The ITAR and the FCPA: What You Disclose May Hurt You October 7, - - PowerPoint PPT Presentation

October 7, 2014

The ITAR and the FCPA: What You Disclose May Hurt You

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Presenters

Mark Srere

Bryan Cave LLP

Susan Kovarovics

Bryan Cave LLP

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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

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Foreign Corrupt Practices Act Background

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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

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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

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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 emails, telephone calls, transfers through correspondent bank accounts in U.S. intermediary banks

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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

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Penalties for Violation of FCPA Provisions

• Significant Monetary and Criminal Penalties

– Antibribery Violations

• Fines up to $2 million per violation
• 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)

• Corporate fines in excess of $25 million for a company
• 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

Top Ten FCPA Enforcement Actions

• 1. Siemens (Germany): $800 million in 2008
• 2. KBR / Halliburton (USA): $579 million in 2009
• 3. BAE (UK): $400 million in 2010
• 4. Total S.A. (France) $398 million in 2013
• 5. Alcoa (USA) $384 million in 2014
• 6. Snamprogetti Netherlands B.V./ENI S.p.A (Holland/Italy): $365 million

in 2010

• 7. Technip S.A. (France): $338 million in 2010
• 8. JGC Corporation (Japan) $218.8 million in 2011
• 9. Daimler AG (Germany): $185 million in 2010
• 10. Weatherford International (Switzerland): $152.6 million in 2013

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Dodd-Frank Whistleblower Provisions

• Whistleblowers who

– ―Voluntarily‖ provide the SEC with – ―Original information‖ – That leads to a ―successful enforcement‖ action in a federal

• r 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

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International Traffic in Arms Regulations Background

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 120-130
• Requires registration for manufacturing defense articles,

exporting defense articles and provision of defense services,

• r brokering defense articles and defense services

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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

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ITAR Part 129 Brokering Provisions and Part 130 Reporting Provisions

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

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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.

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ITAR Part 129

• What actions are covered?

– Financing, insuring, transporting, or freight forwarding defense articles and defense services;

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– 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.

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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 130

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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

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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

• rganization

– Covered by an ITAR license, TAA, MLA, WDA or in an FMS transaction

• Reporting must cover payments by the license applicant
• r 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

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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)

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Enforcement Actions Involving FCPA and ITAR

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

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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.

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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 3rd 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

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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

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L-3 Communications Corp. – 2005

• 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

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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 re- election 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.

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Lessons from L-3

• Government sought multiple avenues for prosecution
• f 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.

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Weatherford International Ltd. – Nov. 2013

• 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

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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

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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

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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

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Compliance Tips

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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

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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

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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

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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

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Key Considerations for Due Diligence

• n 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

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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

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You See…

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Prosecutors See…

QUESTIONS?

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Contact Information

• Mark Srere, Partner, Washington, DC

mark.srere@bryancave.com T: 202-508-6050

• Susan Kovarovics, Partner, Washington, DC

susan.kovarovics@bryancave.com T: 202-508-6132