Understanding the FCPA. Charles E. Meacham Gardere Wynne Sewell LLP Phone:

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1 Understanding the FCPA Charles E. Meacham Gardere Wynne Sewell LLP Phone:

2 Increased FCPA Enforcement Around the World Alcoa pays $384 million to resolve Bahrain-bribery probe. (Bloomberg, 1/9/2014). Wal-Mart Forecasts More Than $200M in FCPA Costs. (Wall Street Journal blog, 2/21/2014). PetroTiger CEO Going to Trial for FCPA Charges. (Wall Street Journal blog, 5/12/2014). 2

3 FCPA: Overview Background - Passed in 1977, amended in 1988 and Enforcement - Recent surge in enforcement activity in the U.S. and abroad. Extraterritorial - Unprecedented application of U.S. law throughout the world. 3

4 Monetary Settlements Siemens AG (2008) $800 million KBR/Halliburton (2009) $579 million BAE Systems (2010) $400 million Total S.A. (2013) $398 million Alcoa (2014) $384 million ENI/Snamprogetti (2010) $365 million Technip S.A. (2010) $338 million Daimler AG (2010) $185 million Weatherford (2013) $152 million Hewlett-Packard (2014) $108 million Parker Drilling (2013) $4 million Ralph Lauren (2013) $1.6 million 4

5 FCPA: Two Primary Components 1. Anti-bribery Provisions: Prohibits most non-routine payments to government officials; and 2. Recordkeeping Provisions: Requires specific records be maintained to demonstrate compliance. 5

6 FCPA: Jurisdiction Who is subject? U.S. citizens (including permanent resident aliens) acting in the U.S. or abroad Foreign citizens if any part of illegal act occurs in U.S. (now defined to include s, bank transfers, etc.) Corporations and their employees if corporation is domiciled within the U.S. Corporations whose securities are listed on a U.S. exchange or who otherwise participate in U.S. capital markets Individuals and companies if any part of the underlying transaction is performed in the U.S. (i.e., money transmission passes through U.S., non-u.s. executive takes any action while on U.S. soil, etc.) 6

7 FCPA: Elements A violation of the FCPA can be triggered by the following: Anything of Value - A gift, payment, offer, or promise (even if not kept) of anything of value Offered to an Official (broadly defined) - To any foreign government, political party official, candidate for political office To Act or Not Act - For the purpose of influencing an official to act or not act. For any Improper Advantage - To secure any improper advantage or to obtain or retain business 7

8 Anti-Bribery Prohibition It is unlawful for any U.S. citizen, resident or company (or for any officer, director, employee, agent, or stockholder of such U.S. company) to, with corrupt intent 1 in furtherance of any offer, payment, promise to pay, or authorization, take action, pay any money or give anything of value to: any foreign official for purposes of : i. influencing any act or decision of such foreign official in his or its official capacity; ii. inducing such foreign official to do or omit to do any act in violation of the lawful duty of such foreign official; iii. securing any improper advantage; or iv. inducing such foreign official to use his or its influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality in order to assist such U.S. person or company in obtaining or retaining business for or with, or directing business to any person 1 Corrupt Intent means a bad or wrongful purpose and an intent to influence a foreign official to misuse his official position. 8

9 FCPA: Reporting Reporting - The Department of Justice encourages companies to report known or suspected FCPA violations. Reporting can provide mitigation of violations. e.g.: Ralph Lauren case. Failure to Report - A company s failure to report a violation can create more significant liability than the actual conduct. e.g.: Wal-Mart case. 9

10 FCPA: Penalties Transactions can be parsed into pieces to produce multiple civil or criminal violations per transaction. 10

11 FCPA Exceptions There are three qualified exceptions available under the FCPA: 1) Payments for routine government actions. Payments which expedite or secure the performance of a routine governmental action by a foreign official, political party or party official are not prohibited. 2) Payments which are lawful under foreign law. A payment is not prohibited if it is lawful under the laws and regulations of the relevant foreign country. 3) Reasonable and bona fide expenditures. A payment which is a reasonable and bona fide expenditure and directly related to the promotion, demonstration or explanation of products or services or directly related to the execution or performance of a contract is not prohibited. 11

12 FCPA Exceptions Exception Limitations- FCPA exceptions are applicable under limited circumstances. Other Laws- Local law or other applicable law may prohibit the activity authorized under the FCPA exception (such as the 2010 U.K. Bribery Act, 2012 Mexican Anti-Corruption Law, or 2013 Brazil Anti-Corruption Law prohibiting facilitation payments). Consult- Based on this complicated analysis, individuals should rely on a FCPA exception only after consultation with a compliance expert. 12

13 FCPA: Recordkeeping Requirement Rule: Requires books, records and accounts be recorded and maintained in reasonable detail, accurately and fairly reflecting the transactions and dispositions of the assets of the issuer. 13

14 FCPA: Enforcement Escalation : The U.S. government averaged three FCPA prosecutions per year : The number of prosecutions increased ten-fold. 2010: The U.S. government initiated 74 enforcement actions in one year : The number of investigations against individuals increased and, although the number of enforcement actions against corporations was relatively steady, the amount of penalties and settlements increased. 14

15 FCPA: Extraterritorial Impact Since 2011, there has been a dramatic increase in extraterritorial FCPA enforcement actions with 72% of FCPA-related penalties assessed against non-us companies. 15

16 Additional Consequences of Violations of the Bribery Provisions (per DOJ Criminal Resource Manual) Civil and criminal forfeiture of assets. The Civil Asset Forfeiture Reform Act of 2000 (CAFRA) provides for criminal forfeiture of assets for all offenses for which civil forfeiture is authorized. Persons or companies that violate (or are indicted for alleged violations of) the FCPA may be barred from doing business with the U.S. government Persons or companies that violate the FCPA may be: Suspended from the securities business Barred from obtaining export licenses Barred from agency programs * 33 agencies, including Overseas Private Investment Corporation (OPIC) Last but not least, unlawful payments cannot be deducted as a business expense 16

17 Anti-Corruption Compliance Focus on Compliance: As a result of increased FCPA enforcement actions around the world, companies are focused on implementing effective anticorruption compliance programs. Compliance Results: Recent U.S. cases demonstrate that effective compliance programs can minimize or prevent corporate FCPA liability. U.S. Law Recognizes Value of Compliance Programs: U.S. Sentencing Guideline 8B2.1 expressly states that proof of an effective compliance program will result in a reduction in penalties. 17

18 Anti-Corruption Compliance Programs Program Value - International companies implement anti-corruption programs based on numerous factors, including: Compliance is a shared goal Laws are designed to prevent conduct that jeopardizes the company s international reputation and the integrity of foreign institutions. Prevents Costs - The cost of implementing a compliance program is a fraction of defending an enforcement action. Protects Business Opportunities - FCPA enforcement actions can harm or preclude private business opportunities and partnerships for years to come. Uncommon Not to Have One - It has become best practices for international companies to have a global anti-corruption program. The market and investors expect to see it. 18

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20 Compliance Programs: Generation of Defensive Data Critical Component: An effective anti-corruption compliance program must generate defensive data. 20

21 Compliance Programs: Defensive Data Defensive data may include: Proof of Policy Review: Signed acknowledgment by each employee who has reviewed anti-corruption policies and procedures; Proof of Compliance Training: Compliance training minutes and attendees; Proof of Testing: Online compliance training testing data; Proof of Due Diligence: Risk-based due diligence records performed on third parties. Certifications: Compliance certifications provided by third-party contractors and agents as required by contract; and Assessments: Internal and external audit reports. 21

22 Compliance Programs: Use of Defensive Data The generation of defensive data serves multiple purposes, including: Compliance Tracking: Provides a tool to efficiently track compliance efforts; Issue Spotting: Highlights deficiencies in the compliance program that must be addressed; Evidence: Provides critical evidence to defend against an anticorruption enforcement action. 22

23 Value of Defensive Data Value of Defensive Data: The value of maintaining an effective anticorruption compliance program and collecting defensive data was most recently highlighted in a 2012 FCPA enforcement action. Morgan Stanley Case Facts: In April 2012, a Morgan Stanley executive based in Shanghai pleaded guilty to corruption charges for offering significant bribes to a government official in order to secure new business. Traditional Prosecution Model: Historically, the U.S. government would pursue an aggressive FCPA enforcement action against the company as a result of an employee s illegal conduct. 23

24 Value of Defensive Data Morgan Stanley Case con t New Order: Instead, the U.S. government decided not to pursue a criminal or civil enforcement action against Morgan Stanley, citing defensive data provided by the company demonstrating that it maintained an effective anti-corruption program. Clear Statement: The U.S. government took the rare step of publicly acknowledging that it declined to bring any enforcement action against Morgan Stanley, based in large part on the firm s proof of robust controls, which provided reasonable assurances that its employees were not bribing government officials. 24

25 When there is a problem Morgan Stanley case proved that defensive data can be extremely important, but what if there was a corrupt act? The key words for the SEC and the DOJ are cooperation and remediation. Ralph Lauren case is an exceptional example where cooperation and remediation helped the company to obtain a nonprosecution agreement: 25

26 When there is a problem Ralph Lauren case In 2014, Ralph Lauren was subject to an FCPA investigation in connection with its Argentine subsidiary payments of bribes to customs officials in Argentina. Ralph Lauren cooperated and took action to remediate the situation. Most of those actions are mentioned in the FCPA Resource Guide, but some were innovative (e.g., ceasing retail operations in the country). Ralph Lauren obtained a Non-prosecution agreement and its cooperation and remediation were publicly referred as exceptional by the DOJ and SEC. 26

27 Cooperation and remediation However, the course of action to be taken depends on a case by case evaluation. And cooperation and remediation should be done in a strategic way to avoid further damage to the entity investigated. Also, despite any actions taken after the investigation was triggered, a good result in an FCPA investigation will still be highly dependent on the existence and the quality of the compliance program. 27

28 Trendy topics FCPA and M&A transactions Risks and problems: successor liability, overvaluation of a deal, delay in the negotiations. The FCPA resource guide published by the DOJ and SEC on November 2012 provides guidance to buyers wanting to limit FCPA liability in M&A transactions Key concepts: Cases: Pre-acquisition due diligence Post-acquisition integration of compliance programs Lockheed/Titan (2004) merger failed due to FCPA issues GE/Invision (2004) acquisition completed, but real value of deal decreased Elandia/Latin Node (2009) After closing, elandia discovered illegal payments had been made before deal and disclosed to government. Latin Node (now owned by elandia) paid a $2 million fine and went out of business. 28

29 Trendy topics FCPA and liability for third parties The statute expressly prohibits giving or offering or promising or authorizing directly or indirectly anything of value to any foreign official [cont.] The DOJ and SEC warn: Companies should be aware of the risks involved in engaging thirdparty agents or intermediaries. The fact that a bribe is paid by a third party does not eliminate the potential for criminal or civil FCPA liability. November 2014 Resource Guide to FCPA 29

30 Trendy topics FCPA and liability for third parties And they also act on it: Most of recent enforcement actions involved third-party agents. For example: Alcoa (2014) liability for bribes paid by a distributor who entered into a contract with Alcoa subsidiaries in Bahrain. Settlement: $384 million Stryker (2013) Amounts booked as legal expenses were actually illicit payments made through law firm in Mexico. Settlement: $13.2 million 30

31 Trendy topics FCPA and liability for third parties How to mitigate the risk? Implement a compliance program Businesses may reduce the FCPA risks associated with third-party agents by implementing an effective compliance program, which includes due diligence of any prospective foreign agents. November 2012 Resource Guide to FCPA Include a FCPA liability clause in your contracts with all foreign agents (e.g., Partner Agreements with foreign representatives, Sales Representation Agreements, license agreements, distribution and sales representatives, joint ventures etc.). 31

32 How is your company doing with this check-list? 32

33 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions Argentina* Australia Austria Belgium Brazil* Bulgaria* Canada Chile Colombia Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy Japan Korea Latvia Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Russian Federation* Slovak Republic Slovenia South Africa* Spain Sweden Switzerland Turkey United Kingdom United States Ratification Status as of April 2014 * Not members of the OECD 33

34 Thank you! Charlie Meacham Gardere Wynne Sewell LLP 1000 Louisina Suite 3400 Houston, Texas