Chicago And Houston Slides 20111109b

Michael Volkov, Partner (202) [email protected]

Vince Connelly, Partner(312) [email protected]

Anti-Corruption Compliance Solutionsin an Aggressive Enforcement Era

© Copyright Mayer Brown LLP, 2011

mailto:[email protected]


Overview I. Trends in Anti-Corruption Enforcement

II. Playing Well With Others: Acquisitions, Joint Ventures and Agents

III. Third Parties

IV. Compliance Programs

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Trends inAnti-Corruption

Enforcement

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Major Risk Factors for Corruption

How much does your business depend on: Government sales; Dealings with state-owned enterprises; Regulatory approvals, visas, and inspections/audits; Hiring of third party agents and consultants.

Do you have an existing policy: To conduct due diligence of third party agents and consultants; To conduct due diligence of prospective target company to acquire

or joint venture partner; To prospectively approve expenses for gifts, meals, entertainment

and travel.

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Trends in Anti-Corruption Enforcement

Anti-Corruption Enforcement

GLOBAL enforcement is on the rise.

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In response to internationalpressure, Canada its increasing

enforcement of itsanti-corruption law.

The UK Bribery Act becameeffective on July 1, 2011.

Asia and Latin American countrieshave been slower to enact tough, new

anti-corruption laws and beginaggressive enforcement programs.

China and the US are increasingcooperation and beginning to establish

a framework for information sharingand enforcement; China enacted

its own foreign bribery law.

In the past three years,US prosecutors haveenforced the FCPA to

the tune of $3.6 billion.

Germany, Spain and otherEU countries are

increasing enforcement.

Risk of anti-corruption multi-jurisdictional, “piggy-back” actions is growing.


Enforcement Trends

Aggressive FCPA enforcementhas resulted in corporate mega-fines:

For 2010, fines total over $1.6 billion - more than half of all federal criminal fines collected.

Fueled by voluntary disclosures and industry-wide investigations - oil, pharmaceuticals and medical devices, military and law enforcement equipment, and telecommunications.

FBI has dedicated FCPA squad which is using aggressive investigative tactics - consensual recordings, ambush interviews, undercover officers, informants, search warrants and wiretaps.

SEC Dodd-Frank whistleblower bounty program will increase number of credible complaints, investigations and prosecutions.

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7

27 7

18 20

26

48

3 58

20

13 14

26

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010

DOJ

SEC

2010 witnessed an 85% increase in FCPA enforcement actionsover 2009, which itself was a record year.

FCPA Enforcement at a Glance: Increase in Actions


$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$579

KBR/Halliburton

$800

Siemens

JGC Corporation

Johnson & Johnson

$218.8

$70

ENI/SnamprogettiBAE Systems

Technip

$185 $137

$365 $338

DaimlerAlcatel-Lucent

$82

Panalpina

$400

2008

2011

2010

2009

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Eight of the top ten monetary settlements in FCPA history were reached in 2010.

FCPA Enforcement at a Glance: Blockbusters


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FCPA Enforcement at a Glance: Prison Sentences

0 10 20 30 40 50 60 70 80 90 100


Albert Jack Stanley, CEOand Chairman, KBR (2009) 84 months

Douglas Murphy, President American Rice, Inc. (2002) 63 months

Juan Diaz, OwnerThird party consultantto Haiti Telco (2010)

57 months

Robert Antoine, Director Haiti Telco (2010) 48 months

Jorge Granados, CEO Latin Node 46 months

Carlos Rodriguez, VPTerra Telecomm 84 months

Charles Paul Edward Jumet,President, Ports EngineeringConsultants Corporation (2009)

87 months

Joel Esquenazi, Pres.Terra Telecomm (2009) 180 months (15 Years)

FCPA: Whistleblower Bounty

Whistleblower Bounty program offers rewards of 10 to 30 percent of any settlement over $1 million. SEC’s Whistleblower Office opened on 8/12/2011.

SEC regulations have been adopted(pending appeal).

SEC estimates it will receive 30,000 complaints a year; 1-2 credible complaints each day.

With certain exceptions, whistleblowers must first file complaint internally with company and wait for 120 days before filing with SEC.

Companies will increase self-reporting to pre-empt whistleblowers.

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FCPA: Partnerships

“Partnerships like the one we have with the Serious Fraud Office are critical to our transnational approach to combating foreign bribery, and we intend increasingly to rely on our foreign partners in future cases.”

— Lanny Breuer, Assistant Attorney General, Nov. 4, 2010

SFOSerious Fraud Officewww.sfo.gov.uk

T H E U N I T E D S TAT E S

DEPARTMENTof JUSTICE

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FCPA v. UKBA: Offenses and Defenses

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FCPA UK Bribery Act

Consideration of compliance programs at prosecution and sentencing stages

“Adequate procedures” is the only potential defense available against failing to prevent bribery

Prosecutes active participation in bribery,though internal controls requirement is

independent of any bribery activity

No accounting offence in the Bribery Act but Companies Act 2006 includes an offence of failing to keep adequate accounting records

Only penalizes those making bribes Accepting bribes is also punishable

Bribery of foreign government officials (including state enterprise employees, political

parties, party officials, political candidates, public international organization employees)

Bribery of public and private sectorindividuals – includes a discrete offence

of bribing a foreign public official

Statutory exception for “facilitation payments” narrowly defined

Facilitation payments only permitted if local written law so permits

Reasonable and bona fide expenditure on travel, lodging and entertainment expenses permitted if

directly related to promotion of product or service or to performance of government contract

No express exception for corporatehospitality but Guidance advises that

“reasonable and proportionate”hospitality is permissible


FCPA v. UKBA: Territorial Effect and Punishment

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FCPA UK Bribery Act

Up to 5 years prison sentence for bribery, 20 years for accounting offences

Up to 10 years prison sentence – accounting offences may be prosecuted under other Statutes

Conduct within the USby anyone

Conduct (including omissions) within the UK by anyone

Criminal fine for entities up to $2m for bribery or $25m for violation of accounting provisions,

or twice the benefit sought, and debarment; for individuals, fines of up to $100,000 (bribery) or

$5 million (accounting offences)

Unlimited fine; additionally SeriousCrime Prevention Orders, Confiscation

Orders, Winding up proceedings,debarment, director disqualification

and regulatory/disciplinary action

Conduct (including omissions) outside of the UK by persons (natural and legal) with a close

connection to the UK, if that conduct would form an offence if committed in the UK. If a

commercial organization “carries on a business or part of a business in the UK” then may be

prosecuted for “failing to prevent” bribery even if the bribery occurs entirely outside of the UK

Conduct outside of the US if by an issuer of US Securities or a “domestic concern” (e.g. a company organized under US law

or having its principal place of business in the US) – or anyone acting on its behalf;

foreign persons who commit an act in the United States in furtherance of a subject

act are also covered

Civil penalties up to $10,000 per bribery violation or $500,000 per corporate accountancy violation

Civil Recovery Orders – no criminal conviction required (lower threshold of proof)


Playing Well With Others:

Acquisitions,Joint Ventures

and Agents

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Case Study: Damn the Torpedoes, Full Speed Ahead!

After months of negotiation,CEO reaches deal to acquire target

company. For various business reasons, CEO insists on closing the

deal within 2 weeks.

What anti-corruption risksare created?

In such a situation, what should Chief Compliance

Officer do?

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Playing Well With Others: Acquisitions, Joint Ventures and Agents

An acquiring company can be held liable for FCPA violations committed by a target company prior to the acquisition:

Alliance One: $4.2 million fine and $10 million disgorgement for pre-acquisition FCPA violations.

Saipem: $240 million fine for conduct of an acquired subsidiary of ENI, Snamprogetti, where the FCPA violations occurred over 2 years prior to the acquisition.

NOTE: Not only may liability be inherited for a company's past action, but a firm may be liable for ongoing corruption even if there is no direct evidence that the company or its officers knew of the corrupt acts.

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Buying into an Anti-Corruption Violation


Due Diligence of Target Companies

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Basic Risk Assessment(countries of operation, industry, extent of foreign government interactions)

Overall Compliance Structure

Prior History of Bribery or Internal Investigations

Internal Controls

Use of Third Party Intermediaries

Anti-Corruption Training

Employee Discipline/Hot-Line Reporting

Assessment and Review Procedures


The risk assessment should be a formal and documented review which examines:

The geographic and industry risks: nature and extent of corruption (countries reputation for corruption) and history of corruption in industry;

The level of government interactions – business and regulatory, and specific interactions and relationships with former government officials and relatives;

The use of third party agents and consultants;

The level of gifts, entertainment, meals and other benefits given to foreign officials and/or their relatives;

Mergers, acquisitions and joint ventures.

Risk Assessment: The Foundation for Compliance

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Complex corporate relationships or the presence of former government officials raise risk that government officials may be real party in interest:

Who Are the Real Parties in Interest?

Due diligence must dig as far as possible.

Interviews and site visits of parties are important.

Such steps combined with specific representations and warrantiesmay tip the balance in going forward.

A detailed document outlining investigation is important to avoiding liability.

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Companies are often required to partner with foreign government enterprises (e.g. China joint ventures).

Due diligence of foreign enterprise is critical.

Building in controls for interactions with foreign state-owned enterprise.

Contractual provisions in joint venture agreement including representations and warranties governing compliance and requiring training.

Policies for gift giving, dealings with foreign officials and other proactive measures should be developed.

Partnering with a Government Enterprise

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How Much Diligence is Required to Avoid Liability?

Justice Department appears to have modified its policies governing pre- and post-acquisition due diligence requirements, relaxing its policy outlined in 2008 Halliburton Opinion Release (08-02).

In Halliburton, Justice Department decided not to impose successor liability on Halliburton on condition that Halliburton complied with specified stringent conditions relating to due diligence, and reporting requirements.

Halliburton was prevented by UK law from obtaining information from target company before the acquisition.

In recent enforcement settlement involving Johnson & Johnson, Justice Department imposed “enhanced compliance” obligations which relaxed timing obligations on pre- acquisition due diligence and post acquisition FCPA compliance by newly-acquired companies.

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Case Study: Gift Giving in Asia

One of the most prevalent areas for violations is operating in a gift-giving business culture.

Chinese business culture is based on relationships, or guanxi, which are formedin part by giving gifts and doing favors.

Line between modest gift giving andillegal intent to influence can be murky.

Establishing a review protocol which balances amount of gift, level ofinfluence of foreign official (or privatein case of UKBA) is helpful.

Documenting lack of intent and stepstaken to ensure no intent to bribe.

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ThirdParties

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Case Study: The Critical Agent

Proposed agent is needed to secure regulatory approval in short period of time for transaction:

− $1 million 30-day success fee;

− Known in the government but not specifically in the office for approval.

Due diligence means “reasonable inquiries” but must address red flags:

– Prior history of bribery and other crimes;

– Conduct interview, and interview 3 business references;

– Nature of services, reasonableness of fee in relation to market and overall size of transaction; and method of payment.

Written contract with representations and warranties on compliance; right to inspect and audit third-party books; and right to terminate contract if believe violation has or will occur.

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Third Parties

Screen the Initial Terms of Relationship with Third Party:

Develop a different screening procedures for review of individual transactions.

Do not over-standardize procedure. Need to tailor to individual circumstances in each country based on risk.

Need to conduct background check to determine (5-10 year history) to determine if:

a) ties to foreign government officials and employees; or

b) existence of any pending or prior investigations of bribery or other malfeasance.

Create written package and record of review and approval process to demonstrate compliance.

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Due Diligence Screening of Third Party Agents

Third Parties

Case Study: Obtaining the Necessary Permit

In order to open a business in Afghanistan, a company needs a license. Company applies and wait and waits and nothing happens.

Out of frustration, company finds another agent to help obtain the approval. Company conducts limited due diligence. Hires the agent with no success fee or contingency.

Within 24 hours, the agent obtains the license.

Company learns that agent was relative of head of licensing office for new businesses.

What should company do?26

Third Parties

CompliancePrograms

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How to Solve Specific Anti-Corruption Compliance Problems?

There is a solution which minimizesrisk in response to every problem

The ultimate decision whether to go forward in the face of some risks depends on risk sensitivity versus benefit to the business.

Some key principles and strategies are:– Building a record of good faith consideration of issues with

documentation. Such a solution will negate any inference of criminal intent;

– Good faith attempts to comply based on adherence to procedures and reasonable interpretations of the law.

Acquire all of the facts concerning the issue.

Document your inquiry and reasoning for your action.28

Compliance Programs

Principles for a Successful Compliance Program

The key elements of a successful program require:

1) A commitment to compliance from top management and a consistent message throughout the company.

2) A careful weighing of risk, commitment to compliance and business needs so that there is “buy-in” at every level of the company.

3) A business-practical approach which is flexible to respond to risks, local business operations, and effective compliance needs.

4) Avoiding a Dr. No. perception and creating a positive compliance structure which emphasizes common sense, communication and issue identification, solutions to common problems; and recognizes importance of new opportunities.

5) Building in controls and procedures which ensure adequate documentation of compliance reviews and actions.

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Compliance Programs

The Critical Building Block: Tone at the Top

The company should issue a clear and visible corporate policy against corruption violations.

Demonstrate a strong commitment from senior management.

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Compliance Programs

Anti-Corruption Policies and Procedures

The company should implement specific policies for:

Gifts, hospitality, entertainment, and travel expenses;

Political contributions, charitable donations and sponsorships;

Facilitation payments,solicitation and extortion.

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Compliance Programs

Train, Train, Train: Train of Fools

Critical to design, implement anddocument extensive training program.

Communication and education are keys to compliance.

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Compliance Programs

Train, Train, Train: Train of Fools

Training program should include following elements:

Train board of directors and top management;

Train the trainers;

Train gatekeepers who are most likely to detect corruption(in-house counsel, auditors, HR personnel);

Train sales and regulatory interaction staffs separately;

Message should be tailored to audience;

Records should be maintained of every training program.

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Compliance Programs

Keystones

Senior Management Oversight and Reporting: Designate one or more senior corporate executives of the company to implement and monitor compliance.

Guidance and Monitoring: Establish internal guidance protocol, internal reporting via hotline or anonymous internet-based.

Annual Review: Review and assess anti-corruption compliance program at least annually, and implement, where appropriate, continuous monitoring procedures (e.g. regular surveys and other procedures).

Internal Controls: The company should ensure that it has a system of internal controls for the purpose of foreign bribery or concealing bribery.

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Compliance Programs

Avoiding Jail: How to Protect Against Criminal Prosecution

The two key principles:

If decisions are made and actions taken which are transparent and inconsistent with criminal intent,

companies will avoid criminal prosecution.

Disguising actions andintent make criminal prosecution

more likely.

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Compliance Programs

Affirmative Defense

Reasonable and Bona Fide Expenditures

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Reasonable and bona fide expenditures, such as travel and lodging expenses that are legal under local law and are directly related to:

OR The execution or performance(s) of a contract with a foreign

government or agency thereof

üCONTRACT

The promotion, demonstration,or explanation of products

or services

NEW!

ü

Compliance Programs

Contact Information

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Michael Volkov, Partner (202) [email protected]

Vince Connelly, Partner(312) [email protected]



Chicago And Houston Slides 20111109b

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