Overview of Joint SEC/DOJResource Guide on the Foreign

Corrupt Practices Act

Jim Sanders, Francisca Mok and John Tan

November 19, 2012

James SandersPartnerCentury CityT+ 1 310 734 5418F+ 1 310 734 5299jsanders@reedsmith.com

Francisca MokPartnerCentury CityT+ 1 310 734 5287F+ 1 310 734 5299fmok@reedsmith.com

John TanCounselShanghaiT+ 86 (21) 6032 3188F+ 86 (21) 6032 3199jtan@reedsmith.com

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Joint Publication by SEC and DOJ

• Downloadable 130 page document available from SEC and DOJ websites which is titled “A Resource Guide to the U.S. Foreign Corrupt Practices Act”

• Comes with an express disclaimer:

“It is non-binding, informal, and . . . does not in any way limit the enforcement intentions or litigating positions …” of the DOJ or the SEC.

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Guide Structure

• Ten “ Chapters”• Introduction• The FCPA Anti-Bribery Provisions• The FCPA Accounting Provisions• Other Related U.S. Laws• Guiding Principles of Enforcement• FCPA Penalties, Sanctions and Remedies• Resolutions• Whistleblower Provisions and Protections• DOJ Opinion Procedure• Conclusion

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Key Points

• Much of the Guide Is:• Compilation of existing materials - cases, statutes, opinion

releases, jury instructions, etc.• A handy reference book on the FCPA

• The Guide Is Not:• A significant change in policy

• The Guide does, however, provide some helpful information in some areas.

• The Guide also advocates for DOJ’s and SEC’s interpretations of the law.

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Today’s Focus

• Gifts and Entertainment

• Benefits of Compliance Programs

• Merger and Acquisition Issues

• Enforcement Priorities and Policies

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FCPA Basics: Two Types Of Provisions

• Anti-bribery provision• Criminalizes the bribery of foreign officials anywhere in the

world • Prohibit giving or offering anything of value to officials of

foreign governments, political parties or international organizations for the purpose of influencing the officials to assist in obtaining or retaining business

• Books and records provisions• Require accurate and honest record keeping and effective

internal controls by public companies, including records that would reveal, and controls that would prevent, bribery

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Broad Reading of “Business Purpose”

• One element of an FCPA violation is that a suspect payment must be made to assist in “obtaining or retaining business.”

• The Guide specifically endorses a broad reading of this business purpose test – “ bribe payments made to secure favorable tax treatment, to reduce or eliminate customs duties, to obtain government action to prevent competitors from entering a market, or to circumvent a licensing or permit requirement, all satisfy the business purpose test.”

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Broad Reading of “Government Official”

• Another element of an FCPA violation is that a suspect payment must be made to a “foreign official.”

• The Guide specifically endorses a broad reading of this business purpose test – “The FCPA broadly applies to “any” officer or employee of a foreign government and to those acting on the foreign government’s behalf. The FCPA thus covers corrupt payments to low-ranking employees and high-level officials alike.”

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Broad Reading of “Government Official”

• Covered foreign officials include employees of state-owned and state-controlled entities.

• Guide includes a non-exclusive list of factors to be considered in making the determination, including:• the foreign state’s degree of control over the entity

(including whether key officers and directors of the entity are, or are appointed by, government officials);

• the circumstances surrounding the entity’s creation; • the purpose of the entity’s activities; • the entity’s obligations and privileges under the foreign

state’s law;

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Broad Reading of “Government Official”

• Additional factors to be considered in making the government official determination, including:

• the level of financial support by the foreign state (including subsidies, special tax treatment, government-mandated fees, and loans);

• whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government; and

• the general perception that the entity is performing official or governmental functions

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Gifts, Travel and Entertainment

• References several obvious examples of “corruptly” given travel and entertainment – long trips to tourist destinations with essentially no business purpose

• Expressly states that modest gifts appropriate to the occasion, inexpensive brand reminders, and reasonable meal and entertainment expenses are not the focus of enforcement

• Examples include cab fare, modest bar tab, “moderately priced” wedding gift

• Permits international business class travel, where company policy would permit it for employees, as well as modest entertainment (dinner, baseball game, play) during reasonable and bona fide promotional trip (e.g., multi-day factory inspection).

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Gifts, Travel and Entertainment

• Does not provide any minimum threshold for what could constitute a corrupt payment and cites $100 payments in commercial bribery context

• Maintains that small gifts frequently distributed can form the basis of prosecution.

• Gifts should be: (1) transparent; (2) properly recorded; (3) “only to reflect esteem or gratitude”; (4) lawful; (5) customary where given and reasonable for occasion.

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Corporate Compliance Programs

• Discourages “one size fits all” and “good on paper” only compliance programs

• Encourages continuous updating of compliance programs –as business operations, locations, customers and laws change

• Encourages program design based on risk assessment.

• Discourages undue focus on routine expenses – modest meals and gifts – that take resources away from higher risk areas like large government contracts, third party consultants, and risky countries

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“Hallmarks of Effective Compliance Programs”

• Top Down Culture of Compliance• Code of Conduct and Policies – updated and available in native language

• That address third parties, travel/entertainment, facilitating payments, ongoing compliance activities by audit and internal controls

• Individuals in Charge of Compliance Have Autonomy and Resources• Program Tailored to Company’s Unique Risks• Periodic Training and Certifications – In-person and Web-based where

appropriate• Mechanism for Fast Compliance Advice• Incentives and Punishment for Compliance• Third Party Diligence – Consultants, Distributors and Local Partners• Third Party Controls – Contract Terms, Audit Rights

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Merger and Acquisition Issues

• Successor Liability – reducing risk from acquisitions• Do Not:

• Need to meet Halliburton time frames • Do:

• Need to conduct pre-acquisition due diligence• Need to conduct post-acquisition deep dive, no matter pre-

acquisition findings• Need to work with “reasonable speed”

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Merger and Acquisition Issues

• Pre- and post-acquisition work will be guided by• Risk level of industry• Risk level of environment• Purpose of acquisition (e.g., if you are acquiring company for its

manufacturing capacity, do not need to focus on sales force)• Numerous references to disclosure as a standard part of due

dilligence/M&A process

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Third Parties

• Review of third parties is a necessary part of M&A Due Diligence

• Areas of focus:• Contacts with Government Officials• Resources available• Level of supervision

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Self-Reporting

• No express information is provided on the benefits of self-reporting

• Discussion focuses on the procedure

• Benefits Under the Sentencing Guidelines

• The SEC’s previously Stated Policies on Voluntary Cooperation.

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Examples of Declinations

• Generally Declinations by DOJ or SEC are not Public

• Guide contains 6 examples of declined FCPA cases.

• All six included

• Prompt internal investigation

• Voluntary disclosure to DOJ/SEC

• Improvements to compliance function

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Conclusions

• Not new law

• No major changes to policy

• Not binding on SEC/DOJ

• Reasonable gifts and entertainment likely acceptable

• Emphasizes

• Compliance Programs

• Pre & Post Acquisition Due Diligence

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