fcpa – building a culture of compliancewhy fcpa compliance is important – continued government...

FCPA – Building a Culture of Compliance

Discussion Leader:

Jonathan Marks, CPA/CFF, CFEPartner and Leader of Fraud, Ethics &

Anti-Corruption Services

© 2011 Crowe Horwath LLP 2Audit | Tax | Advisory | Risk | Performance

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Today’s Presenter

Jonathan Marks, CPA/CFF, CFE

Partner and Leader of Fraud, Ethics & Anti-Corruption Services



Building a Culture of Compliance



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1. Overview2. Enforcement Trends3. Whistle-Blowers Under Dodd-Frank4. Significant Changes to the U.S. Federal Sentencing Guidelines 5. Risk-Based Third-Party Due Diligence6. The FCPA and the U.K. Bribery Act7. M&A and Successor Liability 8. FCPA 13-Step Action Plan9. Questions

Webinar Agenda



1. Overview



USSC Annual Sourcebooks (1996 – 2009), available at http://www.ussc.gov/Data_and_Statistics/archives.cfm.

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Totals

Organizations with effective compliance program 0 1 0 1 0 0 0 0 0 0 0 1 0 03

Organizations with compliance program, but was not effective 0 0 0 0 14 2 0 0 0 0 0 0 0 0

16

Organizations without effective compliance program 94 112 118 91 118 90 143 90 20 69 108 88 93 96

1330

Total 94 113 118 92 132 92 143 90 20 69 108 89 93 96

1349

Compliance Deficiencies (O.22%)



Why Compliance With the Foreign Corrupt Practices Act of 1977 (FCPA) Is Important Increased enforcement Increased penalties Individual enforcement U.S. Department of Justice (DOJ) and U.S. Securities and Exchange

Commission (SEC) are increasingly targeting executives; sentences include jail time.

Increasing cooperation and coordination internationally



Why FCPA Compliance Is Important – continued

Government settlements are also requiring external monitors to ensure compliance. 2- and 3-year monitors are becoming a standard part of settlements. Documented monitor costs are up to $50 million per year .



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 UK Bribery Act Cross-country cooperation

Why FCPA Compliance Is Important – continued



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 that have securities registered or

file reports with the SEC to maintain records that accurately reflect transactions and the nature and quantity of corporate assets and liabilities

Falsification of company records to cover up a bribe violates both the FCPA and Sarbanes-Oxley Act



FCPA Fundamentals – continued

1. Anti-Bribery Provision2. Books and Records Provision3. Internal Controls Provision

Requires such entities to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that” transactions are executed with proper authorization of management, financial statements are prepared in accordance to proper accounting principles, and that the company “maintain(s) accountability” for assets

4. Other Key Facts Ignorance of the law is not a valid defense Source of the alleged bribe does not have to be in the

United States Actions of an agent acting “on behalf” of a company are

attributed to the company Actions of the foreign subsidiary will be attributed to the

U.S. parent



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 Justice Enforced by the Securities and Exchange Commission (and DOJ in rare circumstances)

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

Sanctions Against Noncompliance



Impact of FCPA

Direct Impact Fines: Criminal and civil fines against

companies and individuals Profit Disgorgement: Repay profits

obtained as a result of the act Government Contracts: Debarment from

government contracting For a company relying heavily on government

contracts, could be the equivalent of the death penalty

Indirect Impact Reputations: Damaged business reputation

and “trial by press” Professional Fees: Legal and audit costs

can run into the millions External Monitor Fees: External monitors

often required for 3 years Management Time: Significant executive

time spent on investigations/defense Class-Action Suits: FCPA actions often

invite class-action lawsuits Impact on M&A: FCPA issues in target

companies can stall M&A Drop in Credit Rating



Five Elements Constituting a Violation

Who Corrupt Intent Payment Recipient Business 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 or her 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, advisers, and 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



Defining “Value”

FCPA does not define “value,” but it has been broadly interpreted to include tangible and intangible benefits, including: Cash payments Commissions that seem large in relation to the services provided Gifts: jewelry, travel, etc. Employment of an unqualified relative College scholarship for a child of official Donations to political parties Personal favors Charitable contributions Promise of future employment

Offers of value – both direct and indirect –are sufficient to create FCPA liability no matter what their size.



Who Is a Foreign Official?

“Foreign official” is broadly defined to include nearly anyone in a foreign government, including: Anyone in a foreign government

Ministers, government officials, members of parliament, etc. Any employee of a government agency Any employee of any government-owned business (e.g., PEMEX or government-owned

airlines)

Political parties and international organizations Political candidates Political parties International organizations (e.g., World Bank, United Nations, Olympic Committee, etc.)

Private persons and advisers Anyone who has responsibilities similar to those of government employees Consultants Advisers: In a Communist country, potentially all persons can be viewed as foreign

governmental officials as theoretically all citizens own the means and methods of production.



Exceptions to the Anti-Bribery Provisions

Facilitating or “grease” payments made to expedite or secure the performance of a routine governmental action by a foreign official, political party, or party official are permitted by the FCPA: Obtaining permits, licenses, or other official documents Expediting lawful customs clearance Mail pickup and delivery, police protection, etc. Obtaining telephone service, electricity, water, etc. Obtaining issuance of entry or exit visas

Facilitating payments are given to secure or accelerate performance of nondiscretionary acts that an official is already obliged to perform.



Affirmative Defenses Exceptions Extortion Defense

• Business-related payments as part of demonstrating a product or performing a contractual obligation (e.g., travel expenses for a visit to another client)

• Payment deemed lawful under written law of the country

• “Facilitation payments” to low-level officials to expedite or secure services deemed as “routine government actions” (i.e. to low-level government employees to carry out acts that they are otherwise required to do)

• Obtaining permits or licenses

• Processing visas or work orders

• Providing utility services (e.g., phone service, power, or water)

• Potential common law defense may apply to payments made to ensure the safety of a corporation’s agents and employees

Defenses and Exceptions



2. Enforcement Trends



A new record in FCPA enforcement was set in 2010.

• From 2009 to 2010, the number of enforcement actions more than doubled and total fines against companies and individuals nearly tripled. The DOJ and the SEC collected almost $2 billion in FCPA-related fines.

• Eight of the top 10 FCPA enforcement actions of all time involved non-U.S. companies such as French telecommunications company Alcatel-Lucent, British security specialists BAE Systems, and German carmaker Daimler.

• Concurrent settlements by Panalpina World Transport Holding Ltd., a Swiss freight forwarding company, and six of its customers – including Royal Dutch Shell plc – paid a combined total of $236.5 million in fines to resolve related FCPA enforcement actions.

Source: “FCPA Winter Review 2011,” Miller & Chevalier Publications, Jan. 21, 2011



Enforcement



Individuals1. 2009 continued the annual trend of



The Sting: In January 2010, the DOJ filed criminal charges against the largest number of individuals prosecuted in a single case as part of an undercover sting operation.

In remarks on February 25, 2010, U.S. Assistant Attorney General Lanny Breuer observed, “Out are the days of resting easy in the belief that only self-reporting or tipsters will bring criminality to light. In are the days of proactive and innovative white-collar enforcement.”



Criminal convictions after trial1. Frederic Bourke2. William Jefferson3. Gerald and Patricia Green

Prison sentences1. Charles Jumet – 87 months2. Juan Diaz – 57 months3. Shu Quan-Sheng – 51 months4. John Warwick – 37 months

Some Recent Individual Prosecutions



Theory of Liability

1. Section 20(a) of the Securities Exchange Act of 1934 provides that any person “who, directly or indirectly, controls any person liable” for violating the act is himself liable to the same extent as the violator.

2. It is used to hold U.S.-based executives responsible for alleged corrupt payments made at the foreign subsidiary level when the U.S. officers did not authorize or even have knowledge of the payments.

Individuals – “Control Person”



A Brazilian subsidiary of NSP that manufactures nutritional and personal care products made cash payments to customs officials to facilitate the importation of unregistered products into Brazil. The subsidiary also purchased false documentation to conceal the nature of the products.

• NSP was charged with anti-bribery, books and records, and internal controls violations.

The SEC also alleged that Faggioli (NSP’s former COO) and Huff (NSP’s former CFO), in their capacity as “control persons,” violated the books and records and internal controls provisions of the FCPA.

Individuals – Nature’s Sunshine Products



• Jail time for corporate executives• Financial penalties, fines, and disgorgement

of profits• Damage to reputation• Criminal and civil litigation• Potential debarment from government

contracting• Massive attorneys’ and accountants’ fees• Disruption of business • Distraction • Drop in credit rating• Monitor

Impact



Settlements – Many Are Non-U.S. Companies

• Siemens – More than $800 in combined fines and penalties

• Halliburton/KBR – $579 million

• BAE – $400 million• Snamprogetti Netherlands B.V.

and its parent company, ENI S.p.A of Italy – $365 million

• Technip – $338 million

• Daimler – $185 million



Increased international cooperation noted in Russia, Germany, France, Norway, Switzerland, and even China have become more aggressive.

Nigeria's anti-corruption police attempted to charge Dick Cheney.

Global Cooperation



Global View

2010 Corruption Perceptions Index

Source: Transparency International



• Technology

• Telecommunications

• Oil and gas

• Manufacturing

• Engineering and construction

• Pharmaceutical

• Medical devices

• Mining

• Transportation

• Private equity (new)

• Banking – sovereign wealth funds: Employees are viewed as foreign governmental officials under FCPA

Targeted Industries



• Avon• Hewlett-Packard• CB Richard Ellis• SciClone• Schlumberger• Royal Dutch Shell• 3M

2011 enforcement actions• Alcatel-Lucent• Maxwell Technologies• Tyson Foods

Open Investigations



A. Dodd-Frank

1. Whistle-blower provisions2. Extractive industry disclosure requirements

B. Proposal to allow private rights of action under the FCPAC. Chamber of CommerceD. U.K. Bribery Act

Legislative Developments



3. Whistle-Blowers Under Dodd-Frank



1. The recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) contains whistle-blower bounty provisions that are expected to accelerate the detection of FCPA violations and the initiation of investigations and prosecutions.

2. Under the new law, whistle-blowers stand to make much more. A whistle-blower who provides information to the SEC about a violation of the anti-bribery, books and records, or internal control environment provisions of the FCPA by a public company, will receive an award of 10 to 30 percent of any monetary sanctions in excess of $1 million recovered through enforcement actions.

3. This new whistle-blower provision may end up playing a key role in identifying and prosecuting violations of the FCPA.

A copy of the Dodd-Frank Wall Street Reform and Consumer Protection Act is available from the U.S. Government Printing Office at www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html

Whistle-Blower Incentives Increased

http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html�



4. Significant Changes to the U.S. Federal Sentencing Guidelines



Individuals with operational responsibility for the compliance and ethics program must report directly to an audit committee, board of directors, or other governing authority.



5. Risk-Based Third-Party Due Diligence



Some High-Risk Areas

Third-Party Agents Due diligence of foreign third parties and agents is essential. U.S. companies are liable for acts of foreign subsidiaries, their employees,

and joint ventures as well as consultants, agents, distributors, and brokers. You are liable where you either know or should have known of violation by

those acting on the company’s behalf.



Why the Need for Third-Party Diligence

The scope of the FCPA extends beyond the direct actions of the company:

Culturally accepted or tolerated ways of doing business focusing on theimportance of relationships can create conflict with anti-corruption standards.

Agents and distributors are often critical to conducting business globally. Some agents are seen as “foreign officials.”

Due diligence of third parties can, in addition, assist in identifying potential conflicts of interest and other adverse relationships.



Business Relationship Types

A broad range of third parties should be assessed, across every country in which you operate. Some examples:

Accountants/Accounting Firms Agents/Distributors Agents Authorized Dealers Charitable Organizations Commercial Consultants Construction Firms Consultants Customs Agents/Brokers Distributors Environmental Consultants Engineering, Procurement Freight Forwarding Agents/Brokers General Contractors

Lawyers/Law Firms Lobbyists Marketing/Advertising Other Consultant Pure Resellers Real Estate Agents/Brokers Sales Representatives Subcontractors Tax Agents/Specialists Trade Associations Other



Red Flags

Agents, consultants, joint ventures, and contractors that reside outside the country where the services are to be rendered

Demand an unusually high commission without a corresponding level of service or risk

Do not have the organizational resources or staff to undertake the scope of work required under the agreement

Have a close family connection or other personal or professional affiliation with a foreign government or official



Red Flags – continued

Refuse to disclose their complete ownership Refuse to sign representations, warranties, and covenants saying that they

have not violated and will not violate the requirements of the FCPA Request that false invoices or other documents be prepared in connection with

a transaction Request payment before conclusion of contracts or award of bids



Red Flags – continued

Engage in transactions in a country with a general reputation for bribery and corruption

Have a lack of transparency in expenses and accounting records Request to provide services without written contract Request to retain other intermediaries to perform similar functions as agent Request reimbursement of expenses with incomplete documentation



Red Flags When Dealing With Agents and Consultants

Requests for excessive compensation or “success fee” Are fees reasonable and proportionate to legitimate services?

Claims (or threats) based on personal ties “My brother works for the Ministry of Commerce, so you won’t succeed without

me” Requests for payment In cash To someone other than the agent To accounts in third countries



Suggested Process for Third-Party Management

Accountability at every stage Business sponsorship and data collection Risk assessment Business justification Investigative due diligence FCPA certification Documentation Training Third-party program controls Third-party qualification requirements Governance structure FCPA compliance terms and conditions embedded in the relevant contract



Hold a Business Sponsor Accountable

Business Sponsor role The Business Sponsor is an employee, often in business

management or sales, who owns and sponsors a third-party relationship.

The Business Sponsor is the primary contact with the third party and oversees their work for the organization.

The Business Sponsor provides a business justification as required and certifies his responsibility as a sponsor, and that the data submitted to the Third Party Compliance Team on behalf of the third party is, to the best of his knowledge, accurate.

Business Sponsor responsibilities span the entire third-party life cycle.



Collect Third-Party Data

Data collection and evaluation Review finance vendor and customer master files for all third parties with

transactions over a two-year period. Collect detailed information and data for each third party (e.g., name, address,

country, bank). Track details on each third-party account, payment information, etc., to enable

investigative due diligence. Analyze each third party to establish a risk assessment score.



Risk Assessment

Consider at a minimum Relationship activity Geography Industry Payment terms and spend Attempt to conceal identity and/or location



Business Justification

Business justification process Third-party information, including risk score, is provided to Business Sponsor to

assess need to continue with third party. Sponsor reviews data and recommends third-party retention or inactivation,

based on commercial considerations.



Deeper Dive: Perform Further Investigative Diligence

Investigative due diligence includes in-depth, in-country evaluations and leverages the knowledge of Crowe Horwath’sInternational Network.

Possible additional procedures performed: Identify substantive adverse reports. Liaison with information sources to address law enforcement,

regulatory and reputation concerns. Contact references. Search of foreign public records by in-country investigator Site visit to headquarters, inclusive of photographs Neighborhood investigation and source interviews, and

extended scope liaison with information sources



India – Country Risk



Bangladesh



Kazakhstan



Review Business Justification

All high-risk third parties are reviewed by the CFO, General Counsel, and the Chief Compliance Officer. There is also an outside review by a qualified outside FCPA attorney.

All remaining high-risk third parties require investigative due diligence, which could be done by Crowe’s Fraud, Ethics, and Anti-Corruption Practice.



Obtain Compliance Certifications Compliance certifications are required from third

parties. Consider using an automated certification

process: Requests to accept the organization’s compliance

certification are sent electronically. Third parties register and follow prompts to review

policy statements and certify compliance. Third party signs the certification electronically. The Compliance team reviews all third parties who

fail to sign the certification in a timely manner and follows up accordingly

Completed certifications are stored with all related third-party documentation and notes

Certification



Evaluate Your Written Documentation

Review contracts to confirm that existing documentation complies with your organization’s requirements; if not, amend or create new documents as needed.

Collect current documents and capture key data elements. Validate basic information and divide third parties into relationships to be

continued or discontinued. Group documents by compliance category: compliant/requires FCPA

language/new document/terminate. Conduct compliance gap analysis and prepare amendments. Finalize and negotiate all such amendments and agreements. Store all executed copies of amendments/agreements. Send termination notices as applicable.



Provide Ongoing Training

Phased Approach

Ensure our employees understand

Employee online training with localization

Third-party training and ongoing employee training



Controls: Risk-Based Third-Party Qualification Requirements



Thwarting an Investigation

Is your third-party anti-bribery program designed to prevent and control bribery risk, and is there appropriate due diligence on third parties?• If yes, do the key elements include CEO and senior

management support?• Is the “Tone from the Top” appropriate, and does it promote

a culture of compliance? Is there... Accountability? Transparency? Regular reporting to senior management and the Board? Ongoing and adequate training?

Are controls in place to monitor bribery risks? Is Internal Audit qualified, and do they monitor and test

FCPA compliance?




Gifts and Entertainment In many cultures, it is common to give gifts as a

general expression of goodwill, but the boundary between a gift and a bribe can be narrow.

Problems arise when the gifts are disproportionately large or expensive.

Gifts should be of a level that would cause no embarrassment to either party if made public.

Must be permitted under local law.




Travel, meals, and lodging Cannot offer to pay excessive travel and

entertainment costs. Should try to pay vendors directly for any costs

incurred. Any expenses reimbursed directly to a foreign

official should be done so only after legitimate receipts and support are received.



6. The FCPA and the U.K. Bribery Act



• On April 9, 2010, the U.K. Bribery Act 2010 (“Act”) received royal assent.

• On January 31, 2011, the United Kingdom's Ministry of Justice announced a further delay to the implementation of the Act. This is the third delay in the implementation of the Act, which was originally planned to go into effect in October 2010.

• On February 15, 2011, Justice Secretary Ken Clarke said legitimate businesses are "frightened" by the Act, but he made clear the government had no intention of "watering down" the rules.

U.K. Bribery Act Overview



U.K. Bribery Act – Comparison

FCPA U.K. Bribery ActThe FCPA applies only to bribery of foreign officials. The act covers both commercial bribery and bribery of

foreign political officials.

The FCPA does not apply to the receipt of a bribe. The commercial bribery provisions of the act apply toboth the offer and the acceptance of a bribe, while thoserelating to bribery of foreign political officials apply only tothe offer, promise, or payment of a bribe.

The bribery provisions of the FCPA apply to: (1) SECissuers (U.S. and foreign companies); (2) “domesticconcerns”; (3) U.S. persons acting outside U.S. infurtherance of a prohibited payment; (4) foreign nationalsand entities that commit an act in the U.S. in furtheranceof a prohibited payment; and (5) U.S. or foreign agents ofany of the foregoing.

The “failure to prevent bribery” provision applies to: (1)U.K. entities that conduct business in the U.K. orelsewhere; and (2) any corporation, wherever formed,that carries on business or part of a business in the U.K.

Source: Pepper Hamilton LLP



In alleging violations of the bribery provisions of theFCPA, the government must show that the defendanthad the requisite state of mind with respect to hisactions (i.e., negligence, recklessness, intent).

The act imposes strict liability on a corporation for“failing to prevent bribery” where an associated personbribes another person regardless of whether thatperson is a foreign political official or not. The onlydefense to such a claim is that the company hadadequate procedures in place to prevent the bribe.

The FCPA permits facilitation payments for low-levelpayments for certain routine governmental actions.

The act does not permit an exception for facilitationpayments.

The FCPA provides an affirmative defense forpayments that are reasonable and bona fide businessexpenses that are directly related to the promotion,demonstration, or explanation of products or servicesor the execution or performance of a contract with aforeign government or agency.

The act does not provide an affirmative defense forbona fide business expenses.





The FCPA provides an affirmative defense forpayments that are permissible under written locallaw.

The act provides the same affirmative defense – butonly with respect to payments made to foreignpolitical officials. On the other hand, with respect to“commercial bribery,” written local law can beconsidered only as a mitigating factor in determiningwhat a reasonable payer or payee in the U.K. wouldexpect in return for the payment.





7. M&A and Successor Liability



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 more than $26 million.



M&A: The Other Shoe Drops Shortly after purchase, eLandia

discovered a bribery scheme to obtain contracts, and reported it 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.



Private Equity: The Impact of Corruption

“Pirate of Prague” Viktor Kozeny, Czech-born fugitive financier who graduated from Harvard in 1989 with a bachelor's degree in economics, led an effort in the 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.



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



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 approved procedures before sale,

emphasizing importance of compliance program. Vetco/Aibel sold again to private equity, and more FCPA issues

emerged. In 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.

In late 2008, Aibel entered plea to FCPA offenses and paid $4.2 million fine.



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



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



Lessons Learned Successor liability issues are

best managed with transparent, comprehensive, pre- and post-closing due diligence

Vibrant compliance program Timely post-acquisition

review/compliance Self-audits Periodic reevaluations

Remedial steps Self-reporting of violations

Mark Mendelsohn, DOJ, expects thatcompanies will do what they can pre-closing– expectation of “significant, focused, risk-based efforts to identify corruption issues.”



8. FCPA 13-Step Action Plan

Note: The draft guidance is not prescriptive and does not detail specific anti-bribery measures, but instead adopts a principles-based approach, which is intended to be used as a guide by a company when

implementing its own anti-bribery compliance programs.



1. Top-Level Commitment/“Tone From the Top”

FCPA 13 Steps



2. Corruption and Bribery Risk Assessment

FCPA 13 Steps



3. Internal Controls

FCPA 13 Steps



4. Structures/Roles and Responsibilities

FCPA 13 Steps



5. Risk-Based Third-Party Due Diligence

FCPA 13 Steps



6. Clear, Practical, Current, and Accessible Policies and Procedures

FCPA 13 Steps



7. Detailed Implementation Plan

FCPA 13 Steps



8. Appropriate Disciplinary Procedures to Address Violations

FCPA 13 Steps



9. Monitoring and Reviewing

FCPA 13 Steps



10. Training

FCPA 13 Steps



11. An Effective System for Reporting Suspected Criminal Conduct and/or Violations of the Applicable Anticorruption Laws for Directors, Employees, Agents, and Business Partners

FCPA 13 Steps



12. Other Risk Mitigation Procedures

FCPA 13 Steps



13. Periodic Independent Testing of the Compliance Program

FCPA 13 Steps



FCPA – Lessons Learned From Past Violations Effective policy for monitoring and auditing internal controls Must have a strong process for evaluating FCPA risk Must regularly monitor and audit FCPA-related controls Must investigate when red flags and other bribery allegations arise

Proper due diligence and oversight of business partners Agent/business partner due diligence and training are critical Any aspect of the business related to foreign governments creates risk of

corruption (e.g., procurement, tax, customs, regulations, licensing, ads) Foreign subsidiary management is not always adequately supervised Local management often lacks appreciation of corruption risk



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.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 and consider using World-Check).



10 Steps to Minimizing FCPA Risk – continued

8. Include FCPA language in contracts and agreements, including the right to audit.9. Ensure periodic training of relevant employees.10. Perform proper due diligence on foreign business partners.



FCPA “Red Flags”

DOJ and SEC have identified a number of “red flags” that should serve as guidance for companies engaged in international business with foreign joint venture partners, agents/consultants ,and marketing representatives (“venture principals”): Payments made in a country with a widespread history of corruption Off-the-book accounts where payment is made to a venture principal who

then diverts part of the proceeds to a separate account for unexplainable reasons

Marketing representatives who make unusual requests (e.g., backdating or altering invoices, asking for payments by unusual means, such as through bank accounts outside the country where services are being offered, or to third persons)

Marketing representative requests checks to be made out to “bearer” or “cash” or seeks payment by some other anonymous means



FCPA “Red Flags” – continued

Marketing representative wants to work without a contract (or vague contract) and either refuses to confirm that they will abide by the provisions of the FCPA or disclose their identity

Marketing representative asks for commissions that are substantially higher than the “going rate” in that country among comparable service providers

Marketing representative has family or business ties with government officials or has a bad reputation in the business community

Potential government customer or authorizing agency recommends a specific partner

False accounting entries Inadequate documentation for payments



FCPA “Red Flags” – continued

Hiring companies or individuals closely associated with foreign officials or their relatives

Payments for schooling or scholarships for children of foreign officials Purchasing or renting properties from foreign officials or their relatives Payments to charitable organizations headed by foreign government officials Unusual forms of payment or barter transactions are requested Requests for trade discounts or price variances



Look Out for Other Warning Signals! Business is done (directly or indirectly) with government or government-

related party. Country/industry has reputation for corruption. Business partner has ties to a public official. Business/deal involves consultants. Business involves complex deal or holding structures (tax havens, etc.). Public official recommends business partner. Business partner insists on anonymity. Business partner lacks resources to assume proposed role. Payment to business partner is excessive or with unusual method. Business partner requests money to “get the business” or “make the

necessary arrangements.” Business partner refuses to certify compliance or is uncooperative during an

audit. Prospective business partner has been mentioned in press with negative

reputation or past sanctions. Delivery of services, such as express deliveries that get through customs 100

percent of the time, is “too good to be true.”



If You Think You Are in Violation

Elevate the issues to the compliance officer, legal department, or general counsel.

Engage internal audit. Ensure attorney-client privilege is maintained. Consult with outside counsel competent in FCPA matters. Determine the scope and extent of additional possible

violations. Consider voluntary disclosure to DOJ and SEC. Review and refine your policies and procedures, internal

controls, and compliance policies. Automate FCPA controls monitoring using all available tools.



For more information, contact:Jonathan Marks, CPA/CFF, CFEDirect 212.572.5576Mobile [email protected]

Special Thanks to: Tom Fox, FCPA Attorney and Author of the FCPA Compliance and Ethics Blog

www.tfoxlaw.wordpress.com Greg Paw, FCPA Attorney at Pepper Hamilton LLP http://www.pepperlaw.com/ Bruce Ackerman of World-Check http://www.world-check.com/

mailto:[email protected]�

http://www.tfoxlaw.wordpress.com/�

http://www.pepperlaw.com/�

http://www.world-check.com/�

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