Compliance, Cooperation, and the

New FCPA Resource Guide

William Pollard

James Harrington

Brandon B. Smith

Richard Konrath

Mark S. Cohen

Agenda for the Presentation

Overview of the Resource Guide

• Selected Topics

• Certain Open Issues

Corporate Compliance Programs under the Resource Guide

Self-Reporting and Cooperation under the Resource Guide

Experience of In-House Counsel

• Recent Trends in Implementing a Global Anti-Corruption Compliance

Program

Questions

Overview of the Resource Guide

Selected Topics Covered by the Guide

Gifts and entertainment expenses

No monetary cut-offs; enforcement has only focused on small

payments and gifts when part of a systematic bribery scheme.

• Facilitating payments

No monetary cut-offs; whether payment is proper turns on “the

purpose of the payment rather than its value.”

• Definition of “foreign official”

No bright-line test; gov’t continues to use multi-factor test.

Selected Topics (cont’d)

• Successor liability

Enforcement actions against successor companies only where violations are “egregious and sustained” or successor participated in or failed to stop them.

• Jurisdiction over foreign companies

Broad jurisdiction over foreign non-issuers that “engage in any act in furtherance of a corrupt payment while in the territory of the United States.”

Foreign non-issuers may be liable for aiding and abetting, conspiring with, or as agent of a U.S. company, regardless of whether foreign non-issuer acts in U.S.

Selected Topics (cont’d)

• Elements of an effective corporate compliance program

• Strong program not only helps prevent violations, but is a significant factor in gov’t decision whether to bring an action or in the penalty sought

• Enforcement Issues

• Guide stresses the benefits of self-reporting and cooperation

• Includes DOJ and SEC frameworks for cooperation, hypotheticals, and examples of past declinations

Open Issues Remain

• Guide largely a compilation of previously available public source material

• Judicial opinions, complaints, press releases, materials from prior enforcement actions

• Does not resolve the many open interpretive issues. Some examples:

• Gifts and Entertainment. Few examples at lower end of the scale; extravagant gifts such as $12K birthday trip for Mexican official are clearly improper and do not provide guidance with respect to closer calls.

• Facilitating Payments. Continued uncertainty; whether payment is proper turns on “purpose of the payment rather than its value”

New Approaches

• While little is substantively new, the Guide hints at some

new approaches.

• Two examples:

1. Elements of a corporate compliance program

2. Self-reporting and cooperation

Corporate Compliance Programs

under the Resource Guide

New Approach:

“Hallmarks of Effective Compliance Programs”

• Guide offers a list of nine “Hallmarks” of

corporate compliance, noting:

• Compliance is not “one-size-fits-all.”

• Compliance programs should be tailored to a

company’s corruption risks.

The Hallmarks

1. A clearly articulated anti-corruption policy and a

strong commitment to institute a “culture of

compliance”

2. A clear, concise, and accessible code of conduct,

with policies and procedures tied to business risks

such as third party agents, or gifts and entertainment

Hallmarks (con’t)

3. Oversight and management by one or more senior

executives with sufficient resources and autonomy

4. A risk-based program that allocates compliance

resources to areas of greatest risk, rather than a one-

size-fits-all program that is “spread too thin”

Hallmarks (con’t)

5. Periodic training and certification for directors,

officers, employees and, where appropriate, agents

and business partners

6. Clear disciplinary procedures for misconduct and

positive incentives for superior compliance leadership

Hallmarks (con’t)

7. Risk-based due diligence on agents, consultants,

and distributors

8. A mechanism for employees confidentially to report

misconduct, and a process for investigating allegations

9. Periodic testing, review, and improvement of the

compliance program to ensure its effectiveness

Basis for the Compliance “Hallmarks”

• Prior enforcement actions (including an April

2012 Morgan Stanley declination)

• Federal sentencing guidelines

• Public statements

What’s New

• List of “hallmarks” arguably amounts to DOJ/SEC

approval of key compliance elements / best

practices

• An appropriate FCPA compliance program can offer

protection even if it does not prevent the violation

• DOJ and SEC understand that “no compliance program can ever

prevent all criminal activity . . . . and they do not hold companies to

a standard of perfection.” to a standard of perfection.” Id.

The Morgan Stanley Case

• First publically announced declination by the DOJ and

SEC following an FCPA investigation.

• Suggests that the compliance “Hallmarks” and the

Guide’s comments about not holding companies to

perfection have substance.

• Resolved in April 2012, while Guide was being drafted.

• Referred to several times in the “Enforcement” and

“Resolution” sections of the Guide.

Morgan Stanley Case: Basic Facts

Garth Peterson was a Managing Director at Morgan Stanley in

charge of the firm’s Shanghai real estate portfolio.

Between 2004 and 2007, Peterson caused Morgan Stanley to

transfer interests in real estate deals to a Chinese government official

in return for help with government approvals and deal leads.

DOJ charged Peterson with conspiring to circumvent Morgan

Stanley’s internal controls; SEC charged him with bribery and internal

controls violations.

Both DOJ and SEC declined to bring any enforcement action against

Morgan Stanley.

Morgan Stanley’s Compliance Program

• In announcing decision not to charge Morgan

Stanley, DOJ cited company’s strong compliance

program.

• Compliance Details from DOJ press release:

• Anticorruption policy prohibited bribery and addressed risks

associated with gifts, entertainment, travel, and other items

• Policy was regularly updated to reflect regulatory

developments and specific risks

Morgan Stanley’s Compliance Program (con’t)

• Employees received frequent training

• From 2002 to 2008, Asia-based employees trained 54

times; Peterson trained 7 times and reminded to comply

with the FCPA at least 35 times

• Co. monitored transactions, performed random

audits, and tested payments

• Conducted due diligence on new business partners

and subjected payments to stringent controls

Significance of Morgan Stanley Case

• “Hallmarks” may be seen as quasi-codification of the

Morgan Stanley factors

• Case is evidence that gov’t is serious about concrete

benefits from robust compliance – even where the

program fails to prevent a violation

• Issue to watch: will the Morgan Stanley factors /

“hallmarks” become an effective “compliance

defense”?

Self Reporting and Cooperation

under the Resource Guide

The “New” Approach

No new information but consolidation of information and additional details

Provides self-reporting and cooperation guidelines in a succinct format

DOJ and SEC place a HIGH PREMIUM on self-reporting and cooperation

Clearly outlines key aspects and considerations for companies and individuals

Presents guidelines for both DOJ and SEC – Criminal vs. Civil

Basis of Framework

The FCPA Resource Guide outlines certain factors1 which determine

the need for an investigation, charging a corporation, and negotiating

plea agreements

9. Remedial actions taken, including efforts to

improve a compliance program

4. Collateral consequences (disproportionate

harm to shareholders, employees, etc.)

8. Existence and effectiveness of compliance

program

3. Corporation’s history of similar conduct,

including prior enforcement actions

7. Timely and voluntary disclosure and

cooperation

1. Nature and seriousness of offense, including

the risk of harm to the public

2. Pervasiveness of wrongdoing within the

corporation

5. Adequacy of the prosecution of individuals

responsible for the company’s malfeasance

6. Adequacy of remedies such as civil or

regulatory enforcement actions

These 9 Factors include:

1 As prescribed in Principles of Federal Prosecution of Business Organizations, set forth in Chapter 9-28.000 of the U.S. Attorney’s Manual

Guidelines for Criminal Cases (DOJ)

Follows Principles of Federal Prosecution of Business Organizations

– considers a company’s cooperation including:

• Voluntary and Timely disclosure

• Provides relevant information and evidence (identify individuals and senior

executives involved)

• Acceptance of Responsibility

• Remedial Actions taken

• Determination of an effective compliance and ethics program

Principles of Federal Prosecution of Business Organizations also

considers other factors for prosecution

• An individual’s willingness to cooperate

• Willingness to cooperate does not provide general relief but is given “serious

consideration” in evaluating a plea agreement

Guidelines for Criminal Cases (DOJ) (cont’d)

The U.S. Sentencing guidelines for individuals similarly takes into account an individual’s cooperation and voluntary disclosure

• A defendant’s cooperation, if sufficiently substantial, may justify the government filing for a reduced sentence.

• Voluntary disclosure of a violation before it is discovered, if it may not have been discovered otherwise, may result in lesser charges or a lighter sentence

For Corporations, U.S. Sentencing guidelines takes into account an organization’s remediation as part of an “effective compliance and ethics program.”

• Having an effective ethics and compliance program may lead to a 3 point reduction in an organizations culpability score under § 8C2.5.

• Similarly, an organization’s self-reporting, cooperation, and acceptance of responsibility may lead to fine reductions under § 8C2.5(g) by decreasing the culpability score.

• Conversely, an organization will not qualify for the compliance program reduction when it unreasonably delayed reporting the offense

Guidelines for Civil Cases (SEC)

SEC’s Framework for evaluating Cooperation by Companies –

Follows principals outlined in the Seaboard report:

• Self-policing prior to discovery of misconduct, including establishment of effective

compliance procedures and tone at the top

• Self-reporting to the public and regulatory agencies, and conducting a thorough review

• Remediation and proper dismissal of wrongdoers, and improvement of internal controls

• Cooperation with law enforcement and disclosing all relevant information

SEC’s Framework for evaluating Cooperation by Individuals –

Follows 4 basic factors:

• Value and timeliness of individuals cooperation

• Importance of the matter being reported on

• Societal impact of whether or not the individual is held accountable

• Appropriateness of providing cooperation credit in light of the individual’s profile

Example - Ralph Lauren Corp.

Background

• Payments and gifts provided to Argentinian customs and government officials between 2005 and 2009

• On 4/22/2013, the company entered into non-prosecution agreements (NPA) with the SEC and DOJ

What Ralph Lauren Did - Self-Reporting & Cooperation

• Company made complete, timely, and voluntar disclosure

• Fully cooperated with the DOJ and SEC with ongoing investigations

• Accepted responsibility for and agreed to not contest the factual statements included in the NPA

• Early and extensive remedial efforts and ongoing anti-corruption enhancements

$1.6 million in total settlement payments

Self-Reporting – Trends and Statistics

Independent study1 conducted on FCPA-related agreements from

2002 through 2011 (DOJ only)

• All companies which voluntarily disclosed between 2007 through 2011 resulted in a

non-prosecution agreement, the least harsh disposition

• Most companies receiving penalties below the range prescribed in the Sentencing

Guidelines voluntarily disclosed the misconduct

• In the 8 cases below (at least 30% below recommended range), companies either

voluntarily disclosed, cooperated or had an extenuating circumstance

Company Date Of Settlement Reduction in Fine Reason for reduction

Innospec Inc. 3/17/2010 86.11% Extenuating Circumstances

Siemens Aktiengesellschaft 12/12/2008 66.67% Exemplary Cooperation

Pride International, Inc. 11/14/2010 55.00% Voluntary Disclosure

Latin Node, Inc. 3/23/2009 52.38% Voluntary Disclosure

Daimler 3/22/2010 48.53% Voluntary Disclosure

ABB Inc. 9/29/2010 40.00% Voluntary Disclosure

Bridgestone Corporation 10/5/2011 37.34% Extraordinary Cooperation

Control Components, Inc. 7/22/2009 34.77% Voluntary Disclosure

1 Study conducted by Vanderbilt Journal of Transnational Law

Experience of In-House Counsel

Recent Trends in Implementing

a Global Anti-Corruption

Compliance Program

Building a Compliance Program

Perform a Global Risk Assessment

Develop and Implement the Company’s Partnering and

Training Plan

Establish a Process for Conducting Third Party Due Diligence

Employ Measures to Verify the Effectiveness of the Program

Perform a Global Risk Assessment

The Risk Assessment should be designed to identify high risk

aspects of the company’s business

• Conduct in-person interviews wherever possible

Typical areas of concern include:

• Means employed to win new business

• Import and Export; Freight Forwarders

• Agents employed to secure preferred outcomes

Develop and Implement a Partnering and Training

Plan

Partner with Compliance Ambassadors for your company’s

Compliance Initiatives

• HR

• Finance

Key Functions of your Compliance Ambassadors

• Training Assistance

• Conveying the “Message in the Middle”

• Books and records compliance and awareness

• Enhance awareness of the company’s Code of Conduct and anonymous

reporting resources

Develop and Implement a Partnering and Training

Plan

Training Initiatives

• Select a reputable vendor to help create training materials if you lack internal resources

• Determine frequency and location

• Consider mix of in-person and remote training options

Keys for Successful Training

• Avoid U.S.-centric references

• Use hypotheticals and real-world anecdotes to relate compliance concepts to your employees

• Know your trainers, as not all vendors are equally capable of delivering effective training

• Build relationships with business unit managers to ensure training is respected

• Ensure your domestic workforce is not forgotten, they may have global roles increasing their risk profile

Establish a Process for Conducting

Third Party Due Diligence

Systematically review and monitor third parties

• Classify third parties as high, medium, and low risk

• High Risk – Intensive manual review

• Medium Risk – Case by case analysis to determine appropriate level of review

• Low Risk – Automated review (database searches)

• Key elements of an effective third party due diligence program

• Compliance Committee or business unit has some ownership

• Due diligence efforts are integrated with GSCM on-boarding process

• No payments to a third party are permitted until the entity is vetted

• Once on-boarded, on-going compliance certifications from the entity are required

• Online or in-person training is provided to high risk third parties

Employ Measures to Verify Program Effectiveness

Conduct Additional Risk Assessments

Partner with your Internal Audit function to test key elements of your

compliance program

Submit surveys to employees asking them to rate the effectiveness of

the program

Other Keys to a Successful Compliance Program

Automate to increase efficiency

• Contract forms containing key compliance provisions

• Establish an online approval process for gifts

Vet potential joint venture partners and acquisition targets early and thoroughly

Spend as much time as possible learning how your business operates

• How does you business operate?

• Do they use petty cash or cash cards?

• Do meetings with joint venture partners occur offsite?

• What roles do your joint venture partners play in the business?

• Where are the areas your employees feel the most pressure?

Conclusion

Every company’s compliance strategy will look different due to the dynamic nature of modern enterprises

Therefore, it is important to structure your compliance program to meet your company’s key characteristics

• Risk profile

• Global footprint

• Resources available

Nonetheless, successful compliance programs often share the same core elements

• Promotion of a Culture of Compliance

• Consistency Measured with Innovation

• Transparency