anticorruption enforcement is alive, well and...

39 Offices in 19 Countries

ANTICORRUPTION ENFORCEMENT IS ALIVE, WELL AND COSTLY

Rebekah J. Poston Squire Sanders (US) LLP 305.577.7022 [email protected]

GTDC February 19, 2014

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10 largest FCPA Settlements

Company Amount

1. Siemens (2008) $800 million (DOJ - $450 million) (SEC - $350 million)

2. KBR/Halliburton (2009) $579 million (DOJ - $402 million) (SEC - $177 million)

3. Total S.A. (2013) $398 million (DOJ - $24 million) (SEC - $153 million)

4. Alcoa (2014) $384 million (DOJ - $209 million) (SEC - $175 million)

5. Snamprogetti/ENI (2010) $365 million (DOJ - $240 million) (SEC - $125 million)

6. Technip (2010) $338 million (DOJ - $240 million) (SEC - $98 million)

7. JGC (2011) $219 million (DOJ - $219 million)

8. Daimler (2010) $185 million (DOJ - $94 million) (SEC - $91 million)

9. Weatherford Int’l (2013) $153 million (DOJ - $87 million) (SEC - $66 million)

10. Alcatel-Lucent (2010) $137 million (DOJ - $92 million) (SEC - $45 million)

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•  Alcoa now ranks #4 on this chart as of the first week of January, 2014.

•  $384 million in disgorgement of profits and fines against the parent Alcoa, Inc. by DOJ and SEC.

•  No proof the parent actively knew about or participated in any of the corruption.

•  The DOJ and SEC held the parent responsible for the acts of its subsidiary, Alcoa World Alumina LLC (AWA), and an agent in its supply chain.

•  Why?

Ø  “Alcoa did not conduct due diligence or otherwise seek to determine whether there was a legitimate business purpose for the use of a middleman.”

The Alcoa Case

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•  SEC warned: Ø  “The law does not permit companies to avoid responsibility for foreign

corruption by outsourcing bribery to their agents . . . It is critical that companies assess their supply chains and determine that their business relationships have legitimate purposes.”

•  DOJ: Ø  AWA pled guilty to criminal charges and paid fines to DOJ of $209 million

and forfeited $14 million. •  SEC:

Ø  Alcoa paid fines and disgorged profits to SEC for bookkeeping offenses in the amount of $161 million.

Ø  The SEC imposed an “enhanced global anti-corruption compliance program on Alcoa.”

•  FACTS: Ø  The scheme related to a supply arrangement between Alcoa subsidiaries

and Aluminum Behrain, B.S.C. (“Alba”), a majority-government owned smelter in Bahrain.

Ø  1989, Alcoa of Australia began to engage in dealings with Bahrainian officials, including members of the royal family in order to secure supply contracts with Alba.

The Alcoa Case

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Ø  The Australian sub (and later AWA, who took over the relationship), to assist with negotiations, retained a London-based consultant with close ties to the Bahraini royal family, named Victor Dahdaleh.

Ø  The sales agent set up a complex structure of shell companies and offshore accounts, through which all the alumina was eventually provided.

Ø  Dahdaleh was allegedly able to impose inflated markups on the purported sales by approximately $188M between 2004-2009.

Ø  $110/188M which were falsely classified as legitimate mark-ups and commissions, were then dispersed as kickbacks to Bahrainian officials and members of the royal family.

Ø  In February 2008, Alba filed a civil suit against Alcoa in the U.S. District Court for Western Pennsylvania, alleging that Alcoa was bribing Alba officials and overcharging for alumina.

Ø  This civil suit led to the DOJ and SEC investigation.

The Alcoa Case

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•  LESSONS LEARNED: Ø  Alcoa’s control over its subsidiaries resulted in its liability under the

government’s new expanded agency theory of enforcement.

Ø  Parents must maintain vigilance over their subs and agents to avoid FCPA liability. Failure to do so will be seen a willful blindness and culpability.

Ø  Even when a parent company doesn’t bribe anyone, it can be held liable if it fails to properly monitor and conduct due diligence on the actions of its subsidiaries and their business relationships.

Ø  Failure to maintain “sufficient internal controls to prevent and detect the bribes, which were improperly recorded in Alcoa’s books and records as legitimate commissions or sales to a distributor” violates the accounting provisions of the FCPA. ($161M in disgorgement of profits by Alcoa.)

The Alcoa Case

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Risks Posed by Partners, Agents, and Other Third Parties • Third parties are one of the highest risk areas for FCPA violations.

Ø  60%-70% of the SEC’s FCPA actions involve third-party intermediaries who passed money to Foreign Officials.

• It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a Foreign Official.

• DOJ does not have to prove third party acted on company’s direct order.

• DOJ does not have to prove company actually knew the third party engaged in prohibited conduct.

• A company’s failure to investigate suspicious circumstances or turning a blind eye can be sufficient to establish knowledge and culpability on behalf of the company under the FCPA.

Understanding the FCPA

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Subsidiaries and Affiliates Consultants

Sales Representa4ves/

Distributers

Subcontractors Franchises Joint Venture Partners

Agents Lawyers Accountants

Who are the typical intermediaries?


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Ø  Vaguely worded services contracts. Ø  Payments exceed what others charge for the same services. Ø  Volume discounts appear excessive and repeated. Ø  Owned by a government entity or refuses to disclose owners, partners or

principals. Ø  Uses shell or holding companies or other unusual corporate structures

that obscure ownership without credible explanation. Ø  Is specifically requested by a customer or is recommended with

enthusiasm out of proportion to qualifications. Ø  Has a business that seems understaffed, ill-equipped or inconveniently

located to support the proposed undertaking. Ø  Has little or no expertise in the industry in which he/she seeks to

represent his/her company. Ø  Is ignorant or indifferent to laws and regulations. Ø  Identifies a business reference who declines to respond to questions or who

provides an evasive response. Ø  Is the subject of credible rumors or media reports of inappropriate payments. Ø  Is currently under investigation or has been convicted of previous violations of

law. Ø  Reputation, reputation, reputation.

Third Party Red Flags

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Due Diligence – DOJ/SEC Resource Guide •  Third party due diligence:

Ø “Understand the qualifications and associations of [your] third-party partners.” Ø “Have an understanding of the business rationale for including the third party in the transaction.” Ø Review payment terms and confirm that the third party is actually performing work and that compensation is appropriate for the work performed. Ø “Undertake some form of ongoing monitoring of third-party relationships.”

•  Conduct background checks to ensure the agent is not closely related to a Foreign Official and has no history of, nor reputation for, engaging in improper conduct.

•  Obtain information from reliable sources:

Ø U.S. Embassy Commercial Attaché; U.S. Dept. of Commerce; interviews; local counsel. Ø Internet; investigators.

•  Document all third-party due diligence.

•  Distribute anti-corruption policy to third parties and obtain certificates of compliance on a periodic basis.

•  Train and monitor third parties.

Third Party Due Diligence and Contracts

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Contracts – DOJ/SEC Resource Guide •  Negotiate contractual access to third parties’ books and records,

along with audit rights and periodically exercise these rights.

•  Include reps and warranties language re: anti-corruption compliance in the third party agreements.

•  Provide indemnification rights along with termination clauses in the third-party agreements for anti-corruption violations.

Third Party Due Diligence and Contracts

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•  The FCPA has two components that address international corruption and bribery:

Ø  Anti-bribery provisions.

Ø  Accounting provisions which address record keeping and internal controls.

•  The DOJ and SEC enforce the FCPA and broadly construe many of its terms.

•  Anti-Bribery Provisions

The FCPA’s anti-bribery provisions prohibit:

Ø  Paying or offering to pay “anything of value.” Ø  Directly or indirectly.

Ø  To a “foreign official,” or to any other person while knowing that all or part of the thing of value will be paid or offered to a Foreign Official.

Ø  For the corrupt purpose of influencing the official in some official act, directing business to another, or securing any improper advantage.

Ø  In order to “obtain or retain business.”


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•  “Anything of Value” Ø  Gifts, meals, entertainment expenditures, travel expenses. Ø  Commissions, honorariums. Ø  Rebates and discounts. Ø  Loans, services. Ø  Charitable donations. Ø  Jobs to Foreign Officials’ family members and children. Ø  Referrals, use of facilities.

•  “Foreign Official” Ø  “[A]ny officer or employee of a foreign government or any department agency or instrumentality

thereof ... or any person acting in an official capacity for or on behalf of any such government, department, agency, or instrumentality....”

Ø  Employees of SOE’s (all SOE employees are Foreign Officials, regardless of rank or title). –  Hospitals, utility companies, telecommunications companies –  One-half (1/2) of corporate FCPA enforcement actions in 2012 involved foreign healthcare

providers (doctors, nurses, mid-wives, laboratory personnel) as the foreign officials Ø  Judges, lawyers. Ø  Political parties, candidates. Ø  Officers and employees of a public international organization (e.g. International Olympic

Committee, World Bank, UN, International Red Cross).


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•  “Obtain or Retain Business.” Ø  Influencing a procurement process.

Ø  Circumventing import rules.

Ø  Avoiding contract termination.

Ø  Payments to obtain special tax treatment.

Ø  Payments to obtain government licenses or permits, not otherwise entitled to.

Ø  Securing an improper advantage over competitors.

Ø  Promotional or other payments made to, or for the benefit of the foreign official or government employee to incentivize referrals, or use certain products.


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•  Limited Exception for Certain Meals, Entertainment, and Other Business Courtesies.

Ø  Payments made for expenses to benefit Foreign Officials directly related to the promotion or demonstration of the company’s products or services or to the negotiation, execution, or performance of a contract. –  Travel and expenses relating to visiting a company facility, for training or

meeting with a legitimate business purpose –  Expenses must be necessary and transparent

Ø  Costs should be paid directly to vendors and accurate records kept of such payments.

•  Facilitation payments allowed:

Ø  Small, one-time payment made to a low-level foreign official to expedite a process to which payor is lawfully entitled.

Ø  Prohibited by UKBA; OECD Convention; most non-U.S. countries; and in many Latin American countries because they are considered bribes.


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Broad Applicability •  The anti-bribery provisions apply to various types of companies

and individuals, including: Ø  Issuers (companies registered on national exchanges or that are

required to file reports with the SEC).

Ø  Domestic Concerns. -  All U.S. companies and any company that has its principal place of

business in the U.S. -  All U.S. nationals, citizens, or residents

Ø  Non-U.S. companies and individuals who cause an act in furtherance of a corrupt payment in the U.S. while within U.S. territory.

Ø  Foreign companies whose ADRs (American Depository Receipts) are traded on a U.S. exchange.

Ø  Officers, directors, employees, agents and shareholders acting on behalf of all of the above.


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•  FCPA – Anti-Bribery Provision Penalties: Ø  Companies:

–  Criminal fines up to $2M per violation –  Civil penalties up to $16K per violation –  Other civil remedies generally available to SEC (injunctions, cease

and desist orders, accounting/disgorgement)

Ø  Individuals: –  Criminal fines up to $250K per violation –  Imprisonment for up to 5 years –  Civil penalties up to $16K per violation –  Other civil remedies generally available to SEC

Ø  Alternative Fines Act. –  Allows a criminal fine to be up to twice the gross gain or gross loss

associated with the conduct


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•  Books and Records/Internal Controls Provisions Apply to: Ø  Issuers.

Ø An officer, director, or employee can also be charged with aiding and abetting or causing a company’s violation of the accounting provisions of the FCPA.

Ø  Foreign subsidiaries, joint ventures or affiliates owned and controlled (more than 50%) by the issuer.

•  Books & Records Violations: Ø  Record keeping violations normally involve 3 types of offenses:

–  Records that simply fail to record improper transactions, e.g., off-the-books transactions such as bribes and kickbacks

–  Records that are falsified to disguise aspects of improper transactions –  Records that correctly set forth the amount of the transaction, but fails

to record the true purpose of the transaction that would have revealed the illegality or impropriety (payments to agents, distributors or customers)


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•  “Good Faith” Defense: Ø  An issuer with 50% or less of the voting power of a foreign or domestic firm

need only attempt in good faith to use its influence to cause the firm's compliance with the accounting provisions (books and records and internal controls) of the FCPA.

Ø  “Good faith” relevant factors include: –  Issuer’s degree of ownership & control –  The laws and practices governing the business operations of the

country in which such firm is located –  (See 15 U.S.C §§ 78m(2)-(6) & 78ff; Rules 13B2-1 & 13A-15)


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•  FCPA – Books & Records Provisions Penalties: Ø  Companies:

–  Criminal fine up to $25 million per violation –  Civil fine up to $725,000 per violation –  Other civil remedies generally available to SEC (injunctions, cease

and desist orders, accounting/disgorgement)

Ø  Individuals: –  Criminal fine up to $5 million per violation –  Up to 20 years imprisonment –  Civil fines up to $150,000 per violation and remedies generally

available to SEC

Ø  Alternative Fines Act. –  Allows a criminal fine to be up to twice the gross gain or gross loss

associated with the conduct


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•  DOJ’s FCPA Unit Chief said the DOJ expects to bring “top 10 quality type cases” in 2014, despite fewer prosecutions in 2013.

Ø  13 enforcement actions by the DOJ in 2013.

Ø  8 enforcement actions by the SEC in 2013.

•  Cumulative dollar value settlement in 2013 almost 3x that in 2012; almost 2x that in 2011.

Ø  In 2013 the average cost of resolving an FCPA case was $81.8 million.

•  Increased prosecutions of individuals.

Ø  Criminal and civil prosecutions brought against 14 persons in 2013, versus 5 in 2012.

Ø  63% of DOJ prosecutions against individuals in 2013.

FCPA and Related Enforcement Actions Promised to Increase

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•  DOJ is utilizing its traditional investigative techniques in FCPA cases e.g. wiretaps, undercover operatives, search warrants.

•  Hybrid monitors are becoming more popular with the DOJ.

Ø  18 months followed by self-reporting.

•  Growth in cross-border cooperation in FCPA prosecutions.

Ø  OECD: Argentina, Brazil, Chile, Colombia, Mexico.

FCPA and Related Enforcement Actions Promised to Increase

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•  Increased international cooperation and whistleblower tips are fueling these enforcement fires.

Ø  149/3,238 WB complaints to SEC WB office re: FCPA.

Ø  WB complaints from all 50 states, D.C. Puerto Rico, Guam, U.S. Virgin Islands.

Ø  WB complaints from 55 foreign countries: –  UK (66) –  Canada (62) –  China (50) –  Russia (20)

•  SEC paid out rewards in four cases:

Ø  $14M

Ø  $150,000

Ø  $125,000 (3 ways)

Ø  $55,000

Increased SEC Action on Whistleblower Complaints

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Cost of FCPA Investigations

•  A handful of companies each reported spending well beyond $100 million in FCPA-related investigation costs alone pertaining to multinational probes: Ø  Avon ($339.7M in “professional and related fees” since 2009; $92.4M

FY2012). Ø  Avon estimates $132M to settle with DOJ and SEC. Ø  Wal-Mart ($300M in legal fees and compliance charges since internal

investigation began in November 2011). –  Wal-Mart paying legal fees of approximately 30 executives under investigation

•  Shareholder and derivative lawsuits. Ø  Hewlett Packard Board members sued in federal court in California for

allegedly covering up HP’s overseas spending “significant resources” and hundreds of millions of dollars to repair its reputation and comply with federal investigations.

•  Share prices fall. •  Possible debarment from federal contracting.

Ø  Clean Company Law of Brazil provides for debarment and blacklisting. Ø  DOD debarment with an FCPA conviction.

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Corruption Indicator in the Americas

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•  Scores (CPI) are from aggregated data from 13 international surveys of local governance, economic and investment risk and executive opinion.

•  More than 2/3 of the 177 countries ranked below 50 on a scale of 0 (“highly corrupt”) to 100 (“very clean”).

•  Compliance risks are more than CPIs:

Ø  Sector risk.

Ø  Business model risk e.g. degree to which the company relies on 3rd parties and the nature of controls over their activities.

Ø  Excess capacity; disproportionate sales-based compensation; limited oversight over sales and supply chain personnel.

Ø  Nature and scope of government interactions e.g. contracts; zoning and building permits; tax and customs clearances; currency transaction permissions; investment and financing approvals.

Corruption Indicator in the Americas

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•  The World is Changing: Ø  In Alcoa’s case, it faces liability in Canada under Canada’s recently

amended (6/13) Corruption of Foreign Public Officials Act (“CFPOA”).

Ø  Canada’s anti-bribery statute has been law since 1998, but in 2013 it added strict requirements for recordkeeping and internal controls – the cornerstone of Alcoa’s prosecution and settlement with the SEC.

Ø  Colombia joined the OECD Convention Against Bribery of Public Officials in International Business Transactions on January 19, 2013.

Ø  Mexico enacted a new Federal Anticorruption Law in Public Procurement on June 12, 2012.

Ø  European Commission published a report in first week of February detailing the extent of corruption with the EU Member States – “breathtaking,” by EU Commissioner, Cecilia Malarstrom. –  Report estimated corruption costs the EU economy EUR 120 B/yr., a little

less than the EU’s annual budget

Ø  Brazil’s Clean Company Law took effect January 29, 2014.


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•  Factors leading up to the “Clean Company” Law: Ø  Public and widespread protests of government corruption in 2013. Ø  International pressure because Brazil ratified the OECD Convention in 2000,

but had not done much else. Ø  Anticipation of 2014 FIFA World Cup and 2016 Summer Olympics.

•  Basics: Ø  The law imposes (strict) civil and administrative liability on corporations that

commit corrupt acts through their officers, directors, employees or agents. –  No criminal liability for companies

Ø  Any foreign or Brazilian company – that is headquartered in Brazil or that has a local subsidiary or representation.

Ø  Forbids bid rigging and anti-competitiveness in public contracts. Ø  Prohibits the actual payment or provision of any undue advantage to any

public official. Ø  Prohibits the offering, promising, sponsoring or otherwise supporting such

activity, directly or indirectly. Ø  Prohibits using the company or third party to facilitate unlawful acts or

conceal the true identities of the beneficiaries. Ø  Prohibits wrongful acts to public officials, whether domestic or foreign.

Anti-Corruption Enforcement In Brazil

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•  Penalties: Ø  Fines can range from 0.1% up to 20% of the companies annual gross

revenues.

Ø  If annual gross revenues cannot be determined, fines shall range between R$6,000 –R$60,000,000 ($2,640 USD- $26,400,000 USD).

Ø  Fine may not be lower than the benefit obtained.

Ø  Publication of the company’s misdeeds in a public register ~ to a blacklist.

Ø  Company prohibited from receiving incentives and subsidies from public entities for 1-5 years.

Ø  Seizure and confiscation of assets.

Ø  Partial suspension of corporate activities.

Ø  Corporate dissolution.

Ø  Debarment.


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•  Liability: Ø  Holds parents, affiliates, subsidiaries and members of the same

consortium in a public contract jointly liable.

Ø  Liability is not affected by change in ownership.

Ø  In case of merger or sale of assets, successor company is only liable for a fine up to the value of transferred assets.


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•  Mitigation: Ø  An effective compliance program with internal mechanisms for

corporate integrity, audit and incentives for reporting irregularities, code of ethics.

Ø  Self reporting: –  The company must be the first to indicate its interest to self-disclose –  The company must admit its guilt –  The company must cooperate with the investigation

Ø  Benefits of self-disclosure: –  The fine may be reduced by 2/3 –  The company can obtain immunity from the penalty of prohibition on receipt

of incentives, and subsidies from public entities –  The company can avoid debarment

•  Enforcement Limitations:

Ø  No single specific government agency to enforce the law. The many independent government agencies conflict with each other.


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•  The United Kingdom Bribery Act of 2010 (“UKBA”). Ø  More restrictive than the FCPA.

Ø  No facilitation payment exception.

Ø  Strict liability for failure to prevent a bribe. –  An offense is committed where a "relevant commercial organization" fails to

prevent bribery by a person "associated" with such organization, even if the organization was not aware of the transgression

–  Affirmative statutory defense to companies that can show it had adequate procedures in place to prevent persons from making bribes

Ø  Broad definition of “associated person.”

Ø  Prohibits commercial as well as public bribery.

Ø  Prohibits bribing of a foreign official to obtain or retain business.

Ø  Broad extraterritoriality reach.

Ø  Unlimited penalty for corporates; Individuals 10 years and/or unlimited fine.

Ø  Came into effect 1 July 2011; not retroactive.

UK Bribery Act (“UKBA”)

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REBEKAH J. POSTON Partner – Miami T +1 305 577 7022, [email protected] Rebekah is a former prosecutor with the US Department of Justice who now focuses her practice on defending complex US and non-US white collar criminal cases and corporate compliance. She has successfully represented multinational, public and private corporations, brokerage firms, airlines, banks, and medical device, pharmaceutical and industrial manufacturing companies, as well as their officers, directors and employees. She has counseled and defended on matters involving a wide range of charges and issues including the Sarbanes-Oxley Act, the USA Patriot Act, the FCPA, money laundering, Internet fraud and identity theft, tax evasion, bank and securities and tax fraud, customs and embargo violations, asset seizures, forfeitures and healthcare fraud and abuse. She has written corporate compliance programs and conducted FCPA trainings, audits and investigations for Fortune 500 companies and conducted numerous corporate internal investigations.

Principal Anticorruption Contacts

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