The Growing Reach of the FCPA and Global Anti-Corruption Enforcement How to Comply Effectively and What's Coming

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1 The Growing Reach of the FCPA and Global Anti-Corruption Enforcement How to Comply Effectively and What's Coming Thursday, May 16, :30-4:45 PM Speakers: Eric Bustillo, Kelvin Dickenson, Deborah Morrisey, Paul Pelletier and Eileen Radford

2 Paul E. Pelletier Member Mintz, Levin, Cohn, Ferris, Glovsky & Popeo Washington, DC

3 What Is the FCPA? Federal statute passed by Congress in 1977 Two provisions: Anti-bribery provision Books and records/internal controls provisions (applies only to "issuers") Enforced by the DOJ (criminal/civil) and SEC (civil) Jurisdiction: U.S. issuers "Domestic concerns" Any person or entity that engages in any act in furtherance of a corrupt payment while in the territory of the U.S. Prohibits corruptly making, offering or promising to make, a payment, gift, or anything of value, directly or indirectly, to a foreign official for the purpose of obtaining or retaining business

4 FCPA Enforcement Trends FCPA enforcement actions initiated by DOJ and SEC ( ) DOJ SEC

5 Record Penalties Largest Settlements Under the Foreign Corrupt Practices Act

6 2012 FCPA Statistics 12 unique enforcement actions initiated in 2012 Total DOJ and SEC fine/penalty/settlements: $260 million (compares to $652 million in 2011 and $1.8 billion in 2010) 6 of the 12 enforcement actions were against pharmaceutical or health care companies Represent 65% of the $260 million in total penalties 6 of the 12 enforcement actions were voluntary disclosures Despite fewer number of enforcement actions in 2012, the FCPA remains a priority for the DOJ and SEC Mary Jo White: The FCPA "has been and will continue to be a priority for us" SEC, DOJ, and FBI recently partnered to train 130 foreign bribery investigators and prosecutors from 30 countries Dedicated group of 15 Criminal Division prosecutors Dedicated group of FBI agents Dedicated group of SEC enforcement staff

7 Focus on Individuals DOJ has charged 93 individuals with FCPA criminal offenses since % charged since 2008 April/May 2013: 4 executives from Alstom Criminally charged with FCPA and money laundering violations for bribery of Indonesian electric company through two consultants who used bank accounts in Maryland 4 executives from BizJet 2 plead guilty and had pleas unsealed in April 2013; 2 still at large today Uriel Sharef (Siemens) $275,000 civil penalty to SEC Frederic Cilnis French citizen charged with tampering and obstruction in an ongoing FCPA investigation into bribes paid to win lucrative mining rights in Republic of Guinea FBI wire (proactive investigative techniques) February 2013: Straub (Magyar Telekom) and Steffen (Siemens) decisions in SDNY

8 Rise of the DPA/NPA DOJ began utilizing the DPA/NPA in FCPA cases in % of DOJ corporate enforcement actions since then have been resolved solely with an NPA or DPA A full one-third still resolved by criminal pleas First SEC DPA in 2011 (Tenaris) and NPA in 2013 (Ralph Lauren)

9 Ralph Lauren NPA Double-NPA from SEC and DOJ (first SEC NPA ever) Company adopted a new FCPA policy and distributed it to employees; led to employees in Argentina raising concerns about the company's customs broker Company immediately conducted internal investigation and self-reported findings to DOJ and SEC within two weeks of discovery Investigation uncovered $600,000 in payments to customs officials Company took remedial measures, including firing customs broker, enhancing compliance program, cooperating with government, and reviewing its operations world-wide $1.6 million penalty to SEC Lesson: Carefully consider risks of self-reporting Gov't is very reluctant to grant declinations, even for model remediation Risks and consequences include internal investigation costs, compliance policy review and overhaul, monitoring/reporting to government, remediation, loss of revenue from corrupt contract, reputational damage

10 Focus on Financial Services Industry FCPA industry sweep Steven Tyrrell, former Chief of DOJ s Fraud Section, noted that the boom of sovereign wealth funds (SWFs) is an area at the top of the Justice Department s hit list. (Oct. 2008) Jan SEC sent preservation letters to 10 banks and private equity firms Primary areas of concern DOJ and SEC likely consider SWF employees "foreign officials" under FCPA (under theory that SWF is "instrumentality" of foreign government) Gifts, travel and entertainment typically used to recruit investments and funds Use of third-party placement agents Money laundering Tool to charge individuals and companies even where FCPA might not apply All bribe money flows through some financial institution (e.g. Alstom case)

11 Tips for Financial Institutions Tone from the top Tailored, risk-based compliance program and AML program FCPA Guide "Hallmarks of Effective Compliance Programs" Effective gifts, entertainment and travel policies Morgan Stanley declination example of DOJ recognizing strong compliance and training program despite lone-wolf bad actor Third party due diligence FCPA contractual representations and warranties Audit rights, financial controls, and monitoring M&A deals / portfolio company acquisition Pre-acquisition risk-based due diligence Post-acquisition integration

12 Kelvin Dickenson Global Risk Management Solutions D&B New York, NY

13 Protection and prevention measures are essential Having the best defense against corruption, is the best defense against prosecution Program must address Internal ethical behaviors Audit and accounting standards to leave corruption no hiding place A robust process to manage the compliance of third parties In a recent case of a Real Estate Fraud in China which involved an associate of Morgan Stanley: After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley. While the SEC, in pressing formal action against a major pharmaceutical company: The DOJ and SEC consider the adequacy of a company s compliance program when deciding what, if any, action to take. and its subsidiaries possessed a check the box mentality when it came to third-party due diligence. Companies can t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official s pocket.

14 Building a dynamic, risk-based and scalable program is key Technology and services can be leveraged to build your program

15 Scalability challenge is most palpable in managing third party risk There is a diverse range of third parties, each presenting different risks Suppliers Suppliers Suppliers in Emerging Markets Co-devlopment Partnerships Temporary Employees International Joint Ventures Auditors Joint Ventures Consultants Suppliers Your Corporation Contractors Agents Subcontractors International Intermediaries A High Level of Complexity Corporations need to manage divergent legal relationships across a multitude of partners, and struggle to gain visibility into oftenhidden risks. Lobbyists Distributors Vendors Domestic Agencies Dealers or Resellers Offshore Service Providers Foreign Distributors Data Vendors Source: Compliance and Ethics Leadership Council

16 A systemic technology based approach is the optimal choice for scalable, risk based management of third parties Identification Risk Enhanced Due Case Onboarding and Screening Monitoring Assessment Diligence Management Authentication 8 Visual Analytics Resulting in: A Culture of Integrity Brand Protection Regulatory Compliance

17 Eileen Radford Director, Advisory Services TRACE International Annapolis, MD

18 Extractive Industries Manufacturer/Service Provider Aerospace/Defense/Security Health Care Technology/Software Transportation/Communications Financial Services FCPA Industry Trends Engineering/Construction Entertainment/Film Agriculture/Food Retail Enforcement Actions ( ) Declinations ( ) Ongoing Investigations Consulting/Advertising/Other Property Development/Real Estate

19 Morgan Stanley: Background Complex financial scheme Peterson: prison sentence, $3.8 million disgorgement Morgan Stanley: declination Peterson = Rogue Employee

20 Morgan Stanley: FCPA Compliance Lessons Learned Voluntary disclosure Full Cooperation Rigorous Compliance Program: Training Internal Controls Due Diligence

21 Morgan Stanley: Other FCPA Lessons Evaded internal controls for own benefit Complex Payment Mechanisms Foreign Officials: SOEs included Third Party Liability

22 Deborah Morrisey Assistant Special Agent Department of Homeland Security Investigations Miami, FL

23 Eric Bustillo Regional Director Securities and Exchange Commission Miami, FL

24 Please Join Us in Grand Ballroom East for a Networking Reception Courtesy of: