New FCPA Compliance Guidance DOJ Issues Long-Awaited Guidance - - PowerPoint PPT Presentation

New FCPA Compliance Guidance

DOJ Issues Long-Awaited Guidance Clarifying Agency Enforcement Policies and Approaches Today’s faculty features:

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THURSDAY, DECEMBER 13, 2012

Presenting a live 90-minute webinar with interactive Q&A

John E. Davis, Member, Miller & Chevalier, Washington, D.C. Kathryn Cameron Atkinson, Member, Miller Chevalier, Washington, D.C.

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New FCPA Compliance Guidance

December 13, 2012 John E. Davis and Kathryn Cameron Atkinson Miller & Chevalier Chartered Washington, DC

5

Overview

• FCPA Basics
• Enforcement Trends
• Background on Efforts to Obtain Guidance or

Changes to FCPA

• Primary Aspects of New FCPA “Resource Guide”
• Key Takeaways

6

Two Primary FCPA Elements

• Anti-Bribery Provisions
• Accounting Provisions
• Books and Records

Requirements

• Internal Controls

Requirements

7

FCPA Anti-Bribery Provisions: Elements of a Violation

• No issuer, domestic concern, person with a U.S. nexus
• May corruptly
• Take any action in furtherance of payment or a promise,
• ffer, or authorization of payment
• Of a bribe or anything of value
• Directly or indirectly (with “knowledge”)
• To a foreign official
• To obtain or retain business or improper advantage

8

FCPA Accounting Requirements

• Maintain books, records, and accounts that, in reasonable

detail, accurately reflect transactions and the disposition of assets

• Maintain a system of internal accounting controls sufficient

to reasonably assure that transactions are:

• Consistent with management authorizations
• Recorded so that financials can conform with GAAP
• Primarily civil/administrative penalties, but criminal for

willful violations

9

FCPA Penalties

• Corporate penalties: Criminal and civil fines,

disgorgement of profits, prejudgment interest, imposition

• f monitorship or reporting requirements
• BAE – $400 million (plus $45 million in UK)
• Halliburton/KBR – $579 million
• Siemens – $800 million (plus $800 million in Germany)
• Potential for individual incarceration:

Individuals can be independently charged

• Conspiracy, aiding and abetting,

money laundering

• Parallel foreign penalties

10

Enforcement Trends

• Cases more frequent, penalties higher
• More criminal prosecutions
• More individual prosecutions
• International cooperation / enforcement abroad
• Industry-focused investigations
• Intrusive compliance requirements

11

Sustained Increase in FCPA Enforcement

20 40 60 80 100 120

Total Resolved FCPA Enforcement Actions (DOJ and SEC) 1977 through 3Q 2012

Note: The 2012-14 totals are estimated based off of the current pace of enforcement through 3Q 2012.

12

Trends: Prosecutions of Individual Corporate Officials

Note: Updated through September 30, 2012.

13

Sources of FCPA Guidance

• Historic sources of FCPA guidance
• Statute and its legislative history (no regulations)
• Government enforcement manuals
• DOJ Opinion Procedure
• Settled dispositions
• Court cases (mostly in last 4-5 years, as individuals seek their

day in court)

• Many key FCPA issues remain untested in court
• Questions about transparency and consistency in

FCPA enforcement practices have led to calls for formal guidance and/or statutory amendments to the Act

14

FCPA Guidance Timeline

• Aug. 23, 1988 – 1988 FCPA amendments call for U.S. Attorney General

(“AG”) to consider issuing FCPA guidelines. In 1990, DOJ declined, calling guidelines “unnecessary”

• Oct. 2010 – OECD “Phase 3” working group recommends that

DOJ/SEC consolidate publicly-available information on FCPA and raise awareness of anti-corruption issues for small- and medium-sized companies

• Nov. 30, 2010 – Senate Judiciary Committee hearing examining FCPA

enforcement

• Jun. 14, 2011 – House Judiciary Committee hearing on FCPA
• Nov. 8, 2011 – Assistant AG Breuer promises “detailed new guidance”
• n FCPA’s criminal and civil enforcement provisions
• Feb. 2012 – Stakeholder groups release letters and comments

stipulating expectations for forthcoming FCPA guidance

15

Release of FCPA Resource Guide

• On Nov. 14, 2012, DOJ and SEC jointly issued 120-page

“Resource Guide on the U.S. FCPA” (“FCPA Guide”)

• Agencies asserted that there is “no other area of the law”

where the DOJ/SEC have “provided the public with as much information about our enforcement approach and priorities”

• Agencies highlighted hypotheticals and attempts to provide

“practical tips” regarding various compliance issues

• Overall, FCPA Guide does not fundamentally change key

enforcement positions (including those currently being challenged in court), but expressly clarifies current agencies practices, while confirming and consolidating public guidance and some “lore” in detail

16

Legal Status of FCPA Guide

• Key language behind cover page
• FCPA Guide is "non-binding, informal, and summary"
• "does not constitute rules or regulations"
• would have little legal authority if cited in court
• “not intended to substitute for the advice of legal counsel on

specific issues related to the FCPA” or as a definitive guide

• n “specific prospective conduct”
• However, agency representatives have stated publicly that

statements in Guide may reasonably be relied on and cited when negotiating with the agencies, which intend to abide by the Guide’s terms

17

Overview of FCPA Guide

• Key Issues Covered in FCPA Guide
• Foreign Official / “Instrumentality”
• Gifts/Hospitality
• 3rd Party Vetting and Vicarious Liability
• Facilitating Payments / Extortion
• Successor Liability / M&A Due Diligence
• Jurisdiction Issues and Related Statutes
• Accounting Provisions and Internal Controls
• Hallmarks of Successful Compliance Program

18

Who Is a “Foreign Official”?

• FCPA covers broad range of officials, including employees
• f “foreign government…or instrumentality thereof”
• Past dispositions have involved, e.g., judges and

legislators (Lockheed); customs officials (Panalpina); employees of government-owned refining joint venture (KBR); official of a public international organization (Titan); royal family member (BAE); employee of government- controlled tobacco monopoly (Alliance One); relative of

• fficial (BellSouth)
• Recent court cases have focused on breadth of term

“instrumentality” – especially state-owned companies and

• ther “quasi-governmental” entities

19

FCPA Guide: Who Is an Official?

• Requires “fact-specific analysis of entity’s ownership,

control, status, and function” – no definitive list of instrumentalities

• Discusses 11 “non-exclusive” relevant factors – some from

rulings and jury instructions in recent court cases

• Notes that “as a practical matter” entities are “unlikely to

qualify” as instrumentalities “if a government does not own

• r control a majority of its shares”
• However, cites 2010 Alcatel-Lucent disposition as

exception, and notes other factors can apply

• Reminds that commercial bribery can violate FCPA

accounting provisions or other criminal laws

20

Gifts & Hospitality: Basics

• Key considerations under FCPA:
• Bribes can be “anything of value”
• Gifts & hospitality must not be given “corruptly” for the

purpose of influencing an official act or decision

• Affirmative defense for gifts & hospitality that are

“reasonable and bona fide” and directly related to:

Promotion, demonstration, or explanation of products or

services, or

Performance of a contract with a government entity

21

Gifts & Hospitality: Key Factors for Consideration

• DOJ Opinions have determined whether gifts, entertainment or

travel expenses are reasonable and bona fide by considering several factors:

• Purpose of the expenditure (must be articulated and permissible

business-related purpose)

• Whether the expense complies with local law
• Whether the value of each expenditure is reasonable
• Whether the method of selecting recipients is reasonable and

transparent

• Whether payment for travel and entertainment is made directly to

foreign official or third party service providers

• Whether the expenditures are accurately recorded in the

company’s books and records

22

FCPA Guide: Gifts & Hospitality

• Confirms that FCPA has no minimum threshold value for

corrupt gifts or payments, but dismisses notion that modest gifts and hospitality could give rise to an enforcement action:

• Violations require a corrupt intent, and “it is difficult to envision

any scenario in which the provision of cups of coffee, taxi fare, or company promotional items of nominal value would ever evidence corrupt intent”

• The DOJ and SEC use discretion – smaller gifts are

mentioned in FCPA cases only where they are part of a pattern of more egregious conduct

23

FCPA Guide: Gifts & Hospitality (cont’d)

• Hypotheticals reinforce that minor gifts and hospitality

generally are not FCPA issues, and more substantial items may be appropriate under appropriate circumstances:

• Booth at trade show – pens, hats, t-shirts, and other similar

promotional items with logos, coffee and snacks

• Drinks following trade show – moderate bar tab
• Wedding gift for general manager of state-owned enterprise –

moderately priced crystal vase

• Appropriate inspection and training visit – business class

airfare, moderate dinner, tickets to baseball game and theater

24

FCPA Guide: Gifts & Hospitality (cont’d)

• Compliance program implications
• Warns companies against spreading compliance resources

too thin

• Notes that effective programs do not:

Put “too much focus on low risk…transactions” Devote “a disproportionate amount of time policing modest

entertainment and gift-giving”

• Guide positions may diminish attention traditionally given to

questions of line-drawing and reasonableness of gifts, travel, and entertainment for foreign officials

25

3rd Party Vetting and Vicarious Liability: Basics

• Liability for “indirect” payments with “knowledge” of pass-

through to officials – “conscious disregard” of red flags

• Vicarious liability for companies for payments by 3rd parties:
• Payment “while knowing” there is a “high probability” that the

payment will pass through to an official (Kozeny/Bourke)

• Failed to investigate 3rd party risks, ignored general and

specific “red flags” (UIC, Wurzel, Pfizer)

• Hired a 3rd party who was likely to pay (InVision)
• All types of 3rd parties present risk: Sales reps (UIC);

distributors/subcontractors (Oracle, InVision); customs brokers (Panalpina, Vetco); lawyers (KBR); tax advisors (Baker Hughes); JV partner (Technip); visa processors (Natco); travel agents (IBM)

26

FCPA Guide: 3rd Party Vetting and Vicarious Liability

• Discussion of past dispositions plus “common red flags”:
• Excessive commissions or unreasonable discounts
• Agreements with “vaguely-described services” or with third

parties without relevant experience

• Close association to foreign official, including involvement “at

express request or insistence of foreign official”

• 3rd party is “shell company” in offshore jurisdiction
• Payments to offshore bank accounts
• Focus on risk-based due diligence, with increasing scrutiny

as red flags are uncovered

• Hypothetical provides added details on possible steps

27

FCPA Guide: 3rd Party Vetting and Vicarious Liability (cont’d)

• Additional considerations (as part of effective compliance

program):

• Appropriate business rationale:

Need for and role of third party to be clearly defined Clear payment terms and reasonable compensation for actual

services to be provided, benchmarked to comparable terms in industry and country (if possible)

• On-going monitoring of 3rd party activities:

Documenting work performance Training and messaging on compliance expectations Schedule for updating due diligence Obtaining compliance certifications and exercising audit rights

28

Facilitating Payments: Basics

• FCPA contains an exception for “facilitating or

expediting” payments to secure “routine governmental action”

• Secure basic services (telephone, water, mail)
• Schedule (but not pass!) inspections
• Process paperwork
• Official action must be non-discretionary, i.e., official has

no legal basis to refuse to provide the service

• ALL facilitating payments must be accurately recorded
• In the past, DOJ has indicated that pure expediting

payments could be considered an “improper advantage”

• Most facilitation payments are illegal under local law

29

FCPA Guide: Facilitating Payments

• FCPA Guide confirms existing interpretation of facilitating

payments exception:

• “Narrow exception”
• “Routine governmental action” must be non-discretionary

and would not include: Acts within an official’s discretion Decisions to award new business or to continue existing business Acts that would constitute misuse of an official’s office (e.g., paying an inspector to ignore the lack of a valid permit)

30

FCPA Guide: Facilitating Payments (cont’d)

• Explicitly acknowledges that legality of a facilitating

payment is dependent upon its purpose, not value

• However, notes that larger payments are “more suggestive
• f corrupt intent to influence a non-routine governmental

action”

• Underscores that labeling bribes as “facilitating

payments” in books and records does not make them such

• Describes payments from past cases that did not qualify

as facilitating payments, including various payments to customs officials

• Presents hypothetical with one payment that would

qualify for exception and one that would not

31

FCPA Guide: Extortion or Duress

• No explicit reference to extortion defense in FCPA, but

assumed under general criminal law principles and from examples in FCPA legislative history (e.g., Congress did not intend for payment to keep an oil rig from being dynamited to be prosecuted)

• FCPA Guide confirms that true extortion or duress does

not give rise to FCPA liability because payments made will lack requisite intent and purpose for violation

• Must involve real threats to “health and safety”
• Mere “economic coercion” does not amount to extortion

(citing FCPA legislative history and recent court decision in Kozeny)

32

Successor Liability and M&A Diligence: Basics

• Approximately 40 cases in the last 10 years have arisen in

context of M&A activities, focusing on liability of acquiring companies for illegal payments by acquired entities

• Advocates for change have argued that broad uncertainty

created by potential successor liability should be addressed by offering “safe harbors” for companies that perform due diligence or otherwise limiting successor liability

• Agencies have disagreed, arguing:
• Successor liability encourages appropriate due diligence
• Companies cannot be allowed to immunize themselves from

past violations through re-organization or merger

• Successor liability applies across many criminal laws

33

FCPA Guide: Successor Liability and M&A Diligence

• Confirms agencies’ views that successor liability can apply where

pre-merger FCPA violations are discovered post-closing

• States that companies that conscientiously seek to identify and

remedy bribery issues -- either before or soon after completing deal -- will be given considerable credit

• Such credit can include, and has included, no action against

acquiring company

• Past cases also have been brought solely against predecessor

entities

• Agrees that covered company that acquires foreign company

that has not been subject to FCPA will not be held retroactively liable for pre-acquisition improper payments made by acquired company

34

FCPA Guide: Successor Liability and M&A Diligence (cont’d)

• Exercise of discretion by agencies will focus on efforts by

acquiring companies to “uncover and timely remedy” violations by acquired companies – notes that many past cases involve “egregious or sustained violations” or instances where acquiring companies participated in illegal acts or failed to stop misconduct

• Contains two hypotheticals on successor liability
• Other advice from agencies:
• Use FCPA Opinion Procedure for specific transactions
• Conduct thorough risk-based due diligence (though no details on

what diligence is due, other than reference to OPR 08-02)

• Rapidly integrate acquired entities into compliance programs and

conduct “FCPA-specific audits”

• Disclose any discovered improper payments

35

FCPA Guide: Jurisdiction and Related Statutes

• Confirms agencies’ views that parents can be liable for

actions of subsidiaries:

• Through direct participation in illegal conduct or
• Indirectly, under “traditional agency principles” -- agencies

will focus on parent's control, both generally and with regard to specific actions under investigation

• Foreign subsidiaries not directly subject to FCPA
• Entire Guide chapter (plus other areas of discussion)

devoted to related U.S. laws that can create liability in situations beyond FCPA anti-bribery jurisdictional scope (Travel Act, money laundering laws, mail and wire fraud, conspiracy, certification, reporting and tax violations)

36

FCPA Accounting Requirements and Internal Controls: Basics

• Provide far-reaching basis for liability for parents related to

actions of foreign subsidiaries – virtually strict liability (civil) for improperly recorded books and records, even when anti- bribery elements not present

• Obligations automatically flow down to majority-owned or

controlled subsidiaries

• Good-faith obligation for non-controlled subsidiaries
• SEC: Any illicit payment is “material” per se

37

FCPA Guide: Accounting Requirements and Internal Controls

• Notes that bribes are often concealed in records as legitimate

payments, and includes long list of past mischaracterizations

• Confirms that “design of a company’s operational controls must

take into account the operational realities and risks attendant to the company’s business”

• Summarizes different types of schemes resulting in internal

controls “failures” in Siemens, Daimler cases

• Emphasizes key role of “targeted audits to make certain controls
• n paper are working in practice”
• SEC officials speaking during rollout repeatedly emphasized

important role of internal audit functions in ensuring compliance program and controls integrity and effectiveness

38

FCPA Guide: “Hallmarks of Effective Compliance Programs”

• Reaffirms important role of effective compliance programs

under USSG, DOJ’s Principles of Federal Prosecution of Business Organizations, and SEC’s Seaboard Report

• DOJ and SEC have “no formulaic requirements” -- employ

“common-sense and pragmatic approach” to evaluating compliance programs

• Agencies make inquiries related to three basic questions:
• Is the company’s compliance program well designed and

tailored to “specific needs, risks, and challenges”?

• Is it being “implemented earnestly and enforced fairly”?
• Does it detect violations and “remediate them promptly and

appropriately”?

39

FCPA Guide: “Hallmarks of Effective Compliance Programs” (cont’d)

• Key elements:
• Commitment from senior management and strong ethical

culture of compliance

• Clearly articulated policy against corruption
• Code of Conduct and compliance policies and procedures

(including internal controls)

• Senior-level oversight, adequate autonomy, and appropriate

resources for compliance and internal controls functions

• Regular risk assessments that underlie compliance program

design and implementation

• Training of applicable employees and mechanisms for

continuing and timely compliance advice

40

FCPA Guide: “Hallmarks of Effective Compliance Programs” (cont’d)

• Key elements (cont’d):
• Positive incentives (financial and otherwise) and appropriate

disciplinary measures

• Third-party due diligence and monitoring
• Mechanism for confidential reporting of issues and violations

and “efficient, reliable and properly funded process” for documenting and investigating such reports

• Processes for pre-acquisition due diligence and post-

acquisition integration of new entities into compliance program and internal controls

• “Continuous improvement – periodic testing and review” of

program in light of changing business risks and identified weaknesses

41

Key Takeaways

• Guide clarifies the agencies’ views of FCPA provisions that

lack clarity on their face

• However, some of those views are subject to current litigation

and may be affected by future court rulings

• Guide confirms long-standing agency positions and

practices in certain areas, such as extortion

• Guide provides "one-stop shop" that articulates DOJ/SEC

enforcement priorities, compliance expectations, and, to some extent, the general analytical framework the agencies will use when evaluating particular factual scenarios.

• Some important open issues remain, despite the Guide’s
• verall comprehensive scope

42

Thank You!

John E. Davis Miller & Chevalier Chartered 655 Fifteenth Street, N.W. Suite 900 Washington, DC 20005 Phone: (202) 626 – 5913 jdavis@milchev.com Kathryn Cameron Atkinson Miller & Chevalier Chartered 655 Fifteenth Street, N.W. Suite 900 Washington, DC 2005 Phone: (202) 626 – 5957 katkinson@milchev.com