What Every Business Lawyer Should Know About Anti-Corruption

Transcription

1 What Every Business Lawyer Should Know About Anti-Corruption Stephen King, MasterCard William Devaney, Baker & McKenzie, New York Marc Litt, Baker & McKenzie, New York Jonathan Peddie, Baker & McKenzie, London Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm Baker & McKenzie LLP

2 Hypothetical PE, Inc. is a publicly traded private equity firm with a portfolio of over 20 companies. To date, most of PE s investments have been in U.S. domestic companies with limited overseas sales. PE does, however, have significant capital investments from sovereign wealth funds Baker & McKenzie LLP 2

3 What is the FCPA? Enacted by Congress in 1977 to halt the practice of bribing foreign officials Two main provisions: Anti-Bribery Provisions Books and Records Provisions Jointly enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) 2015 Baker & McKenzie LLP 3

4 Recent Enforcement Actions ($772 million) ($4.5 million) ($384 million) ($32 million) ($135 million) ($88 million) ($29.4 million) ($13. million) ($252 million) ($398 million) ($76 million) ($15.85 million) ($48.17 million) ($1.6 million) ($44.8 million) 2015 Baker & McKenzie LLP 4

5 Current Anti-Corruption Environment 48 FCPA-Related Cases DOJ $1,782 Corporate FCPA-Related Penalties (in U.S. millions) $1, SEC 3 5 $509 $261 $721 $ (as of July 6, 2015) (As of July 15, 2015) There are over 150 open investigations. The total amount of sanctions imposed in FCPA cases in 2014 was $1.566 billion Baker & McKenzie LLP 5

6 Trends Increased prosecution of individuals ( Yates memo ) Increased prosecutions outside the United States Greater international cooperation in investigations Increased government resources focused on FCPA The fraud section is adding ten prosecutors to the FCPA unit The FBI is establishing three international corruption squads Civil Litigation Successor Liability/Importance of conducting pre-transactional due diligence Industry initiatives: Technology/Telecommunications; Health Care and Life Sciences ; Government Contracting; Logistics; Financial Services 2015 Baker & McKenzie LLP 6

7 Trends SEC stepping up enforcement Whistleblower (Dodd Frank): The SEC issued whistleblower awards to more individuals in 2014 than in all previous years combined One individual award was more than $30 million (largest award to date) Increasing international reach: awards to four individuals outside of the US thus far (including largest ever) More than 20% increase in whistleblower tips in last two years Potential new DOJ/SEC policy more concretely defining the benefits of voluntary disclosure and cooperation 2015 Baker & McKenzie LLP 7

8 Enforcement Against Individuals Individuals can and do go to jail for violating the FCPA, in addition to paying heavy fines. In 2014, the U.S. Supreme Court declined to hear the appeal of two individuals sentenced to prison for violating the FCPA in the Haiti Telecom case. One defendant, Joel Esquenazi, received the longest prison sentence in FCPA history 15 years. His co-defendant, Carlos Rodriguez, was sentenced to 7 years. Other sentences: Benito Chinea, sentenced to four years and forced to forfeit $3.6 million for his role in the Direct Access Partners case; Joseph DeMeneses also sentenced to four years and forced to forfeit $2.7 million for his involvement in the same case. Frederic Cilins, sentenced to two years, fined $75,000, and forced to forfeit $20,000 for his involvement in the BSG Resources case. Asem Elgawhary, sentenced to 42 months and forced to forfeit $5.2 million in proceeds for his role in the Alstom litigation. Paul Novak, sentenced to 15 months in prison and forced to pay a $1 million criminal fine for his involvement in the Willbros case. Jean Rene Duperval, sentenced to 9 years in prison for his involvement in the Haiti Telecom case. Duperval is the first foreign official to stand trial in connection with an FCPA case. Christian Sapsizian, sentenced to 30 months in prison for his involvement in the Alcatel-Lucent case. Albert Jack Stanley, sentenced to 30 months in prison for his involvement in the KBR/TSKJ case; Jeffrey Tesler sentenced to 21 months in the same case Baker & McKenzie LLP 8

9 Let s assume PE has an office in London 2015 Baker & McKenzie LLP 9

10 Took effect July 1, U.K. Bribery Act U.S. companies that have offices or operations in the U.K. are potentially exposed to U.K. criminal prosecution for bribes occurring anywhere in the world. Unlike the FCPA, the U.K. Bribery Act has no exception for facilitation payments. It also prohibits commercial bribery and covers the acceptance of a bribe. It creates strict corporate liability for failure of a corporation to prevent bribery. It is an affirmative defense that a company had a comprehensive anticorruption compliance program. Individual criminal penalties up to 10 years. Unlimited fine Baker & McKenzie LLP 10

11 Clearly, the FCPA and other anti-corruption statutes are relevant to PE... What should they do about it? 2015 Baker & McKenzie LLP 11

12 Hallmarks of an Effective Compliance Program Compliance programs that employ a check the box approach are insufficient and often ineffective. According to the DOJ s and the SEC s FCPA Guidance, issued in 2012, an effective compliance program usually includes: A commitment from senior management and a clearly articulated policy against corruption ( top-down ) Clear, concise codes of conduct and compliance policies and procedures Oversight from individuals with authority within the company, who are independent from management and have both autonomy and adequate resources 2015 Baker & McKenzie LLP 12

13 Routine risk assessments to determine the company s exposure to corruption Training (and re-training) of employees, agents, and other representatives, as well as guidance and advice Incentives for compliance, disciplinary measures for noncompliance Mechanisms for employees and others to report suspected or actual misconduct on a confidential basis, without fear of retaliation Periodic testing and review Third-party due diligence and payments 2015 Baker & McKenzie LLP 13

14 Five Essential Elements of Corporate Compliance Leadership Risk Assessment Standards and Controls Training and Communication Monitoring, Auditing and Response 2015 Baker & McKenzie LLP 14

15 PE has an investment opportunity to purchase Extracto, a Chinese-owned multi-national in the mining business with extensive operations and mining concessions in China and West Africa. PE is in the midst of its due diligence on this transaction, taking deep dives into the company s finances, contracts, intellectual property, and the like, but nothing having to do with anti-corruption due diligence Should PE do anti-corruption due diligence? 2015 Baker & McKenzie LLP 15

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17 FCPA Red Flags The transaction is in, or involves, a country identified as a high corruption risk. Business ties to sanctioned countries. Representative has a reputation for paying bribes or an otherwise unsavory reputation. A representative or agent is requesting an unusually high commission or a large, non-standard contingency fee. Compensation significantly higher than market rates. The transaction involves unusual contract terms or payment arrangements, such as requests for payments in cash or special invoices. Pressure to make payments urgently or ahead of schedule. Poorly documented invoices, including vague descriptions and improper documentation of expenses. A representative, agent, or employee has a family relationship with a foreign official or government agency. A representative has an investor that was not disclosed Baker & McKenzie LLP 17

18 FCPA Red Flags The foreign counterparty or government official insists that a particular agent be used. A representative describes a special relationship with government officials. Information about the agent is not verifiable. There is a lack of published information about the agent, where such information could be expected to be available. The role or function of an agent or middle-man is unclear. Work plan is vague and/or suggests an undue reliance on contacts or relationships. Minimal offices or staff, or lack of adequate facilities or staff, to perform the work. An agent or representative will not complete anticorruption certifications. No adequate compliance program or code of conduct in place. No right-to-audit clauses in contracts, or hesitation to allow companies to fully exercise them. Payments are being made through third countries, without sound commercial reasons. Shell and off-shore companies are being used. Payment requests to two or more accounts. There has been a request for a charitable donation Baker & McKenzie LLP 18

19 DOJ Guidance on the FCPA Successor 1 Liability Successor company assumes predecessor company liabilities But, if predecessor was not subject to FCPA no retroactive liability DOJ/SEC have declined to take action in M&A context where companies voluntarily disclosed and promptly remediated DOJ/SEC have taken action only in cases involving egregious circumstances where the successor company directly participated in the violations or failed to stop the misconduct after the acquisition Thorough M&A due diligence can avoid a problematic and costly merger or acquisition 1. Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act (November 2012) Baker & McKenzie LLP 19

20 What Due Diligence to Conduct In the past decade, DOJ has issued several Opinion Procedure Releases concerning pre-transactional due diligence/remediation (03-01, 04-02, 08-01, 08-02, 14-02). In June 2008, DOJ issued Opinion Procedure Release 08-02, which set forth due diligence measures that Halliburton would be required to follow in order to avoid FCPA liability for the activities of an acquisition target. The measures included a comprehensive, risk-based FCPA and anti-corruption due diligence work plan, which would address, among other things: The use of agents and other third parties; Commercial dealings with state-owned customers; Any joint venture, teaming, or consortium arrangements; Customs and immigration matters; Tax matters; and The need for any government licenses or permits. The work plan was required to organize due diligence efforts into high-risk, medium-risk, and lowest-risk elements 2015 Baker & McKenzie LLP 20

21 What M&A Due Diligence to Conduct (cont d) In November 2014, DOJ issued Opinion Procedure Release which set forth that the DOJ will not penalize a company subject to the FCPA for acquiring a foreign target with corruption issues, provided: a) the acquiring company did reasonable due diligence under the circumstances; b) the company has an integration plan designed to implement real anticorruption controls at the target post-closing; and c) the company is not knowingly acquiring tainted contracts or other assets from which it will derive financial benefit going forward. Joint Ventures Other Considerations 2015 Baker & McKenzie LLP 21

22 PE s General Counsel, bowing to pressure from the business people who want this deal and want to get it done quickly, decides that what happens in China and Africa, should stay in China and Africa. They don t want to conduct anti-corruption due diligence. This is true, even after PE was told that there was an agent in Africa, a former government official, that handled all of their mining leases, licenses, and concessions. He is paid a yearly flat fee, and no one knows exactly what he does, other than he comes up with the required documents Is it okay for PE to move forward? 2015 Baker & McKenzie LLP 22

23 Third-Party Agent Risk Over 90% of FCPA cases involve third-party intermediary misconduct 2015 Baker & McKenzie LLP

24 Third-Party Agent Due Diligence Risk-based Two types of agents: 1. Sales representatives: independent representatives, consultants, distributors, introducers 2. Operational representatives: customs clearance, licensing, lawyers Broad factors to consider in initially measuring risk: Geography: where will the agent be performing its services? What function will the agent be performing? Will the agent be interacting with the government? Who is the agent? How and under what circumstances was the agent introduced to the company? 2015 Baker & McKenzie LLP 24

25 Additional Steps Background questionnaire Require anti-corruption (FCPA, UK Bribery Act, local law) familiarity and certification Is there any pushback to the certification? Contracts should contain audit rights Risk-based exercise of audit rights Provide periodic training Request periodic compliance certifications Update due diligence 2015 Baker & McKenzie LLP 25

26 Fortunately, the audit committee at PE vetoed the General Counsel, and they are going to conduct pre-transactional due diligence after all Baker & McKenzie LLP 26

27 Under the laws of China, state secrecy, data privacy, and other laws, PE cannot get access to all of the information it needs to conduct appropriate anti-corruption due diligence What should it do? 2015 Baker & McKenzie LLP 27

28 During the pre-transactional due diligence, counsel discovers questionable payments made to obtain mining concessions via the agent we discussed earlier, and questionable payments in conjunction with the sale of minerals to government customers in Russia and Cambodia Baker & McKenzie LLP 28

29 Suppose the only issues uncovered are bribes paid to lower customs duties and the fees associated with mining concessions and government levies. There are no bribes to get a contract Baker & McKenzie LLP 29

30 Despite the problems, PE goes forward with the acquisition 2015 Baker & McKenzie LLP 30

31 Post-Acquisition Due Diligence M&A practical tips: Conduct risk-based due diligence on new acquisitions Ensure that code of conduct and compliance policies are applied as quickly as possible to the Newco Train Newco employees Conduct an FCPA-specific audit of all newly acquired businesses as soon as possible Conduct third-party agent due diligence as soon as possible 2015 Baker & McKenzie LLP 31

32 2015 Baker & McKenzie LLP 32