The Sting in the Deal: What Every Buyer & Seller Must Know About the FCPA April 15, 2010 Sponsored...

The Sting in the Deal: What Every Buyer & Seller Must Know About the FCPA

April 15, 2010

Sponsored by:

The Sting in the Deal – What Every Buyer and Seller Must Know About the Foreign Corrupt Practices Act

Discussion LeaderJonathan Marks, CPA, CFF, CFE

Partner In-Charge of Fraud & Ethics212.572.5576 or [email protected]

http://www.linkedin.com/in/jonathantmarks

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Crowe Horwath LLP is a member of Crowe Horwath International, a Swiss association. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. © 2010 Crowe Horwath LLP

Panel

Jonathan Marks, CPA, CFE, CFF

• Partner In-Charge of Fraud & Ethics at Crowe Horwath LLP

Gregory Paw

• Attorney engaged in Foreign Corrupt Practices Act matters at Pepper Hamilton LLP

Matthew Tanzer

• VP and Chief Compliance Counsel, Tyco International

Kathleen Hamann

• Trial Attorney, U.S. Department of Justice, Criminal Division, Fraud Section

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Siemens: $2.6 Billion

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Others Impacted

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Real World?

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Why Anti-Corruption Compliance Is Important

• Increased Enforcement• Number of investigations is on the rise!

• Increased Penalties• Penalties are up significantly from prior years

• Individual Enforcement• DOJ and SEC are increasingly targeting executives; sentences

include jail time

• Increasing cooperation and coordination internationally• 38 countries have adopted OECD Convention on Combating

Bribery of Foreign Public Officials in International Business

• Some countries aggressively enforcing

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• Voluntary disclosure is increasing• DOJ and SEC are encouraging companies to voluntarily disclose

issues• Almost 2/3 of the disclosed FCPA investigations in 2005-2007 were

voluntarily disclosed to the SEC

• Government settlements are also requiring external monitors to ensure compliance• 2- and 3-year monitors are becoming a standard part of

settlements• The annual cost of external monitors can range from $1 to $3+

million per year

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• Increase in M&A

• FCPA-related due diligence is leading to voluntary disclosures

• SOX certification and internal controls

• Increased expectations of Board of Directors and Audit Committees – possibility of personal liability

• World governmental attitudes changing

• Many other countries are cracking down on bribery

• Cross country cooperation

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And One More Reason…

Source: Transparency International

Target Industries

• Technology

• Oil and Gas

• Manufacturing

• Engineering and Construction

• Pharmaceutical

• Medical Devices

• Mining

• Transportation

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FCPA Fundamentals

1. Anti-Bribery Provision• Makes it illegal to make payments with a corrupt motive directly or

indirectly, to foreign officials, officials of foreign political parties, or any other person acting as a conduit for payments to foreign officials or political parties for the purpose of influencing the official, in order to assist in obtaining/retaining business

2. Books and Records Provision• Requires companies who file reports with the SEC to maintain

records that accurately reflect transactions and the nature and quantity of corporate assets and liabilities

3. Other Key Facts• Ignorance of the law is not a valid defense• Source of the alleged bribe does not have to be in the U.S.• Actions of an agent acting “on behalf” of a company are attributed

to company• Actions of the foreign sub will be attributed to the U.S. parent

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5 Elements Constituting a Violation

Who Corrupt Intent Payment RecipientBusiness Purpose

Test

• Potentially applies to any individual, firm, officer, director, employee, or agent of the firm and any stockholder acting on behalf of the firm

• Includes foreign subsidiaries, affiliates and joint ventures

• Person making or authorizing the payment must have corrupt intent

• Payment must be intended to prompt the recipient to misuse his official position to act or fail to act

• Offer of a corrupt payment can constitute a violation even if unsuccessful

• Prohibits paying, offering or promising to pay, authorizing payment of money or anything of value

• A foreign official

• A foreign political party or party official

• Any candidate for foreign political office

• Includes certain government entities, international governmental organizations, advisors, or consultants to foreign governments

• Payment must be made to a decision-maker for the purpose of:

i. Influencing, inducing or otherwise affecting an official act, decision or omission thereof,

ii.Securing an improper advantage, or

iii.Assisting in obtaining or retaining business for any person or entity

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Sanctions Against Noncompliance

Criminal Sanctions Civil Sanctions

Violating Anti-bribery Provisions

• Business entities are subject to a fine up to $2 million per violation.

• Officers, directors, employees, and agents of the firm can face fine up $250,000 and/or five years imprisonment per violation.*

• For both business entities and individuals, a civil action for a fine $10,000 may be levied for violations.*

• For both business entities and individuals, a court may impose an additional fine not to exceed the greater of (i) the amount of gain as a result of the violation or (ii) a specified dollar amount.*

Violating Accounting Provisions

• Business entities may be fined up to $25 million.

• Employees that knowingly violate the provisions are subject to $5 million in fines and 20 years imprisonment.*

• Business entities can be subject to civil penalties ranging from $50,000 to $500,000.

• For individuals, a civil action for a fine up to $100,000 may be levied for violations.*

Enforced by the Department of JusticeEnforced by the SEC

(and DOJ in rare circumstances)

* Fines levied against individuals may not be paid by their employer or principal

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M&A Anti-Corruption Issues

• Pre-acquisition due diligence

• Successor liability

• Vicarious liability

• Controlling Interest

• Compliance programs

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M&A: Pre-Acquisition Due Diligence

• Private firm Latin Node, Inc. had a number of contracts with state-run telephone companies in Honduras and Yemen

• In 2007, eLandia International, Inc. acquired Latin Node for over $26 million

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M&A: The Other Shoe Drops

• Shortly after purchase, eLandia discovered bribery scheme to obtain contracts, and reported to the SEC

• Latin Node entered guilty plea to FCPA offenses, paid $2 million fine

• eLandia reported it overpaid by $20.6 million for the true value of Latin Node

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Private Equity: The Impact of Corruption

• “Pirate of Prague” Viktor Kozeny led an effort in late 1990s to invest in and privatize SOCAR, the state oil company of Azerbaijan

• Handbag magnate Frederic Bourke was part of a group of private equity investors that included Omega Advisors, Inc. and AIG

• Prosecutors charge that Kozeny led his bid with offers of bribes to Azerbaijani officials

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Private Equity: Criminal Liability?

• Clayton Lewis, Omega employee, allegedly was told by Kozeny about bribes to secure SOCAR bid• Pled guilty to FCPA offenses, awaiting sentencing

• Omega Advisors• Agreed to cooperation agreement and $500,000 civil forfeiture

• Frederic Bourke allegedly turned “blind eye” and kept “head in the sand” about Kozeny’s actions• Convicted at trial, sentenced to 1 year and 1 day imprisonment, on

appeal

• David Pinkerton, AIG• Indicted but charges dropped

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Private Equity: ABB/Vetco/Aibel• In 2004, private equity group led by JP Morgan sought to

purchase ABB/Vetco. Two Vetco units had pending FCPA charges.

• Release 2004-02: Justice approves procedures before sale, emphasizing importance of compliance program.

• Vetco/Aibel sold again to private equity, and more FCPA issues emerge.

• Early 2007, 3 years later, three Vetco units pled to FCPA offenses and paid $26 million fine. Aibel also agreed to compliance reforms• Agreement took into account compliance failures, as well as new

sale, new compliance efforts and self-disclosure

• Late 2008, Aibel enters plea to FCPA offenses and pays $4.2 million fine

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Lessons Learned

• Pre-acquisition due diligence

• Vibrant compliance program

• Timely post-acquisition review / compliance

• Self audits

• Periodic reevaluations

• Remedial steps

• Self reporting of violations

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What is Effective Due Diligence?

• Tailor due diligence based on risk of business being acquired• What is the nature of the business

• Where are they conducting business

• Who are the key players and with whom are they conducting business

• Due diligence should address• Use of agents and other third parties

• Commercial dealings with state-owned customers

• Joint venture, teaming or consortium arrangements

• Customs and immigration matters

• Tax matters

• Any government licenses and permits

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What is Effective Due Diligence?

• Consider external counsel and consultants, including forensic accountants, to conduct the due diligence

• Obtain representations and warrantees from seller

• Implement contractual protections

• Covenants, representations and warranties

• Audit rights

• Suspension/termination rights

• Confidentiality provision allowing pre-acquisition disclosure

• Document due diligence steps

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10 Steps to Minimizing FCPA Risk

1. Ensure commitment and accountability of senior management

2. Include FCPA in corporate code of conduct

3. Establish FCPA policy guidelines including clear approval guidelines for disbursements

4. Review FCPA-related internal controls to ensure you are properly flagging high-risk areas of your business

5. Use all available tools to conduct internal audits of FCPA controls, records and payments made by foreign affiliates

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6. Investigate when red flags or bribery allegations arise

7. Understand corruption risk in countries where business is being done (see Transparency International’s CPI)

8. Include FCPA language in contracts and agreements including right to audit

9. Ensure periodic training of relevant employees

10. Perform proper due diligence on foreign business partners

10 Steps to Minimizing FCPA Risk (continued)

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Intangible Benefits of Anti-Corruption Efforts

• For example, in Iraq, the United Nations Oil-for-Food Program became corrupted

• Massive surcharge and kickback scheme

• 139 companies pay oil surcharge

• 2,250 companies pay kickbacks

• Over $1.4 billion diverted to Iraq government through payment of “Inland Transportation Fees” and “After-Sales Service Fees”

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Follow the Money

• Over $1.4 billion diverted from “humanitarian” purposes

• Diverted to Ministries of Defense and Military Industrialization, as well as intelligence services

• Used to buy trucks, tires, batteries, even date palm excavators

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At the Scene

ACG Philadelphia Cup Business Case Competition

Sponsored by:

ACG Philadelphia Cup Judges

• Michael Bailey, Argosy Private Equity• Barbara Shander, Morgan Lewis & Bockius

Judges Committee• Scott Heery, KPMG• Mitchell Hollin, LLR Partners • Ken Jones, Boathouse Capital• Mike McAleer, KPMG• Joe McGinley, Comcast Corporation• Andrew Panzo, NewSpring Capital Partners

Sponsored by:

Co-Chairs

ACG Philadelphia Cup FinalistsDrexel University, LeBow

College of Business Ryan BakerPaul GreenRobert LodgeScott Freeman

La Salle University School of BusinessBirad BhattJustin SolomonMikael Vincke

Penn State University, Smeal College of BusinessJonathan WesnerXiaoyu ZhangHoward HoTieming Lang

Sponsored by:

Temple University, Fox School of Business Qiyi BaoMichael EttingerVijay IyerShao Zhang

The Wharton School of the University of PennsylvaniaDeb BardhamUttam JainAditya JoshiNikhil KirtaneTzerHan LimFabio Salvagni

ACG Philadelphia Cup 2nd Place Team

Villanova University School of Business

Meet Doshi

Patrick Doherty

Olivia Pietrunti

Sumedha VermaSponsored by:

ACG Philadelphia Cup 1st Place Team

St. Joseph’s University, Haub School of Business

Chris Frystock

Jan Bartczak

Sponsored by:

May 5 - 6, 2010ACG InterGrowth Miami, FL

May 20, 2010Lenders’ Panel Discussion: Joint Program with TMA Philadelphia

June 3, 2010Corporate Buyers Dinner Discussion (Invitation Only to Strategic Buyers)

June 17, 2010The Honorable David M. Walker, Former US Controller

July 12, 2010Annual ACG Member Guest Golf Outing Huntingdon Valley Country Club

Mark Your Calendar for 2010 Events

Upcoming Events

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