shanghai #15959 v1 strafford ppt fcpa 3 11

美国翰宇国际律师事务所

Foreign Corrupt Practices Act in ChinaCompliance Strategies Given China's Unique Cultural and Governmental Intricacies

Best practices for mitigating risk

Amy L. SommersShanghai

March 3, 2011

2翰宇 FCPA Compliance in China Teleconference

III. Best Practices for Mitigating Risk

Monitoring

Compliance Program

Internal Controls

Education/training

Due Diligence

Steps if misconduct is suspected


A. Monitoring

Think about monitoring both as direct oversight for behavior that is clearly forbidden (e.g., gifts of red envelopes to tax officials) and as an awareness of where there might hidden bribes (e.g., an SOE customer has a grand opening ceremony and asks for a cash contribution of several thousands in cash to buy a balloon bouquet – is this legitimate or a bribe?).

Monitoring is perhaps the most difficult of the ‘best practices’ because it requires consistent vigilance.


A. Monitoring (cont.)

Monitoring means affirmatively asking questions and/or checking data/reports.

Ideally, monitoring should involve collaboration between the finance/accounting departments and the legal/compliance departments.

A key focus should be on processes, e.g., how do orders come in/get booked/billed/payment made?

Checks should be recurring at regular intervals so that a baseline is established and deviations can be observed.


B. Compliance Program

The DOJ has advised the 12 expected elements of a rigorous compliance program in an Opinion Procedure Release issued in connection with acquisition of ABB’s upstream oil/gas businesses, including:

• Adoption of a corporate code of conduct against violating FCPA & foreign anti-bribery laws – with standards/ policies/procedures for directors/officers/employees and third party ‘partners’ to comply.

• Assignment of one or more officers responsible to ensure implementation and to report to Audit Committee.

• Regular training on compliance for directors/officers/employees/third parties.

• Annual certifications of compliance by same persons.

• Centrally maintained Standard Language Agreements.

o All deviations from standard language to be approved by appropriate level.

“Every FCPA conviction of an individual is a personal tragedy, resulting in losses of freedom, jobs, and reputations, and there's often financial ruin and damage to families…. Companies that ignore compliance or settle for slipshod programs put themselves and their employees at great risk. ” www.fcpablog.com, posted 2/14/11.


B. Compliance Program (cont.)

• Implementation of a reporting system (e.g., ‘helpline’) for employees/others to reported suspected violation of company compliance code/criminal conduct.

• Code of Conduct and Training – (translated).

• Clear procedures for prudently identifying reliable third party business partners.

• Confirmation of large transactions with End Users, Agents, and Employees involved.

• Use of financial/accounting procedures to ensure internal accounting controls.

• Independent counsel/auditor audits every three years.

http://www.usdoj.gov/criminal/fraud/fcpa/opinion/2004/0402.html


C. Internal Controls

Act requires that issuers

• Make/keep books, records, and accounts that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the issuer’s assets; and

• Devise and maintain a system of internal accounting controls that provides reasonable assurances that…

o Transactions are executed in accordance with management’s authorizations;

o Transactions are recorded so that financial statements can be prepared;

o Access to assets only in accordance with management’s instructions;

o Recorded assets compared at regular intervals with existing assets and appropriate action taken in respect of differences.


C. Internal Controls1. Eliminating deceptive record-keeping

An impediment is the degree to which cash is still used to effect payments.

Most significant area of risk seems to be in entertainment/travel.

Entertainment potentially problematic in several ways:

• entertainment is real, but excessively lavish;

• entertainment expense is distorted (visit a tea house/bar and get $1,000 bill, with majority kick-backed by restaurant to official);

• entertainment is faked using falsified receipts and reimbursed cash used to fund bribes


C. Internal Controls 1. Eliminating deceptive record-keeping (cont.):

Third-party agency/consulting fees another area where bribes are often concealed – sometimes as entertainment or travel: travel agency invoices company for travel/events that don’t take place and then funnels money to targeted official.

Developing appropriate monitoring of processes for selecting/using agents/consults can help lessen risk of improper payments being recorded.


C. Internal Controls 2. Accounting Controls

A challenge arises from the use of standard, pre-printed forms of invoice,which can be used interchangeably

This partly explains the need both for good training and rigorous oversight, particularly of sales and purchasing functions


C. Internal Controls (cont.)2. Accounting controls

Uncovering collusion by an accountant with sales (such as by approving false entertainment expenses) or purchasing team members (such as approving improper agent’s fees or grossing up PO amounts) can be difficult.

Outside auditors may uncover the deception, but the best hope may lie in use of investigative monitoring discussed above, where business processes are analyzed from an accounting/legal/compliance perspective.


C. Internal Controls 2. Accounting controls (cont.)

Best to avoid use of:

Manual Journal Entries and/or those lacking support.

Generic/un-descriptive account names and activity.

Suspense account activity or large un-reconciled account balances.

False or incomplete invoices and mischaracterization of payments.

Falsified or “mislabeled” records.

Supporting documents do not support the category in which payment is recorded.

Unrecorded (“Off the Books”) transactions.

Payments to different vendors/suppliers that share same address.


C. Internal Controls2. Accounting controls(cont.)

Where a facilitating payment has been made – whether in accordance with company policy or otherwise – the accountants should be directed to record it as a ‘facilitating payment’, regardless of whether it was originally characterized as some other kind of payment.

If a payment is improper and not a facilitating payment, then it should be described as such (e.g., ‘improper payment to gov’t official’ and not ‘consulting expense’).


D. Education/Training1. Guidelines for gifts, travel and entertainment of ‘government officials’

Generally advisable to have a single standard for both ‘private’ and ‘official’ entertaining.

• Some clients prefer to set a fixed limit on what can be spent per meal/gift/entertainment

• others prefer a process for approval

• key is to follow whatever rule is set.

Note Avery Dennison case involved gifts with values of only $125; UTStarcom involved gifts of less than $1,000.

Using corporate gifts imprinted with company logo is a good option.

When in doubt, ask: would giver or recipient be embarrassed if gift disclosed? If answer yes, rethink. Would gift/entertainment pass the relevant “newspaper test”?


D. Education/Training 1. Guidelines for gifts, travel and entertainment of ‘government officials’ (cont.)

Demands for travel expenses, home renovation, pre-paid membership cards, cash-equivalent coupons, etc – PRC Supreme Court interpretation now addresses these intangible benefits and says they are improper (scholarships? internships? Not explicitly answered)

Important to have standard policies, not only to guide your employees, but also because employees can use them as an ‘out’ (we’d love to give you X, but we’ll get in trouble/fired)


D. Education/training (cont’d)

2. Of employees

Absolutely vital to pursuing compliance.

Also, should a DOJ investigation commence, useful as a defense to establish company acted reasonably to ensure compliant practices.

One of the factors working against Siemens was the gap between the compliance program they had on paper and how the business actually ran – training lessens risks of gaps.

Universal Leaf – received sentencing credit for compliance program + Noble Corporation’s compliance program a reason for entry by DOJ into NPA.


D. Education/training (cont.)3. Of business partners

Common in China for foreign-invested companies to do business through a variety of ‘partners’: JV partners, agents, distributors.

Some of these parties are interfacing with gov’t agencies (e.g., to get regulatory approvals); some are seeking to sell/distribute products.

These parties know ‘bribes’ are illegal, but might not realize other behavior could be construed as improper (e.g., flying an SOE customer to inspect a factory in Southern China and to play golf – all expenses paid). Need to make the restrictions applicable under FCPA explicit.

Bribery involving commercial transactions is illegal under PRC law and distressingly common, so training about commercial bribery compliance important.


D. Education/training (cont.)4. Culturally sensitive training

Even where team members are good English speakers, conducting training in Mandarin or using bilingual training if group includes Westerners is advisable to ensure full comprehension and avoid claims of having misunderstood if problems arise in the future.

Contextually relevant training in China:

• explains rules under FCPA and under PRC laws/regulations;

• uses examples involving PRC companies/facts;

• A PRC national is the or one of the trainers, providing a common cultural point of reference, which may make attendees feel more comfortable asking questions or posing ‘hypotheticals’


D. Education/training 4. Culturally sensitive training (cont.)

From the PRC perspective, the way that corruption is framed as a “China problem” when a number of cases involving China actually involve wrongdoing by non-Chinese parties is a sensitive issue:

• E.g., Lucent, Morgan Stanley – these involved actions by non-Chinese

• Lesson: avoid structuring training/compliance as a being directed only to Chinese employees.

• And, training can be a great ‘monitoring’ tool – be prepared to act on what is gleaned by the trainer.


E. Due Diligence

FCPA-focused due diligence procedures should be used in all of the following contexts:

• partner or transaction diligence > focus: is partner a gov’t official? Does transaction involve improper payments/offers?

• key hires (e.g., country manager, sales manager) > focus: does candidate ‘get’ compliance? Skeletons in closet? Strong relationships with officials a positive, if they are truly strong and don’t require improper benefits to maintain them

• third parties (agents/consultants) > focus: do they have relevant technical/industry expertise or are they a shield for an official to get cash?


E. Due Diligence (cont.)

Due Diligence with Third Parties.

• Negotiate contractual access to their books and records, along with audit rights and periodically exercise these rights.

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

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

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

• Document the services being performed by third parties.


How to discuss ‘divorce’ before you’re even married? Sample language:

China Co. and Foreign Co. enter into this Agreement in good faith and with absolute confidence in the integrity of the other. China Co. certifies that its directors, officers and employees have not made and shall not make or agree to make, during the performance of this Agreement, any payments, loans or gifts or promises or offers of payments, loans or gifts of any money or anything of value, directly or indirectly, (i) to or for the use or benefit of any official or employee of any government or an agency or instrumentality of any such government, (ii) to any political party or official or candidate thereof, (iii) to any other person if China Co. or its directors, officers or employees knows or has reason to know that any part of such payment, loan or gift will be directly or indirectly given or paid to any such governmental official or employee or political party or candidate or official thereof, (iv) to any employee of a customer or potential customer, or (v) to any other person or any entity, the payment of which would violate either the laws or policies of the United States or the PRC or any other country or countries of such person or entity.


F. Steps if Misconduct is Suspected

Violation Response Plan – Early Actions:

Suspend document retention policy: no information to be destroyed.

Secure the assets/evidence and suspend access (physical and electronic).

Consider the legal privileges.

Do you investigate with in-house counsel or outside counsel (credibility of findings in eyes of DOJ).

Assess potential exposure in PRC and reputational risk.

Notify and secure investigative/legal resources (e.g., forensic auditors, security consultants)


F. Steps if Misconduct is Suspected (cont.)

Despite history of whistle-blowing in Communist China, hierarchy/ face concerns can act as disincentives against disclosure. Less senior personnel can find it difficult to disclose facts challenging their superiors & causing loss of face (or retaliation).

Be aware that PRC authorities not likely to honor claim of legal privilege for information discovered in internal investigation.

If the PRC government demands information from counsel, unlikely that counsel could successfully claim the information is privileged or that the confidentiality required by the Lawyers Law would be interpreted by any State authority to mean confidentiality vis-à-vis the State itself.


F. Steps if Misconduct is Suspected (cont.)

Current PRC privacy laws do not regulate the export of personal data.

The draft Personal Information Protection Law may prohibit an employer from exporting employee personal data if (a) the personal information involves national security and other major national interests, (b) it is required by international law obligations undertaken by the Chinese government; and (c) the country or region receiving the personal information is unable to provide adequate legal protection for personal information.


Top 3 things your company can do to limit risk of noncompliance in China:

Commit to making ‘clean’ business part of your company culture and use that commitment as a selling or defensive point in your China operations (examples: J&J, GE)

Train/retrain employees on company values, understand their feedback about the marketplace and convey commitment to compliance even if it means losing business

Beware of being results-oriented in your instructions – if you tell your China employees to achieve X, they will do so…but not necessarily in a compliant way: so instruct X result + Y compliant-fashion


Thank you for participating!

Biographical information:

Amy L. Sommers’ strong skills in corporate structuring, governance and operations issues in China make her a valued resource to the clients she counsels. A former Chair of the China Committee of the American Bar Association’s Section of International Law (ABA), Ms. Sommers is a frequent speaker and commentator on China issues. Her involvement in China goes back over 25 years, when she first started studying Mandarin, later developing deep appreciation of China’s history, politics, culture and legal system. Her clients benefit from her ability to bring these insights to bear on their strategic China projects. Ms. Sommers is the recipient of the 2007 award for Professional Excellence from the Expatriate Professional Women’s Society of Shanghai. She is a Vice Chair of the ABA’s International Anti-Corruption Committee and the director of The Anticorruption Blog (www.anticorruptionblog.com). The Shanghai Financial Arbitration Centre has appointed her one of only 14 foreign arbitrators asked to serve the Centre.


Copyright Notice:

All rights, including copyright, in these materials are owned by Squire, Sanders & Dempsey L.L.P. and may only be used for personal/non-commercial purposes. Reproduction is subject to prior permission from, and attribution to, Squire, Sanders & Dempsey L.L.P.

For further inquiries, please contact Amy L. Sommers: [email protected]

shanghai #15959 v1 strafford ppt fcpa 3 11

Documents

internal controls act

monitoring think

internal controls1

internal controls2

rigorous compliance

china compliance strategies

issuers assets

great risk