The ITAR and the FCPA: What You Disclose May Hurt You. October 7, 2014

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1 The ITAR and the FCPA: What You Disclose May Hurt You October 7, 2014

2 Presenters Mark Srere Bryan Cave LLP Susan Kovarovics Bryan Cave LLP 2

3 Agenda Background on the FCPA Background on ITAR ITAR Part 129 brokering provisions and Part 130 provisions Enforcement actions involving FCPA and ITAR Compliance tips 3

4 Foreign Corrupt Practices Act Background 4

5 Structure of FCPA Antibribery Provisions Prohibits bribery of foreign government or political officials for the purpose of obtaining or retaining business or securing any improper business advantage Mainly enforced as criminal violations by the Department of Justice Books and Records Provisions Requires SEC-registered or reporting issuers to make and maintain accurate books and records and to implement adequate internal accounting controls Mainly enforced as civil violations by the Securities and Exchange Commission 5

6 Antibribery Prohibited Acts It is unlawful for an issuer, domestic concern, or any person acting within the territory of the United States with corrupt intent directly or indirectly to offer, pay, promise to pay, or authorize payment of anything of value to a foreign official for the purpose of obtaining or retaining business or securing any improper business advantage 6

7 To Whom Do the Antibribery Provisions Apply? Any issuer that files reports to the SEC or trades equity or debt on a U.S. exchange Includes any foreign company that trades, for example, American Depository Receipts (ADRs), on a U.S. exchange. Any domestic concern Includes U.S. citizens, nationals, and residents as well as any entity (corporation, partnership, etc.) that is organized under the laws of the United States or a U.S. territory or that has its principal place of business in the United States. Any person, including an organization, wherever located, that, while in the territory of the United States, does any act in furtherance of the prohibited conduct Government argues minimum contacts include s, telephone calls, transfers through correspondent bank accounts in U.S. intermediary banks 7

8 Why Is This Important? Violations of anti-corruption and related laws can result in Serious criminal penalties, including jail sentences for individuals Serious civil penalties for both company and individuals Debarment from and termination of government contracts Costly internal investigations Bad publicity and reputational consequences 8

9 Penalties for Violation of FCPA Provisions Significant Monetary and Criminal Penalties Antibribery Violations o Fines up to $2 million per violation o Culpable individuals may face fines of up to $250,000 per violation and/or imprisonment for up to five years Books and Records and Internal Control Violations (Willful) o Corporate fines in excess of $25 million for a company o Fine up to $5 million and/or imprisonment for up to 20 years for culpable individuals Alternative Fines Statute, 18 U.S.C. 3571(d) Collateral Consequences 9

10 Top Ten FCPA Enforcement Actions 1. Siemens (Germany): $800 million in KBR / Halliburton (USA): $579 million in BAE (UK): $400 million in Total S.A. (France) $398 million in Alcoa (USA) $384 million in Snamprogetti Netherlands B.V./ENI S.p.A (Holland/Italy): $365 million in Technip S.A. (France): $338 million in JGC Corporation (Japan) $218.8 million in Daimler AG (Germany): $185 million in Weatherford International (Switzerland): $152.6 million in

11 Dodd-Frank Whistleblower Provisions Whistleblowers who Voluntarily provide the SEC with Original information That leads to a successful enforcement action in a federal or administrative court That results in monetary sanctions greater than $1,000,000 Are entitled to a mandatory award from the SEC between 10 and 30% of the monetary sanctions September 2014 developments: $30 million award to foreign national whistleblower Award given to company compliance professional 11

12 International Traffic in Arms Regulations Background 12

13 International Traffic in Arms Regulations (ITAR) Administered by the U.S. Department of State, Directorate of Defense Trade Controls (DDTC) Enforced by Homeland Security, Immigration and Customs Enforcement (ICE) and the FBI 22 CFR Parts Requires registration for manufacturing defense articles, exporting defense articles and provision of defense services, or brokering defense articles and defense services 13

14 ITAR Controls the temporary and permanent export and temporary import of Defense articles Technical data Defense services Exports require a license to all countries unless an exemption applies Regulates brokering of defense articles, technical data and defense services 14

15 ITAR Part 129 Brokering Provisions and Part 130 Reporting Provisions 15

16 ITAR Part 129 ITAR regulates brokering of defense articles and defense services Part 129 imposes registration, prior approval, reporting and record keeping requirements Part 129 may apply to sales agents or other parties with whom you are dealing 16

17 ITAR Part 129 Applies to any person described below who engages in the business of brokering activities: U.S. persons wherever located Foreign persons located in the United States Foreign person located outside the United States where the foreign person is owned or controlled by a U.S. person Brokering activities: Any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin. 17

18 ITAR Part 129 What actions are covered? Financing, insuring, transporting, or freight forwarding defense articles and defense services; or Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service. BUT, brokering activities are not limited to these actions. 18

19 ITAR Part 130 Part 130 reporting requirements are independent of Part 129 brokering Even if foreign party is not a broker engaged in brokering activities under Part 129, still need to report political contributions, fees or commissions in accordance with Part

20 ITAR Part 130 ITAR Part 130 requires reporting on the payment of certain political contributions, fees and commissions Political contributions in an aggregate of $5,000 or more Fees or commissions in an aggregate of $100,000 or more A Part 130 Statement must be submitted with all ITAR license applications and agreements submitted for approval Also applies to FMS transactions 20

21 ITAR Part 130 Reporting requirement triggered for transactions involving exports of defense articles or services valued in an amount of $500,000 or more for use of the armed forces of a foreign country or international organization Covered by an ITAR license, TAA, MLA, WDA or in an FMS transaction Reporting must cover payments by the license applicant or FMS supplier, as well as payments by any vendors to such party if the vendor furnishes defense articles or services valued in an amount of $500,000 or more which are supplied to or for the use of the armed forces of a foreign country or international organization 21

22 ITAR Part 130 Under the ITAR, disclosure of information to DDTC about payments is mandatory if Part 130 criteria are met Under the FCPA, disclosure of information about payments (or offers to pay) is not required Yet consideration should be given to what may need to be disclosed to DDTC (and how might that information be shared with other government agencies) 22

23 Enforcement Actions Involving FCPA and ITAR 23

24 BAE Systems plc March 2010; May 2011 Pleaded guilty to conspiring: to defraud the U.S. by impairing and impeding its lawful functions to make false statements about its FCPA compliance program; and to violate the Arms Export Control Act (AECA) and ITAR $400 million (criminal fine); independent compliance monitor for 3 years Civil agreement with DDTC for $79 million in civil penalties and remedial compliance measures 24

25 BAE s FCPA Violations BAE took steps to conceal payments to shell companies and third party marketing advisors that likely went to bribes. Total payments ultimately exceeded 135M and $14M. BAE paid in excess of 10M and $9M to a Swiss intermediary and was aware that this money would likely go to a Saudi official to win an $80B contract. In its guilty plea, BAE admitted that it had averred to the Department of Defense that it was not knowingly violating the FCPA or other foreign anti-bribery laws, even as conducting the above suspect activities. 25

26 BAE s ITAR Violations 2,591 violations of ITAR parts 129 and 130 As part of its guilty plea, BAE admitted that it: knowingly and willfully failed to identify commissions paid to 3 rd parties for assistance in soliciting, promoting or otherwise securing sales of defense items failed to identify the commission payments paid through a shell company in order to keep the fact and scope of its external advisors from public scrutiny caused the filing of false applications for export licenses by failing to tell the export license applicant or the State Department of 19 million it paid to an intermediary with high probability that this would benefit BAE 26

27 Lessons from BAE ITAR Part 130 requires the reporting of all commissions, including those knowingly paid as bribes While the government could not secure a conviction for bribery under the FCPA, it was able to use ITAR Part 130 to get a criminal conviction for failing to properly report these bribes 27

28 L-3 Communications Corp In 1998, Titan Aerospace allegedly paid bribes to secure a contract in Benin. In 2003, Lockheed attempted to acquire Titan, but backed out after learning of the bribes during M&A due diligence and reported the bribes to DOJ. In 2005, Titan was acquired by L-3, which inherited the ITAR violations through successor liability and settled with DDTC. DOJ/SEC: Titan entered a guilty plea, $13M criminal fine for FCPA and tax violations and $12.5M to SEC for disgorgement and interest, plus compliance monitor/probation DDTC: L-3 $1.5M civil penalty for ITAR violations plus 3- year consent agreement 28

29 L-3 s Violations L-3 admitted to the following: Violating the bribery provisions of the FCPA by paying in excess of $3.5M in commissions to an advisor to the president of Benin which commissions were used in a reelection campaign. Internally recording the payments as "consulting services" and breaking them into smaller increments to make them appear paid out over time, violating the FCPA books and records provision. Failing to report the commissions on 3 separate export license applications and making false statements that no commissions were paid, violating the ITAR. Improperly deducting the bribes on its taxes. 29

30 Lessons from L-3 Government sought multiple avenues for prosecution of the same activity (paying bribes) using different laws and regulations (FCPA, ITAR and tax laws). DOJ and DDTC each extracted different concessions as part of their plea agreement/settlement. M&A due diligence is an important piece of avoiding successor liability. 30

31 Weatherford International Ltd. Nov FCPA penalties (DOJ and SEC): One subsidiary pleaded guilty and also DPA $87.2 million (criminal); $65.6 million (civil, including $1.875MM penalty to SEC for failure to cooperate early) Export penalties (BIS and OFAC): Two subsidiaries pleaded guilty and also DPA $50 million BIS (civil sanction); $48 million (penalty pursuant to DPA); $2 million (criminal fine) Joint with a $91 million OFAC penalty Compliance monitor for 18 months and reporting duties for another 18 months 31

32 Weatherford s FCPA Violations Failed to establish an effective system of internal accounting controls designed to detect and prevent corruption, including FCPA violations Permitted long-running bribery in Africa and Middle East Used joint venture, freight forwarder, distributor, kickbacks (Oil-for-Food), improper travel and entertainment to pay bribes Failed to investigate allegation of bribes on ethics questionnaire 32

33 Weatherford s Export Violations 1998 to 2007 Exporting or re-exporting oil and gas drilling equipment to, and conducting business operations in, sanctioned countries without U.S. authorization Cuba, Iran, Sudan, and Syria Used subsidiaries in Canada, UAE and UK Violations of both the EAR and OFAC regulations 33

34 What to Expect FCPA investigations are here to stay Increased cooperation among Justice, State, Treasury and Commerce Departments Continued efforts to use ITAR Parts 129 and 130 to identify potential bribery concerns Additional scrutiny on individual license applications for Part 130 statement 34

35 Compliance Tips 35

36 Compliance Tips Identify brokers in your transactions They may not all be independent sales agents Determine when your company s or your affiliates activities may be considered brokering under Part 129 Ensure adequate internal tracking and reporting of payments related to defense trade projects Include mechanism on procurement side to capture Part 130 information from vendors supplying $500,000 or more for a particular defense trade project 36

37 Compliance Programs One size does not fit all Requires a careful analysis of your business and an identification of your risks Risk of multiple enforcement requires consideration of other anti-corruption laws like the UK Bribery Act Best practices are evolving Counsel or the head of compliance should be sure to stay on top of best practices and consider whether they are appropriate for his or her company Build in cross-over between FCPA and ITAR compliance programs at least in your training 37

38 Essential Elements Commitment from senior management and a clearly articulated policy against corruption tone at the top Code of conduct and compliance policies and procedures Oversight, autonomy, and resources Risk assessment Training and continuing advice Incentives and disciplinary measures Third-party due diligence and payments Confidential reporting and internal investigation M&A pre-acquisition due diligence and post-acquisition integration 38

39 When Should a Company Conduct Due Diligence? Due diligence is the key to any anti-corruption compliance program It is a must for: New and existing agents, third-party relationships, distributors Joint ventures and business partnerships Major investments Mergers and acquisitions 39

40 Key Considerations for Due Diligence on Agents and Third Parties Determine the qualifications and associations of the agent/third party Especially relationships with foreign officials Understand the business rationale for retaining the agent/third party Review how the agent was chosen Review compensation Continuously monitor/audit the agent/third party relationship 40

41 Due Diligence Considerations for Agents Territory s reputation for corruption Industry s reputation for corruption Agent s integrity, reputation, competence, and ability Agent s relationship with government officials Reasonableness and method of payment to Agent Compliance with local law Anticorruption safeguards in contractual agreements Continuing oversight of agent s activities 41

42 You See 42

43 Prosecutors See 43

44 QUESTIONS? 44

45 Contact Information Mark Srere, Partner, Washington, DC T: Susan Kovarovics, Partner, Washington, DC T: