Compliance Comments and FCPA Review
New York
January 9, 2013 Copyright © 2013 Jon Fee All Rights Reserved
ALSTON&BIRD LLP
The unfortunate tension
• Preference programs like
CAFTA are great; but they
come at a compliance cost
• The challenge to the U.S.
policymakers is to enhance
trade with its partners
without making compliance
so difficult that it offsets the
benefits
Noncompliance isn’t fair
• U.S. and CAFTA companies work hard to comply – and it is an expensive, time consuming enterprise
• When someone is reckless, or cheats, and doesn’t get caught, he gets an unfair competitive advantage
• Worse still, the infractions of reckless companies cause CBP to become suspicious of the industry and to increase intrusive enforcement activity
Compliance comparison
Asia
• Commercial invoice
• Bill of lading
CAFTA
• Commercial invoice
• Bill of lading
• FTA certificate of origin
• Fabric affidavit
• Yarn affidavit
• Thread affidavit
• Pocketing affidavit
• Invoices and transit documents for fabric and other inputs
• Production records
• Information requests
• Notices of action
• Factory visits
• Etc., etc.
So what should we do?
• Have an individual or individuals, supported by senior management, whose job is compliance
• Establish reliable practices and procedures, including checklists and written guidelines ensuring compliance
• Use standardized compliance forms: certificates of origin, affidavits, invoices, etc.
Commercial invoice
• The invoice should describe the
apparel with sufficient detail to
classify it
• Type of garment (e.g., shirt,
trousers, etc.)
• Sex and age group of intended
wearer (e.g., men’s, women’s,
boys’ or girls’)
• Whether woven or knit
• Fiber content (e.g., 60 percent
cotton, 40 percent polyester)
Commercial invoice
• Other descriptive information, where applicable, necessary for tariff classification (e.g., “water resistant,” “with two or more colors in the warp and/or the filling”)
• For short supply garments, the commercial invoice should also include the specifications of the fabric or yarn called for by the short supply designation
Certificate of origin
• This isn’t an entry document
• It must be prepared and signed by the importer, exporter or producer and must be in the importer’s possession at the time the CAFTA claim is made
• The importer must submit it to CBP upon request
• No required form as long as it contains the necessary information
• See 19 CFR 10.584
“Guidance”
• TBT-07-019 (October 10, 2007)
• TBT-11-004 (March 31, 2011)
• TBT-12-003 (March 22, 2012)
• Where to find them: http://www.cbp.gov/xp/cgov/trade/priority_trade/textiles/tbts/
• Hard to use, because they make cumulative changes
Highlights of the 3rd TBT
• Issued March 22, 2012
• Responded to lots of complaints
that CBP was interpreting the
rules too rigidly
• TBTs are guidance, not law
• CBP is “aware of
inconsistencies” in the
application of the TBTs
• TBTs are not exhaustive and
should not be interpreted rigidly
Highlights of the 3rd TBT
• Where correlation is not
apparent, importers should
supplement documents with
information showing how
they are connected to one
another, possibly by
numbering them
• If documents cover materials
that weren’t used to make the
goods in question, the
importer should include a
note that explains this
Highlights of the 3rd TBT
• If there are omissions through oversight or the result of inaccurate translations, CBP import specialists should seek clarification
• When an affidavit doesn’t provide confirming details, the importer should supply more support, like purchase orders, invoices and proofs of payment
• CBP denial solely on the basis of information it did not request is not appropriate
Highlights of the 3rd TBT
• “Will be sold” or “to be sold” on an affidavit is ambiguous – if an affidavit says this, CBP expects records showing when the sale took place
• Affidavits are expected to but need not be signed, nor do they need to be originals – import specialists can call issuers to verify
• The use of letterheads is not required – a letterhead’s implication that the company produces other merchandise does not preclude use of the letterhead
FCPA Perceptions
• We tend to associate the
FCPA with defense
contractors, oil companies and
other big multinationals
• FCPA was passed in the
Carter administration in the
wake of a 1970s Lockheed
scandal involving bribes for
foreign defense contracts and
“Bananagate,” where Chiquita
bribed the president of
Honduras to lower taxes
Reality
• In April 2012, the New York Times
said the SEC asked some Hollywood
studios (including 20th Century Fox,
Disney and Dreamworks) about
payments to government officials in
China to gain the right to film and
show movies there
• The 2010 annual report of Kraft
Foods said it had been subpoenaed
by the SEC for FCPA reasons in
connection with an Indian company
that was part of its acquisition of
Cadbury
Reality
• In a November 2012 SEC filing,
Beam, Inc. said it started an
investigation into whether its
business in India was in compliance
with the FCPA and other US laws
• In 2010, gunmaker Smith &
Western came under FCPA
investigation after a sales executive
was charged with allegedly offering
a bribe to an FBI agent posing as a
government official of an African
country
Reality
• Since 2008, Avon has conducted an internal FCPA investigation after an employee wrote to the CEO about improper spending related to travel with Chinese government officials
• Avon has taken “certain personnel actions, including termination of employment of certain senior members of management,” according to its Form 10-Q filed with the SEC in November 2012
Avon’s problems expand
• The 10-Q says the case involves “travel, entertainment, gifts, use of third-party vendors and consultants, joint ventures and acquisitions, and payments to third-party agents, in connection with our business dealings with foreign governments and their employees”
• “The Company believes that it is probable that the Company will incur a loss related to the government investigations [and] such loss could be material”
And then there’s Walmart
• In December 2011, Walmart
disclosed that it might have
violated the FCPA, that it
started an internal
investigation and that it
alerted the SEC and DOJ
• It said, the investigation
involves “certain matters,
including permitting,
licensing and inspections”
and “discrete incidents in
specific areas”
Walmart story grows
• In April 2012, the NYT
reported that Walmart paid
bribes of $24 to officials in
Mexico to facilitate its rapid
growth there (about one-fifth of
all Walmart stores are in
Mexico)
• After discovering the bribes in
2005, according to the NYT,
Walmart’s leaders engaged in a
“massive cover up” until its
disclosure in 2011
Later Walmart disclosure
• The case could lead to “judgments, settlements, fines, penalties, injunctions, cease and desist orders or other relief, criminal convictions and/or penalties”
• “Could impact the perception among certain audiences of its role as a corporate citizen”
• “The Company can provide no assurance that these matters will not be material to its business in the future”
• Also mentions class action based on claims that the case affected stock value and eleven derivative suits against certain officers and directors who allegedly condoned or participated in illegal activity
Legal cost
• Walmart’s company filings say
that it spent $51 million in legal
fees in 2012
• Avon has spent $280 million in
legal fees
• Siemens, a German
conglomerate, conducted a two-
year internal investigation
following its disclosure of FCPA
violations in 2008 and spent
more than $100 million to law
firms for document review
Top ten FCPA settlements
1. Siemens (Germany): $800 million in 2008
2. KBR / Halliburton (USA): $579 million in 2009
3. BAE (UK): $400 million in 2010
4. Snamprogetti Netherlands B.V. / ENI S.p.A (Holland/Italy): $365 million in 2010
5. Technip S.A. (France): $338 million in 2010
6. JGC Corporation (Japan) $218.8 million in 2011
7. Daimler AG (Germany): $185 million in 2010
8. Alcatel-Lucent (France): $137 million in 2010
9. Magyar Telekom / Deutsche Telekom (Hungary /Germany): $95 million in 2011
10. Panalpina (Switzerland): $81.8 million in 2010
Who’s subject to the FCPA
• Any “issuer” (US or foreign) that
has securities registered, or which is
required to file reports, under the
Securities and Exchange Act of 1934
• Any “domestic concern,” including
any individual who is a US citizen,
national or resident, and any
corporation or partnership that has a
US principal place of business or
that is organized under the laws of a
US state
Who’s subject to the FCPA
• Any other person or entity,
other than an issuer or
domestic concern, “while in
the United States”
• Each of the foregoing
includes any officer,
director, employee, or agent
of such person or any
stockholder acting on behalf
of such person
Extraterritorial reach
• Notice that foreign companies
can be prosecuted under the
FCPA if they violate the Act
anywhere in the world “while
in” the United States
• Similarly, foreign companies
can be prosecuted under the
similar UK Bribery Act if they
violate the Act anywhere in the
world “and carry on a business
or part of a business in the
United Kingdom”
FCPA violations
• “Corruptly” (i.e., with corrupt
intent) to make a “payment”
• To a “foreign official” or
“foreign political party” or “party
official” or “candidate for foreign
political office” or “any person”
while knowing the payment will
be given to such an official, party
or candidate
• For the purpose of obtaining or
retaining business for or with, or
directing business to, any person
Comments
• Foreign officials can be minor officials,
officials of state-owned businesses,
members of royal families and other
non-obvious persons
• Third party payments are sensitive; the
US Justice Department warns to exercise
due diligence and be wary of unusually
high commissions, lack of transparency
in expenses, lack of qualifications of
joint venturers, a history of corruption
in the country where business is
conducted and other “red flags”
Exception – “grease payments”
No violation for payments for “routine governmental action,” such as:
• permits, licenses or other documents to qualify a person to do business in a country
• visas or work orders
• police protection, mail delivery, scheduling of inspections
• phone, power or water services, loading cargo, protecting perishables
• similar nondiscretionary actions
Affirmative defenses
• The payment was lawful under the written laws of the foreign official’s or political party’s country
• The payment was a reasonable and bona fide expenditure, such as travel or lodging, related to (a) promotion, demonstration or explanation of a product or service, or (b) the execution or performance of a contract with a foreign government or agency
FCPA accounting provisions
• A company with listed
securities must keep
books and records that
accurately and fairly
reflect the transactions of
the company and must
maintain adequate
internal controls
• Intended to complement
the anti-bribery
provisions
Penalties under the FCPA
• $2 million criminal penalty for
corporations and other business
entities
• $100,000 and five years
imprisonment for officers,
directors, employees and agents
• The Alternative Fines Act
provides a criminal fine of twice
the benefit that the defendant
sought to obtain by the corrupt
payment (this is the part that
yields such big settlements)
Penalties under the FCPA
• Civil penalties assessed
by the SEC can be as
large as the greater of a
specified amount or the
amount of pecuniary gain
to the violator as a result
of the violation
• The specified amount is
$100,000 for natural
persons and $500,000 for
other persons
Other FCPA sanctions
• Bar from government
contracts
• Ineligibility for export licenses
• Suspension from CFTA,
OPIC and other agency
programs
• Loss of IRS tax deductions
for the expense of unlawful
payments
• Private right of action (e.g., by
a competitor) under RICO
Opinion
• DOJ will issue a written opinion
upon request by any US company
or national as to its enforcement
intentions regarding proposed
business conduct
• DOJ will issue the opinion within
30 days
• Conduct for which DOJ has issued
an opinion stating that conduct
conforms with current enforcement
policy will be entitled to a
presumption of conformity with
the FCPA
November 14, 2012 Resource Guide
A Resource Guide to the U.S.
Foreign Corrupt Practices Act;
available at
http://www.justice.gov/crimi
nal/fraud/fcpa/guidance/
Self Reporting, Cooperation, Remedial Efforts
• Many expected helpful commentary
in the Guide on these topics; but the
Guide is disappointing
• For criminal matters, the Guide
merely makes cross references to
existing, general materials in
Principals of Federal Prosecution of
Business Organizations and the U.S.
Sentencing Guidelines
• No safe harbor and no special rules
for cooperation or remedial effort
Guide on best practices
• Commitment from senior
management
• Codes of conduct and
policies and procedures
• Oversight, autonomy,
resources
• Risk assessment
• Training and continuing
advice
Guide on best practices
• Incentives and disciplinary measures
• Third party due diligence and payments
• Confidential reporting and internal investigation
• Continuous improvement: periodic testing and review
• Pre-acquisition due diligence and post-acquisition integration
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