company and its foreign affiliates;

Any foreign company issuing securities registered with the SEC

• The FCPA has two prongs:

The anti-bribery provisions - prohibit giving or offering money, gifts

or “anything of value” to a foreign government official to obtain or

retain business; and

The accounting provisions - require subject companies to maintain

adequate “books and records” and “internal controls” over financial

transactions and disposition of Assets

• The FCPA prohibits corrupt payments through

intermediaries

7

The FCPA – Anti-Bribery Provisions

• Who is a “Foreign Official?”

A “Foreign Official” is any non-U.S. person acting in an official

capacity for or on behalf of a non-U.S. government agency,

department, instrumentality, or public international organization

A Foreign Official can be:

– Any officer or employee of a foreign government, or any

department, or agency (including Customs Officials)

– Officers or employees of state-owned businesses

– Officials of public international organizations (World Bank,

WHO, International Red Cross)

– Honorary officials whose duties are merely ceremonial, if

they have actual influence in the award of business

8

The FCPA – Accounting Provisions

• Books and Records

Issuers must maintain books and records in reasonable detail such

that the books and records accurately and fairly reflect all the issuer’s

transactions and disposition of assets.

Foreign subsidiaries which are majority or wholly owned by the issuer

are subject to these provisions.

Violations do not require any illegal bribe.

Materiality is not an issue.

o However, disclosure of possible illegal acts may be material.

Issuers may be held strictly liable for the actions of controlled

subsidiaries of foreign affiliates for violations of the accounting and

record-keeping provisions, regardless of any knowledge or suspicion

of wrongful conduct by the issuer

9

The FCPA - Exceptions/Defenses

• The payment to the Foreign Official was lawful under the written

laws or regulations of the foreign country at issue.

• The payment was a reasonable and bona fide expenditure

related to:

The promotion, demonstration or explanation of products or services

The execution or performance of a contract with a foreign government

or agency

• Facilitation (“Grease”) payments:

Payments to expedite or secure performance of a routine

governmental action by a Foreign Official

May violate bribery laws in a foreign jurisdiction and thus present a

risk to the payor

10

The FCPA – Penalties

• Anti-Bribery Penalties:

Corporate.

– Criminal - $2 million per violation or twice the gain or loss

– Civil - $16,000 per violation

Individual.

– Criminal - $100,000 per violation or twice the gain or loss

and/or 5 years in prison per violation

– Civil - $16,000 per violation

– If a fine is imposed on a corporate officer, director,

employee, agent or stockholder, the corporate entity may

not pay, directly or indirectly, that individual’s fine.

11

The FCPA – Penalties

• Books & Records and Internal Control Penalties:

Corporate.


– Civil - up to $500,000 per violation or the gross amount of

gain, disgorgement, fines, and administrative proceedings

Individual.


and/or 20 years in prison

– Civil – up to $100,000 per violation or the gross amount of

gain, disgorgement, fines, and administrative proceedings

• Other Consequences:

– Debarment

– Monitorship

– Damage to reputation

– Drop in share value

– Third party civil suits against the company, officers and

directors

12

US Legislative and

Regulatory Developments

• Nov 2012 DOJ/SEC FCPA Guidance Issued

Little new, but clarifies and consolidates existing guidance

– Gifts and T&E

– Accounting Provisions

– Successor Liability in M&A

– Third Party Agents

– Compliance Programs

Provides Useful Hypothetical Examples

Emphasizes Risk Based Approach

13

Middle East FCPA Risks

Third-party

agents

High-risk

industries

High risk

countries

Business with

governments

14

High Risk Countries –

Corruption Perception Index

1.0 = Most Corrupt (Somalia/N. Korea)

9.5 = Least Corrupt (New Zealand)

*Transparency International Corruption Perception Index 2011

15

Transparency International

CPI Middle East Ratings

TI Corruption Perception Index Rank (out of 183)*

1. Qatar – 22 10. Morocco - 80

2. UAE – 28 11. Egypt – 112

3. Israel – 36 12. Algeria - 112

4. Bahrain – 46 13. Iran – 120

5. Oman - 50 14. Syria – 129

6. Kuwait - 54 15. Lebanon – 134

7. Jordan - 56 16. Yemen – 164

8. Saudi Arabia - 57 17. Libya – 168

9. Tunisia - 73 18. Iraq - 175

*Transparency International Corruption Perception Index 2011

16

2011 Global Integrity Report

Critical of Middle East

• Tracks global trends in 36 countries

• Middle East reform lagging behind the rest of the world

• Steady deterioration in Egypt, Morocco, the West Bank and

Yemen

• Only Israel and UAE scored

higher than “Very Weak”

• Average ME score 51/100;

global average 66/100

* May 2011 Global Integrity Report

17

Enforcement Actions by Industry

18

Overview of FCPA Enforcement

• FCPA prosecutions continue at a record setting pace:

2008: 33 enforcement actions resolved; first year of large fines

($890 million in fines)

2009: 40 enforcement actions resolved; individuals targeted

($644 million in fines)

2010: 48 enforcement actions resolved; non-US companies and

industry sweeps ($1.8 billion in fines)

2011: 15 corporate enforcement actions resolved ($508 million in

fines); 39 individuals indicted, tried or sentenced; Congressional

hearings

2012 YTD: 10 corporate enforcement actions resolved ($211 million in

fines), multiple individual actions;

Nov 2012 DOJ/SEC Guidance Issued

– Assistant Attorney General Lanny Breuer comments “As a result

of our efforts over the past 3 ½ years, robust FCPA enforcement

has become part of the fabric of the Justice Department… there

is no turning back”

19

FCPA Top Ten

Company (Country) Industry Fine Yr

1. Siemens (Germany) Telecom $1.6 billion* 2008

2. KBR/Halliburton (USA) Oil & Gas $579 million 2009

3. BAE (UK) Aerospace &

Defence

$400 million 2010

4. Snamprogetti Netherlands/ENI (Holland/Italy) Oil & Gas $365 million 2010

5. Technip (France) Oil & Gas $338 million 2010

6. JGC Corp (Japan) Oil & Gas $218.8 million 2011

7. Daimler (Germany) Automotive $185 million 2011

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

9 Magyar Telekom/Deutsche Telecom

(Hungary/Germany)

Telecom $95 million 2011

10

.

Panalpina (Switzerland) Logistics $81.8 million 2010

* ($800 million US + $800 million Germany)

20

Middle East Related FCPA Enforcement

Cases

Health South (2004)

Micrus (2005)

Statoil (2006)

Salam (2006)

Oil-for-Food 30+ cases

(2007-2010)

Turk Deltapine (2007)

York International (2007)

Siemens (2008)

Control Components (2009)

United Industrial (2009)

Latin Node (2009)

BAE Systems (2010)

Daimler (2010)

Pride International (2010)

Comverse Technology (2011)

Tyco International Ltd. (2012)

*Alcoa, Inc.


Foreign Corrupt

Practices Act in the

Middle East

2012

Kevin T. Connor

December 5, 2012

22

Defining the Region

• Geography

What is the “Middle East”

• Culture

Nepotism and corruption

• Politics (the Arab Spring)

Has there been any effect?

• History

• Country specific

Each country should be reviewed independently

23

• Complexity of issues and interests

• Different legal systems – Complex Civil Service

• Shari’a Law – Forbids Corruption

• Change as a constant

• Transparency

• Systemic risk

Corruption is deeply rooted and endemic

Understanding the Dynamics in the

Middle East

24

Creating a Risk Matrix for FCPA

Compliance

• Due Diligence and the importance of being

earnest

Due diligence mechanics – checklists, research, site

visits and interviews

Detailed written records

• Market allure and commercial pressure

Balancing competing interests and factors

• Expectation Management

Hurry up and wait

• Building Relationships based on trust

Communication and education

25

• Political risk

Local and national

• Cultural risk

Do you understand your partners ?

• Communication Risk

• Creation and distribution of electronically stored information

• Data Protection

• Third Party Risk

Evaluate and assess the risks

Identify FCPA Risk Factors

26

• Nature of Investment/ Market Activity

Commercial Agency

Joint Venture

Procurement

• Licensing and Company Formation

Facilitation Payments

• Third Party Agent Red Flags

Family or business relationships with foreign

government official or royal family member

Is specified or recommended by a government official

Is owned by a government entity or refuses to disclose

owners or partners


27

Refuses to comply with the company’s code of ethics

and business conduct or to provide FCPA certifications

Advanced payments or unusually high commission

Requests to pay a non-related person/entity or to a

country with weak banking transparency

Appears unqualified or understaffed to perform the

contracted activities

Requests that his identity be kept hidden

Requests that he be paid in cash or up front

Requests that the company create false documents

Seeks reimbursement for unusually high, ill-defined or

undocumented expenses

Is indifferent to local laws and regulations

Reputation, reputation, reputation


28

• Standard Downfalls

“Head in the sand” attitude toward agents,

consultants and partners

Failure to require third parties to comply

with anti-bribery requirements

Lack of adequate training of foreign nationals

in charge of operations

Failure to establish adequate transparency

of financial and operational reporting

Lack of management and internal audit

oversight/monitoring

Compliance program is not a living, breathing

program but just a paper tiger


29

• Pre investment phase

Responsible FCPA risk analysis

Assign a likelihood to the risk

Cost benefit review

• Post investment phase

Risk management plan

Corporate governance / compliance

Record Keeping

• On going monitoring

A Suggested Approach

30

• Islamic Law

Prohibition against corruption deeply rooted in the

Quran

• Anti-Bribery Legislation of Saudi Arabia

1930s Abuse of Position

Combating Bribery Law (“CBL”) Royal Decree No. M/36

(1992)

Civil Service Law, Royal Decree No. M/49 (1977)

Officer Service in the Armed Forces

Shoura Conncil Rules

National Anti-Corruption Commission (2011)

Local Anti-Bribery Laws, Saudi Arabia

31

• Key Provisions of CBL

Definition of Bribery – Every Public Employee is

prohibited from accepting, receiving or soliciting a bribe

for himself or a third party to (i) perform a duty, (ii) cease

performing a duty, (iii) neglect a duty, (iv) not performing

a duty or (v) to use real of alleged authority. A bribe is

any benefit or privilege, promise or gift whether material

or not.

Definition of Public Employee – Anyone who works for

the government, any governmental institutions or

government-owned entity

Penalties

Enforcement


32

• Investigation Authority

Corruption investigation department

Criminal investigation department

Various control authorities.

• Gift Giving

Internal Controls

Gratuities

Facilitation Payments

Entertainment

Receptions, sponsorship of events

Lodging, and transpiration

• E-Government

• Public Procurement


33

• Overview

• UAE Federal Penal Code

Definition of Bribery

• UAE Federal Money Laundering Law

• Dubai Government Human Resources

Management Law

• Gift Giving

Value of Gifts/Hospitality

Frequency

Local Anti-Bribery Laws, Untied Arab

Emirates

34

• Gift Giving, continued

Intention

Relevance to Receipient/Offerer

• Practical Guidelines

Marketing

Conduct of Duties

Favorable Treatment

Local Anti-Bribery Laws, Untied Arab

Emirates

35

Worldwide Locations

• Cincinnati

• Cleveland

• Columbus

• Houston

• Los Angeles

• Miami

• New York

• Northern Virginia

• Palo Alto

• Phoenix

• San Francisco

• Tampa

• Washington DC

• West Palm Beach

• Bogotá+

• Buenos Aires+

• Caracas+

• La Paz+

• Lima+

• Panamá+

• Rio de Janeiro

• Santiago+

• Santo Domingo

• Beirut+

• Berlin

• Birmingham

• Bratislava

• Brussels

• Bucharest+

• Budapest

• Frankfurt

• Kyiv

• Leeds

• London

• Madrid

• Manchester

• Moscow

• Paris

• Prague

• Riyadh

• Warsaw

• Beijing

• Hong Kong

• Perth

• Seoul

• Shanghai

• Singapore

• Sydney

• Tokyo

North America Latin America Europe & Middle East Asia Pacific

+ Independent Network Firm


Q & A

Thank You

Gabriel Colwell

[email protected]

Kevin T. Connor

[email protected]

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