FOREIGN CORRUPT PRACTICES ACT (FCPA) AN OVERVIEW Brazil May, - - PowerPoint PPT Presentation

39 Offices in 19 Countries

FOREIGN CORRUPT PRACTICES ACT (FCPA)

Brazil – May, 2013 Rebekah J. Poston Partner +1 305.577.7022 rebekah.poston@squiresanders.com

AN OVERVIEW

3

UNDERSTANDING THE FCPA

• The FCPA has two components that address international

corruption and bribery, they are the:

Anti-bribery provisions Accounting provisions which address record keeping and internal

controls

• The DOJ and SEC enforce the FCPA and broadly construe

many of its terms

• Anti-Bribery Provisions

The FCPA’s anti-bribery provisions prohibit:

Paying or offering to pay “anything of value” Directly or indirectly To a “foreign official,” or to any other person while knowing that all or

part of the thing of value will be paid or offered to a foreign official

Corruptly For the purpose of influencing the official in some official act or to

secure any improper advantage

In order to “obtain or retain business”

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UNDERSTANDING THE FCPA

• “Anything of Value”

Gifts, meals, entertainment expenditures, travel expenses Commissions, honorariums Referrals, use of medical equipment or facilities Loans, services Charitable donations Jobs to Foreign Officials’ children Rebates and discounts

• “Foreign Official”

“[A]ny officer or employee of a foreign government or any department

agency or instrumentality thereof ... or any person acting in an official capacity for or on behalf of any such government, department, agency, or instrumentality...”

Employees of SOE (all SOE employees are Foreign Officials, regardless of

rank or title)

One-half (1/2) of corporate FCPA enforcement actions in 2012 involved

foreign healthcare providers (doctors, nurses, mid-wives, laboratory personnel) as the Foreign Officials

Judges, lawyers Political parties, candidates Officers and employees of a public international organization

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UNDERSTANDING THE FCPA

• “Obtain or Retain Business”

Improper payment to Foreign Official does not need to lead to a

government contract

Promotional or other payments made to, or for the benefit of

physicians to incentivize referrals, or use certain products

Influencing a procurement process Circumventing import rules Avoiding contract termination Payments to obtain special tax treatment Payments to obtain government licenses or permits Securing an improper advantage over competitors Steering testing to certain laboratories

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Broad Applicability

• The anti-bribery provisions apply to various types of companies

and individuals, including:

• Issuers (companies registered on national exchanges or that are

required to file reports with the SEC)

• Domestic Concerns

− All U.S. companies and any company that has its principal place of

business in the U.S.

− All U.S. nationals, citizens, or residents

• Non-U.S. companies and individuals who cause an act in furtherance
• f a corrupt payment in the U.S. while within U.S. territory
• Foreign companies whose ADRs (American Depository Receipts) are

traded on a U.S. exchange

• Officers, directors, employees, agents and shareholders acting on

behalf of all of the above

UNDERSTANDING THE FCPA

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• The FCPA does not just prohibit direct transactions. It also

prohibits corrupt payments through intermediaries

• It is unlawful to make a payment to a third party, while knowing

that all or a portion of the payment will go directly or indirectly to a foreign official

• Third parties are one of the highest risk areas for FCPA

violations

UNDERSTANDING THE FCPA

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Subsidiaries and Affiliates Consultants Sales Representatives/ Distributers Subcontractors Franchises Joint Venture Partners Agents Lawyers Accountants Who are the typical intermediaries?

UNDERSTANDING THE FCPA

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UNDERSTANDING THE FCPA

• FCPA Risks Posed by Partners, Agents, and other Third Parties

U.S. partner can be held liable for corrupt payments made by its other

partner(s) on behalf of the JV

The majority of recent enforcement actions have involved improper

payments through third parties

No need for DOJ to prove third party acted on company’s direct order No need to prove company actually new the third party engaged in

prohibited conduct

Failure to investigate suspicious circumstances or turning a blind eye

can be sufficient to establish knowledge under the FCPA

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UNDERSTANDING THE FCPA

• Limited Exception for Certain Meals, Entertainment, and Other

Business Courtesies

Payments made for expenses to benefit Foreign Officials directly

related to the promotion or demonstration of the company’s products

• r services or to the negotiation, execution, or performance of a

contract

– Travel and expenses relating to visiting a company facility, for training, or

for meeting with a legitimate business purpose

– Expenses must be necessary and transparent

Costs should be paid for directly to vendors and accurate records kept

• f all such payments
• Facilitation payments allowed

Small, one-time payment made to a low-level foreign official to

expedite a process to which payor is lawfully entitled

Prohibited by UKBA; OECD Convention; most non-U.S. countries

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UNDERSTANDING THE FCPA

• FCPA – Anti-Bribery Provision Penalties:

Companies: – Criminal fines up to $2M per violation – Civil penalties up to $16K per violation – Other civil remedies generally available to SEC (injunctions, cease

and desist orders, accounting/disgorgement)

Individuals: – Criminal fines up to $250K per violation – Imprisonment for up to 5 years – Civil penalties up to $16K per violation – Other civil remedies generally available to SEC Alternative Fines Act – Allows a criminal fine to be up to twice the gross gain or gross loss

associated with the conduct

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• Books and Records/Internal Controls Provisions Apply To:

1. Issuers 2. An officer, director, or employee can also be charged with aiding and abetting or causing a company’s violation of the accounting provisions of the FCPA 3. Foreign subsidiaries, joint ventures or affiliates owned and controlled (more than 50%) by the issuer

UNDERSTANDING THE FCPA

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UNDERSTANDING THE FCPA

• FCPA – Books & Records Provisions:

Record keeping violations normally involve (three) 3 types of offenses: – Records that simply fail to record improper transactions, e.g., off-the-

books transactions such as bribes and kickbacks

– Records that are falsified to disguise aspects of improper transactions – Records that correctly set forth the quantitative aspects of

transactions, but fail to record the qualitative aspects of the transactions that would have revealed their illegality or impropriety, such as the true purpose of particular payments to agents, distributors

• r customers
• “Good Faith” Defense:

An issuer with 50% or less of the voting power of a foreign or domestic firm

need only attempt in good faith to use its influence to cause the firm's compliance with the accounting provisions (books and records and internal controls) of the FCPA

“Good faith” relevant factors include: – Issuer’s degree of ownership & control – The laws and practices governing the business operations of the

country in which such firm is located

– (See 15 U.S.C §§ 78m(2)-(6) & 78ff; Rules 13B2-1 & 13A-15)

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UNDERSTANDING THE FCPA

• FCPA – Books & Records Provisions Penalties:

Companies: – Criminal fine up to $25 million per violation – Civil fine up to $725,000 per violation – Other civil remedies generally available to SEC (injunctions, cease

and desist orders, accounting/disgorgement)

Individuals: – Criminal fine up to $5 million per violation – Up to 20 years imprisonment – Civil fines up to $150,000 per violation and remedies generally

available to SEC

Alternative Fines Act – Allows a criminal fine to be up to twice the gross gain or gross loss

associated with the conduct

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UNDERSTANDING THE FCPA

• Anticorruption is a growth sector of the legal services industry
• A handful of companies each reported spending well beyond

$100 million in FCPA-related investigation costs alone pertaining to multinational probes:

Avon ($339.7m in “professional and related fees”; $92.4m FY2012)\ Walmart ($157m in fees FY2012) News Corp. ($179m in fees; $191 in costs on related civil settlements) Weatherford ($125m FY 2012)

• Anticorruption is also a growth industry worldwide

Brazil, China, France, Germany, India, Italy, Mexico, Russia, UK

– In 2012, all of the above nations either stepped up enforcement of existing

anticorruption laws or expanded the scope of their anticorruption laws

– In short, foreign regulators have taken note of the FCPA’s success in

deterring criminal conduct and in generating government revenue and are getting in on the act

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THE FCPA’s EXTRATERRITORIAL REACH

• SEC v. Straub (S.D.N.Y. Feb. 8, 2013)

Several executives of the Hungarian telecommunications company,

Magyar Telekom, are alleged to have actively participated in a scheme to bribe officials of the Macedonian government

The purpose was to prevent regulatory changes that would have

• pened the Macedonian telecom market to Magyar’s competitors

The executives allegedly directed company officials to disguise the

bribes as sham consulting and marketing agreements

They allegedly made false certifications to the company’s auditors to

further conceal the bribes

The federal court found jurisdiction under the FCPA even though none

• f these executives ever stepped foot in the U.S.

Jurisdiction was based on the fact that they “allegedly engaged in

conduct that was designed to violate U.S. securities regulations and was thus necessarily directed toward the United States, even if not principally directed there”

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THE FCPA’s EXTRATERRITORIAL REACH

• SEC v. Sharef (S.D.N.Y. Feb. 19, 2013)

Case came out two weeks after the Straub case The SEC charged a former executive of the German electronics

conglomerate, Siemens, with facilitating bribes to the Argentine government to secure business contracts

The executive supposedly encouraged others to make bribes that

were ultimately authorized by more senior executives of the company

There were no allegations that the executive had any involvement in

• r even knowledge of the company’s alleged falsification of the

company’s U.S. securities filings

The judge found the defendant’s role in the scheme “tangential at

best”

In distinguishing the Straub case, the judge in Sharef said she found it

necessary, as a result of the Straub case, to assert the “need of a limiting principle” on the boundaries of U.S. jurisdiction. Otherwise, she cautioned, the FCPA could reach “every participant in illegal action taken by a foreign company subject to U.S. securities law ... no matter how attenuated their connection with the falsified financial statements”

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THE FCPA’s EXTRATERRITORIAL REACH

• Similarities Between the Two Cases:

With Straub, the defendants went too far with their alleged bribery

activity and its direct connection to the U.S.

With Sharef, it was the government that went too far in trying to police

conduct that lacked a direct connection to the U.S.

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FCPA PROSECUTIONS INVOLVING BRAZIL

Biomet, Inc. (2012)

Indiana-based global medical device company

• Conduct

Biomet and four subsidiaries allegedly paid bribes from 2000 to 2008

to doctors employed by public hospitals in Argentina, Brazil, and China in exchange for sales of Biomet’s products

Brazilian doctors were paid 10-20 percent of the value of the medical

devices purchased. As early as 2001, Biomet employees were aware

• f that Biomet’s Brazilian distributor was paying doctors in exchange

for purchasing Biomet products

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FCPA PROSECUTIONS INVOLVING BRAZIL

• Penalties (DOJ)

Deferred prosecution agreement $17.8 million criminal penalty Must implement rigorous internal controls, cooperate with DOJ, and

retain compliance monitor for 18 months

Received reduction in penalty as a result of cooperation in ongoing

investigation of other companies and individuals

• Penalties (SEC)

$5.4 million in disgorgement of profits and prejudgment interest

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FCPA PROSECUTIONS INVOLVING BRAZIL

Eli Lilly and Company (2012)

Indiana-based pharmaceutical manufacturer that markets products in

• ver 143 countries
• Conduct

Between 1994 and 2009, Eli Lilly’s subsidiaries made improper

payments to government officials in China, Brazil, Poland, and Russia to win sales contracts and other business advantages

In Brazil, Lilly’s Brazilian sub distributed drugs through third-party

distributors, granting them a discount depending on the distributor’s anticipated sale

In 2007, it allegedly granted an unusually large discount for to a

distributor for two of the distributor’s purchases of a Lilly drug, which the distributor then sold to the government of a Brazilian state

Distributor used portion of purchase price to bribe government officials

from the Brazilian state so the state would purchase the product

Employees who authorized the discount allegedly knew of this

arrangement

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FCPA PROSECUTIONS INVOLVING BRAZIL

• Penalties (SEC only)

Disgorgement of $13,955,196 Prejudgment interest of $6,743,538 Penalty of $8.7 million Total: $29,398,734 Company consented to entry of final judgment permanently enjoining

it from violating FCPA’s anti-bribery, books and records, and internal controls provisions

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FCPA PROSECUTIONS INVOLVING BRAZIL

Universal Leaf Tabacos Ltd. (2010)

• Conduct

From 2000 to 2004, Universal Brazil sold Brazilian-grown tobacco to

the Thailand Tobacco Monopoly (“TTM”)

Admitted to retaining sales agents in Thailand and collaborating

through those agents to apportion tobacco sales to the TTM among two other companies, coordinated sales prices and paid kickbacks to TTM officials to ensure that each company would share in the Thai market

Admitted it paid approximately US$697,000 in kickbacks to TTM

• fficials

Falsely characterized payments in company’s books and records as

“commissions” paid to sales agents

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FCPA PROSECUTIONS INVOLVING BRAZIL

• Penalties (DOJ)

NPA Must retain independent compliance monitor for minimum of three

years to oversee implementation of antibribery and anticorruption compliance program

$4.4 million criminal fine

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FCPA PROSECUTIONS INVOLVING BRAZIL

Nature’s Sunshine Products, Inc., Douglas Faggioli and Craig Huff (2009)

NSP: Utah Corporation Douglas Faggioli: CEO Craig Huff: CFO

• Conduct

Natures Sunshine Produtos Naturais Ltda. (NSP Brazil), NSP’s wholly-

• wned Brazilian subsidiary, manufacturer of nutritional and personal

care products

SEC alleged NSP Brazil violated FCPA’s antibribery provisions by

making payments to customs brokers later passed on to Brazilian customs officials to permit importation of unregistered products into Brazil

To conceal payments, NSP Brazil incorrectly recorded them as

“importation advances” in books and records

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FCPA PROSECUTIONS INVOLVING BRAZIL

SEC alleged NSP failed to make and keep books, records and

accounts that provided reasonable assurances that the transactions it had entered into had been accounted for in accordance with GAAP

SEC also alleged NSP knowingly failed to devise, implement and

maintain a system of internal controls sufficient to ensure customs payments were properly accounted for on its financial statements

SEC further alleged Faggoli and Huff violated the FCPA in connection

with Brazilian cash payments, for failing to adequately supervise compliance with its books and records and internal controls provisions

• Penalties (SEC)

Civil penalty of $600,000 for NSP Civil penalty of US$25,000 each for Faggioli and Huff

27

FCPA PROSECUTIONS INVOLVING BRAZIL

Tyco International Ltd. (2006)

• Conduct

Tyco allegedly engaged in scheme to violate federal securities laws by

• verstating financial results, smoothing reported earnings, and hiding

vast amount of senior executive compensation and a large number of related party transactions from investors

To this end, Tyco allegedly made payments for foreign officials for the

purpose of obtaining or retaining business in violation of the FCPA

Between 1996 and 2000, Tyco acquired more than 700 companies to

become global and diversified manufacturing and service conglomerate

In 1998, Tyco acquired Earth Tech Brazil even though it knew Earth

Tech had made various illegal payments to Brazilian officials to obtain business

Although Tyco knew such payments were common in Brazilian

business practices, it had no FCPA compliance program

Internal controls insufficient to prevent such misconduct at a global

level

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FCPA PROSECUTIONS INVOLVING BRAZIL

• Penalties (SEC)

$50 million civil penalty $1 in disgorgement

• Compliance Best Practices According to the DOJ and SEC

A commitment by senior management and clearly articulated policy

against corruption

A 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 compliance enforcement measures A mechanism for confidential reporting and internal investigations Continuous improvement: periodic testing and review For mergers and acquisitions, pre-acquisition due diligence and post-

acquisition integration

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COMPLIANCE

• Compliance is a Cost Center But a Necessary One

Personnel with responsibility for internal management of FCPA

compliance need to be experienced in the relevant areas

Staffing should be local as well as central, it cannot be managed

completely remotely

All responsible need to be trained The best compliance programs often involve direct reports to the

Board or Audit Committee

In an M&A, due diligence must consider any potential challenges or

problems the new business and its markets may bring

It must include specific FCPA tests and views Agents and other third-party contractors must be carefully vetted and

required to endorse company FCPA policies and procedures

Agents’ and other third party contractors’ compliance with company’s

FCPA policies and procedures should be periodically monitored

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FCPA Resource Guide

• The DOJ and SEC issued their joint FCPA Resource Guide, on

November 14, 2012

• This was the most significant FCPA development in 2012
• The Resource Guide contains 120 pages and 418 endnotes
• The Resource Guide focuses on explaining, including through

the use of case examples and hypotheticals, the factors that influence the DOJ/SEC approach to important factual and legal issues, as well as insights into their exercise of prosecutorial discretion in the FCPA context

• Squire Sanders’ in-depth analysis of the Resource Guide is

available at: http://anticorrutpionblog.com.

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FCPA Resource Guide

• FCPA Guidance provides a list of factors that companies should

consider in determining whether someone is a foreign official:

The foreign state’s extent of ownership of the entity The foreign state’s degree of control over the entity (including whether

key officers and directors of the entity are, or are appointed by, government officials)

The purpose of the entity’s activities The entity’s obligations and privileges under the foreign state’s law The exclusive or controlling power vested in the entity to administer its

designated functions

The level of financial support by the foreign state The entity’s provision of services to the jurisdiction’s residents Whether the governmental end or purpose sought to be achieved is

expressed in the policies of the foreign government

The general perception that the entity is performing official or

governmental functions

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FCPA Resource Guide

• FCPA Guidance provides common red flags that an intermediary

may be engaging in corrupt conduct:

Excessive or unusually high compensation to third-party agents or

consultants

Unreasonably large discounts to third-party distributors Third-party “consulting agreements” that include only vaguely

described services

The third-party consultant is in a different line of business than that for

which it has been engaged

The third party is related to or closely associated with the foreign

• fficial

The third party became part of the transaction at the express request

• r insistence of the foreign official

The third party is merely a shell company incorporated in an offshore

jurisdiction

The Third party requests payment to offshore bank accounts

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Anticorruption Thought Leadership

• http://www.anticorruptionblog.com

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Anticorruption Thought Leadership

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Anticorruption Thought Leadership

MIA_4288396v1

39 Offices in 19 Countries

THE UK BRIBERY ACT

Brazil – May, 2013 Robert J. Elvin Partner +44 161 830 5257 robert.elvin@squiresanderscom

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Overview of the Bribery Act

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The Main Offences

• Offering, promising or giving a bribe (financial or other

advantage) in exchange for improper performance of a relevant function or activity;

• Requesting, agreeing to receive or accepting a bribe (financial or
• ther advantage) in exchange for improper performance of a

relevant function or activity;

• Bribing a foreign public official; and
• Failure of a commercial organisation to prevent bribery

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What is improper performance of a relevant function or activity?

• The general offences are committed, in essence, where a party has

induced the improper performance of a relevant function or activity

• Relevant function

any function of a public nature; any activity connected with a business; any activity performed in the course of a person's employment; or any activity performed by or on behalf of a body of persons (which

can be performed outside UK and have no connection with UK)

• A relevant function or activity is performed improperly if performed in

breach of a relevant expectation.

• “Relevant expectation” means:

Individuals are expected to act in good faith, impartially, or in

accordance with a position of trust within their function and any activities.

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How is a relevant expectation determined?

The Expectation Test –

• “What a reasonable person in the UK would expect in relation to

the type of function or activity concerned”

• NB Does not need to be connected with UK.
• NB Local custom and practice ignored unless “written law”

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Bribing a foreign public official

• An offence if:

Directly, or through a third party, offer, promise or give any financial or

• ther advantage to the foreign public official or another person at their

request or with their assent.

intention to influence in their capacity as a public official (in the

performance of their functions, any omission to exercise those functions or any use of their position):

intention to obtain or retain business or an advantage in the conduct of

business.

• Defence if permitted by written local law
• Expectation test does not apply - focus on intention and

influence.

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Senior Officers’ Liability

Consent or Connive = Guilt

43

Corporate Offence – Failure to Prevent Bribery

• An offence is committed if:

– The defendant is a “relevant commercial organisation” namely:

» a UK partnership; » a UK-registered company; or » any overseas company/partnership which “carries on business” in the UK

and

– A bribery offence has been committed by a person who is “associated” with

the organisation - namely a person who performs services for or on behalf

• f that organisation

and

– The bribe was paid with an intention to obtain or retain business or an

advantage for the organisation

• DEFENCE - Organisation had adequate procedures in place

to prevent bribery

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Guidance on Adequate Procedures

Guidance - http://www.justice.gov.uk/guidance/docs/bribery-act-2010-guidance.pdf Quick Start Guide - http://www.justice.gov.uk/guidance/docs/bribery-act-2010-quick-start-guide.pdf

Six principles for bribery prevention

1. Proportionate procedures 2. Top level commitment 3. Risk Assessment 4. Due diligence 5. Communication (including training) 6. Monitoring and review

45

Penalties

• Commercial organisations – unlimited fine
• Individual – unlimited fine and/or 10 years in prison
• Debarment
• Director Disqualification Orders
• POCA - Confiscation order
• Serious crime prevention orders

46

Recent developments

• On the 9 October 2012, the SFO revised its policies on:

Facilitation payments; Business expenditure (corporate hospitality); and Corporate self reporting – “The SFO encourages corporate self-reporting

and will always listen to what a corporate body has to say about its past conduct: but the SFO offers no guarantee that a prosecution will not follow any such report… The revised policies make it clear that there will be no presumption in favour of civil settlements in any circumstances”.

• Deferred Prosecution Agreements (DPAs)

Organisations will publically face up to their wrongdoing, and in return for

compliance with certain terms, the prosecutor will defer a criminal prosecution.

DPAs will be available in respect of conduct which pre-dates

commencement of the scheme.

But – where does this fit in the context of the SFO’s recent policy updates?

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Jurisdictional Reach

• The general offences apply to:

All UK nationals/residents/commercial organisation (even if they

commit bribery outside UK)

Non-UK persons if offence occurs in UK

• The corporate offence applies to:

Non-UK business carrying on a business or part of a business in the

UK

For corporate offence, “Associated Person” means a person who

performs services for or on behalf of that organisation. Capacity in which services performed does not matter - can be a director, employee, agent, subsidiary, joint venture or supply chain

Brazilian parent potentially liable for action of UK subsidiary as an

“associated person” who performs services on behalf of the parent

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Case Studies / Examples

49 49

Conduct Prohibited

• ABC is a chemicals company headquartered in Sao Paulo that

mines flourite

• ABC is a Brazil publically traded company that also does

business in England

• ABC seeks to sell its flourite to B, a nation in Asia. In order to
• btain a contract with B nation, X salesperson, working for ABC,

pays a bribe to Y official in B nation

• ABC and its employee X could be prosecuted for bribing a

foreign official (Active Bribery) (Bribery Act §§1, 6)

• ABC could be prosecuted for failing to prevent employee X from

bribing foreign official Y (Bribery Act, §7)

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Jurisdiction

• Company X (Brazil) is the 100% shareholder in Company X (UK)
• Ltd. Company X (UK) Ltd enters into a 50/50 joint venture in

India with a German company G, creating an Indian company C. The JV agreement has appropriate anti-corruption provisions. Contrary to the agreement and without knowledge of anyone in company X (UK), the JV pays ₤5,000 to a foreign official as compensation for evaluating and reporting a recommendation to superiors on a proposal submitted by the JV for a contract with the Indian Government.

• Questions

Did C violate the BA? Did Company X (UK) Ltd violate the BA? Did Company X Brazil violate the BA?

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Corporate Hospitality

• The UK subsidiary of a Brazilian company takes its biggest customer plus other

customers who meet sales targets along with their partners to the Maldives each year for a 5 day trip which costs the company £3,500 per person.

• Purpose of trips to incentivise sales, meet senior directors and build relationships.
• Could the trips be seen as a bribe?
• What can the Company do to reduce the risk of them being a bribe?

Ensure trips relate to promoting the Company – allow guests to learn more about

the business, the products, and improve the way the company does business with each customer.

Investigate whether the trips are customary in the industry and gather evidence. Obtain consent from the directors of the customers invited and confirmation from

them and also the guests that the trips are not seen as bribes.

Ensure everyone involved is aware of the company’s stance against bribery and

corruption.

Consider not inviting the partners of guests. Demonstrate products

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Third parties

• A UK company enters a new market in an Asian country with

very complex customs and import laws.

The company plans to hire a customs consultant to provide required

• expertise. Customs officials recommend a specific customs broker

firm that is run by the customs official’s cousin. This customs broker has been retained by various companies which import products into this country.

The customs official states that the other companies using his cousin’s

service have never suffered delays using their import procedures due to failing government inspections.

Is this a risk?

5353

Conclusion

• UK Bribery Act is tough
• Little enforcement, yet!
• Adequate procedures can save you
• Compliance should be an enabler, not be a barrier to business

International Conventions

International Conventions Signed and Ratified by Brazil

• OECD Anti‐Bribery Convention
• UN Convention Against Corruption
• OAS Inter‐American Convention Against Corruption

International Conventions

OECD Anti-Bribery Convention

• All signatories shall take measures to establish that it is a criminal
• ffence under its law for any person intentionally to offer, promise
• r give any undue pecuniary or other advantage to a foreign public
• fficial.
• Each Party shall take any measures necessary to establish that

complicity in, including incitement, aiding and abetting,

• r

authorisation of an act of bribery of a foreign public official shall be a criminal offence.

International Conventions

UN Convention Against Corruption

• All State Parties shall promote integrity, honesty and responsibility

among its public officials, in accordance with the fundamental principles of its legal system.

• Each State Party shall establish measures and systems to facilitate

the reporting by public officials of acts of corruption to appropriate authorities, when such acts come to their notice in the performance

• f their functions.

International Conventions

OAS Inter-American Convention Against Corruption

• The purpose of the Convention is to promote and strengthen the

development by each of the States Parties of the mechanisms needed to prevent, detect, punish and eradicate corruption in the performance of public functions and acts of corruption specifically related to such performance.

Brazilian Criminal Code

• Active Corruption in an International Business Transaction –

Article 337-B of the Decree Law no. 2,848/40

Penalty: Imprisonment from 1 to 8 years and fine

• Influence Peddling in an International Business Transaction –

Article 337-C of the Decree Law no. 2,848/40

Penalty: Imprisonment from 2 to 5 years and fine

Crimes against the Foreign Public Administration

Concerns for Investments in Brazil

• The Brazilian legislation in force focus on the bribery and corruption of

governmental officials only.

• The sanctions currently provided in the Brazilian laws affect the individuals that practice bribery or corruption

acts, even if the individuals were acting on behalf of the company.

• Companies are not subject to the provisions of the Brazilian Criminal Code.

Clean Company Bill

Federal Bill no. 6,826/2010 – the “Clean Company” Act

• Civil and Administrative Liability only.
• Strict Liability.
• Company can be held liable for acts of bribery and corruption involving

national and international public administration, as well as its directors and officers or any individuals that take part in the illicit act.

• The economic group is jointly liable for the bribery acts practiced by
• ther companies of the same group, however, such liability is limited to

the payment of the relevant fine or the full compensation for the damage.

• In mergers, the succeeding company is held liable to the limit of the

equity transferred.

• Severe Sanctions.

• The “Clean Company” Bill only provides sanctions for bribery

acts.

• The Brazilian Laws in force and the “Clean Company” Bill do

not provide any requirements in terms of internal control (e.g. books, records).

Clean Company Bill

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Sergio André Laclau slaclau@xba.com.br Paula Surerus psurerus@xba.com.br

39 Offices in 19 Countries

INTERNATIONAL BUSINESS TRANSACTIONS Mergers & Acquisition Considerations

Brazil – May, 2013 Michele L. Connell Partner +1 26.479.8522 michele.connell@squiresanders.com

65

The Global Business Reality

Example of an International Acquisition or Disposition:

• 17 jurisdictions
• Blended asset and stock deal
• Regulated product in the US and EU
• Thousands of employees; some in unions
• Product sold for military applications
• Dealers used widely
• Long standing manufacturing operations on every continent

66

“Compliance with Law” Representation

Compliance with Laws. Except with respect to (a) matters set forth in Schedule 3.10, (b) compliance with Law concerning employee benefit plans and employee matters (as to which certain representations and warranties are made pursuant to Section 3.16 and Section 3.17, respectively), and (c) compliance with Environmental Laws (as to which certain representations and warranties are made pursuant to Section 3.18), Seller is not in material violation of, has not been threatened in writing to be charged with, given notice of any violation of, nor, to the knowledge

• f Seller, under investigation with respect to, any Law relating to

the conduct of the Business, or pertaining to the Purchased Assets.

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Compliance and Diligence = Value

• Each of these factors impacts the value of the acquisition in the

long-term and the short-term.

• Each of these factors is effected by the seller’s ability to

demonstrate compliance with various laws and regulations globally.

• Compliance is a core strategic issue in an international

transaction.

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Purchasing FCPA Liability

• Liability of the Target for pre-acquisition FCPA violations (like all

liabilities) survive the merger/acquisition

• An acquiring company may be held liable directly – as successor

– for the FCPA violations committed by the Target prior to the acquisition

• This includes criminal liability for the prior violations by the

Target

• Snamprogetti. Saipem was held jointly liable for a $240

million fine for FCPA criminal charges for Snamprogetti conduct that ended in 2004, TWO years prior to Saipem’s acquisition of Snamprogetti

• Alliance One. 2010 DOJ brought criminal charges against

Alliance One for FCPA violations committed before its acquisition of the Company violating the FCPA

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Purchasing FCPA Liability (continued)

• Whether successor liability will attach depends on the particular

facts and on the applicable state, federal and foreign law

• 2012 DOJ Resources Guide: “[I]f an issuer were to

acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer”

• According to the 2012 DOJ Resource Guide:
• “The DOJ and the SEC have only taken action against

successor companies in limited circumstances, generally in cases involving egregious and sustained violations or where the successor company directly participated in the violations or failed to stop the misconduct from continuing after the acquisition”

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Minimizing Risk through Diligence

• Effective pre-acquisition due diligence can minimize risk of

acquiring FCPA liability

• Lockheed/Titan. During pre-acquisition FCPA due

diligence of Titan, Lockheed discovered potential FCPA violations Lockheed pulled out of the deal

–

Ultimately, in 2005, Titan paid a $13 million criminal fine and a civil disgorgement penalty of $15.4 million

• Cardinal Health. In June 2002, during pre-acquisition

FCPA due diligence of Syncor, Cardinal Health discovered potential FCPA violations. Syncor voluntarily disclosed

–

Following Syncor paying a $2.5 million in fines and agreeing to an independent FCPA monitor, Cardinal Health agreed to acquire Syncor, at a reduced price

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Due Diligence Best Practices

• Buyer: Include compliance officer on deal team.
• Buyer: Request policies and any waivers.
• Buyer: Document the diligence process well.
• Buyer: Anticipate that there will be areas for improvement and

history.

• Seller: Put some time and effort into organizing and presenting

your compliance policies.

• Seller: Develop protocol to manage privileged communications

relating to investigations or remediation.

• Seller: A vigorous compliance program will have breaches from

time to time. The buyer will expect that.

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Red Flags and Risk Areas

• No compliance policies
• No compliance breaches
• No audit process
• Customer profiles
• Reliance on critical permits or contracts
• Connected parties
• A large concentration of work with certain intermediaries
• Multiple or concentration in high risk jurisdictions
• Global implementation of compliance program
• Involvement with state owned enterprises

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Diligence Process

• During diligence process:

Focused (based on risk assessment) Target specific diligence – Obtain sales lists – focused on large sales in high risk

countries

– Obtain complete list of third party intermediaries – Understand purpose and role of each intermediary – With respect to risk-identified intermediaries, focus on

payments made, relationships with government and related parties, documentation

– Does company have audit rights on third parties – Evaluate Target’s internal controls

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Diligence Process (continued)

Other Areas to Review:

• Periodic training programs
• Ready access to legal advice
• Internal confidential reporting process
• Diligence and inquiry when establishing intermediary

relationships

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Purchase Agreement Backstops

• Representations and warranties
• Indemnification
• Carve-out certain risks
• Require remedial action pre-closing
• Adjustments to purchase price

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Structuring the Transaction

FCPA concerns have been identified at the Target:

Can the transaction be structured to avoid liability? – Carve out a particular division – Eliminate certain third parties that are high risk Can sufficient comfort be obtained from

representations/indemnification?

If there is not sufficient time, could a “Halliburton” approach

work?

Can you price the risk in? – Escrow funds to cover costs of investigation post-closing,

should issues be uncovered later

Report to the Target? Walk-away?

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Post Closing Considerations

• FCPA due diligence is only a portion of the compliance

process for mergers and acquisitions

• The DOJ and SEC evaluate the following factors in the

M&A setting:

Did the acquiring company promptly incorporate the Target

with all of its internal controls, including its compliance program

Did the acquiring company train the Target’s employees Did the acquiring company evaluate the Target’s third party

relationships under its standards

Did the acquiring company conduct audits of its new business

units

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