©2012

INTERNATIONAL ANTI-FRAUD EFFORTS:

THE ISSUES OF BORDERLESS FRAUD

THE UK BRIBERY ACT AND THE FCPA AND

THE RISING TIDE OF ANTI-CORRUPTION

The UK Bribery Act went into effect in July 2011, reflecting a growing awareness and

demand around the globe to implement anti-corruption policies and procedures. In the past year,

what cases has the UK brought to date? What have the critics and the proponents had to say

about the Act? Discuss these issues as well as the implications for businesses around the world,

as well as a comparison between the UK Bribery Act and the FCPA in the United States.

KENNETH YORMARK, CFE, CPA, CAMS

Director

Navigant Consulting

New York, NY

Kenneth Yormark has led major engagements focusing on forensic accounting, financial

investigations, litigation consulting, and anti-corruption assessments. He works with

management at large corporations, noted law firms, and government agencies primarily in regard

to internal investigations, litigation matters, and Foreign Corrupt Practices Act (FCPA) issues in

both reactive and proactive environments. An expert in fraud investigations, Yormark’s matters

encompass FCPA investigations, accounting improprieties, asset identification and recovery,

investigative due diligence, and anti-corruption/risk assessments around the globe.

CHERYL SCARBORO

Partner

Simpson Thacher & Bartlett LLP

Washington, DC

Cheryl Scarboro is a partner in the Washington, DC, office of Simpson Thacher & Bartlett

LLP and is a member of the firm’s Government and Internal Investigations Practice. Scarboro

joined the firm following a 19-year tenure at the Securities and Exchange Commission. During

her career at the SEC, Scarboro held numerous roles, but most recently, as the Chief of the

SEC’s FCPA Unit in the Division of Enforcement, Scarboro led a wide variety of major

investigations and enforcement actions. Scarboro played a role in all of the SEC’s recent major

FCPA cases and acted as the SEC liaison with the Department of Justice (DOJ) and regulators

around the world. In addition, Scarboro has been responsible for a number of significant

financial fraud cases, including the SEC’s recent action involving Satyam Computer Services

Limited, and several major insider trading cases.

©2012

“Association of Certified Fraud Examiners,” “Certified Fraud Examiner,” “CFE,” “ACFE,” and the

ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of

this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without

the prior consent of the author.

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The FCPA and the UK Bribery Act and the Rising Tide of Anti- Corruption

23nd Annual ACFE Fraud Conference

Orlando, Florida June 17-22, 2012

Kenneth G. Yormark, CFE, CPA Cheryl J. Scarboro, Esq. Navigant Consulting Simpson Thacher & Bartlett LLP

(646) 227-4649 (202) 636-5529 ken.yormark@navigant.com cscarboro@stblaw.com

It has taken 35 years, but the Foreign Corrupt Practices Act (“FCPA”) Act is growing into a mature adult. A slow starter in its infancy, the FCPA has spread it wings in the past few years and has now hit its stride. The UK Bribery Act, its young sibling was just born last year and has the capability to be much bigger and more powerful. We will see how it develops.

FCPA Overview The number of Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) FCPA enforcement matters are on the rise, with 2011 the second most prolific year in history. Many believe enforcement activity slowed in the latter part of 2011 only because the DOJ was focused on preparing for five trials.

The Facts About The FCPA

Passed by Congress in 1977.

An anti-bribery statute.

A books and records statute.

Enforceable by DOJ and SEC.

The Anti-Bribery Provisions Make it unlawful to

Directly make (or offer to promise to make) a payment of gift or money or anything of value to:

Non U.S. government officials

Foreign political parties, candidates or officials

Officials of public international organizations (e.g., U.N.).

Indirectly to such persons through an intermediary while “knowing” the payment or gift will be passed on.

If the purpose is to influence an official act or decision or to induce an official to act or not to act.

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In order to obtain, retain, direct business or “Secure an improper advantage”.

Bottom Line: Avoid giving benefits that may have the appearance of impropriety. Books and Records Provisions

Make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions of the corporation.

Maintain an adequate system of internal accounting controls.

No “scienter” requirement

Requires issuer to exercise control over books and records of foreign subs and other controlled entities.

A bribe to a foreign official must be recorded as a bribe, not a “fee” or other seemingly innocuous transaction.

Who is a Foreign Official?

Foreign government officials

- Very broadly defined and/or a member of a “political party”

- Not limited to high level officials

- Not limited to “federal” employees – state, provincial employees

- Employees of government owned or controlled entities

- Persons acting officially on behalf of a government entity

- Can include private persons who are “advisors”

- Can include, as a practical matter, relatives of officials

- Includes employees of 75+ international organizations, including EU entities, UN entities, World Bank, Asian and African development banks.

UK Bribery Act The UK Bribery Act came into effect in July 2011. This Act is more encompassing than the FCPA, covering all commercial bribery, (not just payments to foreign political officials) and prohibiting the receipt of bribes as well as bribe-paying.

What is Covered by the Act? Bribery - Giving someone a financial or other advantage to encourage that person to perform their functions or activities improperly or to reward that person for having already done so. Seeking to influence a decision-maker by giving them some kind of extra benefit.

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Establishes a statutory defense: Organizations which have ADEQUATE PROCEDURES in place to prevent bribery are in a stronger position if isolated incidents have occurred in spite of their efforts. Show that your organization had ‘adequate procedures’ in place to prevent bribery.

Adequate depends on-the bribery risks you face and

The nature, size and complexity of your business. There are Six Principles which capture the key aspects of the Act Principle 1 Proportionate Procedures Procedures should be clear, practical, accessible, effectively implemented and enforced. An organization’s procedures should be proportionate. Its risks should include certain common elements.

a clear commitment

a strategy Principle 2 Top-level commitment » Top-level management fosters a culture within the organization in which bribery is never

acceptable.

Principal 3 Risk Assessment » The organization periodically assesses the nature and extent of its exposure to potential

external and internal risks of bribery. Principle 4 Due Diligence » The organization should apply procedures using a proportionate and risk based approach. Principle 5 Communication » Communication will vary enormously between organizations in accordance with the different

bribery risks faced, size of the organization and the scale and nature of its activities.

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» Training should be proportionate to the risk faced and tailored to responsibilities Principle 6 Monitoring and review » The organization should regularly analyze procedures to check effectiveness and make

necessary improvements. Top Trends in (FCPA) Enforcement

Corporate financial penalties continue to escalate. Individual prosecutions are on the rise and have become an increased focus. Non-U.S. Companies and individuals continue to be a target. The extractive industries sector has been the subject of international anti-bribery

enforcement actions more than any other sector. Continuing upswing in FCPA activity.

Individuals a Focus: Eighteen individuals were charged. These charges came three years after the settlement and, some contend, resulted from pressure brought by the press, the courts and Congress. This activity indicates that individuals will continue to be a focal point. Twelve of the eighteen charges were non U.S. Citizens and three more held dual U.S. /foreign citizenship. Five defendants were sentenced, one receiving the longest FCPA-related sentence to date (15 years). Sentences continue to increase in length. Some of the individuals include: Albert 'Jack' Stanley, 69, the mastermind behind KBR's Nigeria bribery scheme, was sentenced in February, 2012 to 30 months in prison and three years’ probation following his release. Stanley admitted taking kickbacks from contracts KBR signed with governments in Nigeria, Malaysia, Egypt, and Yemen. He was ordered to make a $10.8 million restitution payment for the kickbacks. Jeffrey Tesler, 63, was sentenced in February, 2012 to 21 months in federal prison followed by two years of supervised release for delivering $132 million in bribes for KBR and its partners through his consulting firm. Tesler also forfeited $149 million as part of his plea deal. Wojciech Chodan, 74, commercial vice-president of KBR company in the U.K., received no jail time and just one year of unsupervised probation and pay a $20,000 fine. He previously was ordered to forfeit $726,000. He was also allowed to leave right away for his home in Britain. Joel Esquenazi, 52, President of Terra Telecommunications Corp. was sentenced in 2011 in federal court in Miami to a 15-year prison term -- the longest in an FCPA-related case. The defendants participated in the scheme from November 2001 through March 2005 whereby having paid more than $890,000 to shell companies to be used to bribe Haitian Teleco officials in order to obtain business advantages. Carlos Rodriguez, 55, Executive Vice President of Terra Telecommunications Corp and Esquenazi's co-defendant, was given an 84-month sentence.

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Jorge Granados, 55, once head of Latin Node Inc., was sentenced in 2011 to 46 months in prison for bribing government officials connected to the wholly state-owned telecommunications authority in Honduras.

Antonio Perez, 52, received two years in prison this year in the Haiti Telco case. He admitted to

arranging bribes to Haitian officials of $674,000 and assisting in $36,000 in side payments.

Ousama Naaman, 62, Innospec's agent in Iraq, was given 30 months in prison late last year. The

DOJ had recommended a 90 month sentence. Cases Brought by the SEC

2012

Noble Corporation executives - SEC charged three oil services executives with bribing customs

officials in Nigeria to obtain illicit permits for oil rigs in order to retain business under lucrative

drilling contracts. (2/24/12)

Smith & Nephew - SEC charged the London-based medical device company with violating the FCPA

when its U.S. and German subsidiaries bribed public doctors in Greece for more than a decade to

win business. The company and its U.S. subsidiary agreed to pay more than $22 million to settle

civil and criminal cases. (2/6/12)

2011

Magyar Telekom - SEC charged the largest telecommunications provider in Hungary and three of its

former top executives with bribing government and political party officials in Macedonia and

Montenegro. The firm and its parent company agreed to pay $95 million to settle civil and criminal

charges. (12/29/11)

Aon Corporation - SEC charged one of the world's largest insurance brokerage firms with violations

of the books and records and internal controls provisions of the FCPA. Aon agreed to pay $14.5

million to settle SEC charges and a $1.7 million criminal fine to the Department of Justice.

(12/20/11)

Siemens executives - SEC charged seven former Siemens executives for their involvement in the

company's decade-long bribery scheme to retain a $1 billion government contract to produce

national identity cards for Argentine citizens. (12/13/11)

Watts Water Technologies and Leesen Chang – SEC charged the company and a former vice

president of sales for improper payments disguised as sales commissions by its Chinese subsidiary

to employees at state-owned design institutes in order to influence design specifications that

favored their valve products for infrastructure products in China. (10/13/11)

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Diageo – SEC charged one of the world’s largest producers of premium alcoholic beverages for

making $2.7 million in improper payments to government officials in India, Thailand, and South

Korea to obtain lucrative sales and tax benefits. Diageo agreed to pay more than $16 million to

settle the case. (7/27/11) [Administrative Proceeding]

Armor Holdings – SEC charged the Jacksonville, Fla.-based body armor supplier for illicit payments

to United Nations officials to obtain contracts related to U.N. peacekeeping missions. Armor

Holdings agreed to an SEC settlement of $5.7 million and a criminal fine of $10.29 million.

(7/13/11)

Tenaris – SEC sanctioned the global manufacturer of steel pipe products for bribing Uzbekistan

government officials during a bidding process to supply pipelines for transporting oil and natural

gas. Tenaris agreed to pay $5.4 million under a Deferred Prosecution Agreement, and paid a $3.9

million criminal fine. (5/17/11)

Rockwell Automation – SEC charged the Milwaukee-based company for illicit payments made and

leisure travel provided by a former subsidiary in China to state-owned enterprises that provided

design engineering and technical integration services to influence contract awards. (5/3/11)

Johnson & Johnson – SEC charged the New Brunswick, N.J.-based pharmaceutical company for

bribing public doctors in several European countries to win contracts for their products and paying

kickbacks to Iraq to illegally obtain business. J&J agreed to pay $70 million to settle cases brought

by the SEC and criminal authorities. (4/8/11)

Comverse Technology – SEC charged the New York-based company for its Israeli subsidiary’s

improper offshore payments to government officials in Greece. (4/7/11)

Ball Corporation – SEC charged the Colorado-based manufacturer of metal packaging for beverages,

foods and household products for improper payments to employees of Argentina’s government in

order to import prohibited used machinery and export raw materials at reduced tariffs. (3/24/11)

[Administrative Proceeding]

International Business Machines Corp. – SEC charged IBM for providing improper cash payments,

gifts, and travel and entertainment to government officials in China and South Korea in order to

secure the sale of IBM products. IBM agreed to pay $10 million to settle the SEC’s charges.

(3/18/11)

Tyson Foods – SEC charged the worldwide chicken manufacturer for making illicit payments to two

Mexican government veterinarians responsible for certifying its Mexican subsidiary’s chicken

products for export sales. Tyson Foods agreed to pay $5 million to settle SEC and criminal charges.

(2/10/11)

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Maxwell Technologies – SEC charged the energy-related products manufacturer for making

repeated bribes to Chinese government officials to obtain business from several state-owned

entities. San Diego-based Maxwell agreed to an SEC settlement of more than $6.3 million as well as

an $8 million criminal penalty. (1/31/11)

Paul W. Jennings (Innospec) – SEC charged the CEO of Innospec for approving bribes paid to

government officials in Iraq and Indonesia. (1/24/11)

A WONDERFUL STORY RELATING TO 2010

SFO, BAE Help Educate Millions of Kids As part of BAE’s 2010 global settlement of bribery charges, BAE agreed with the SFO to pay nearly £30 million to fund educational projects in Tanzania.

The £30 million will be used to buy textbooks for all 16,000 primary schools in the country, the SFO said, benefiting more than eight million children. Teaching guides and syllabi will be provided to 175,000 primary school teachers. Up to £5 million will be spent to buy desks for schools in Tanzania's poorest districts. The SFO said the U.K. has been helping BAE and the government of Tanzania allocate the money and decide how it will be delivered and monitored.

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The Reform Debate in 2012: The U.S. Chamber of Commerce proposes the following changes to the FCPA:

Clearly define “foreign official”. The DOJ and SEC contend that defining “foreign official” is impractical. However, many cases have turned on this definition, which underscores its importance.

Establish a leniency program for companies that self-report. The SEC and DOJ look favorably on self-reporting but have not specifically defined how it benefits a company in the event of an investigation.

Eliminate or reduce successor liability for acts of an acquired company. The DOJ strongly opposes this, stating it would send the wrong message on the U.S. government’s stance on corruption.

Add an affirmative defense for companies with robust compliance programs. Companies with a comprehensive compliance program based on a well-developed risk assessment have used this in their defense. It cannot, however, be an off the shelf product. The DOJ expects to release “detailed new guidance” on the criminal and civil provisions of the Act this year. With more countries developing anti-corruption

Additional Guidance on the FCPA due from the DOJ

DOJ has indicated they are revamping their guidance on the FCPA. Assistant U.S. Attorney Lanny Breuer has rejected requests to “water down” the Act. He did indicate that the updated literature would provide “useful,” “detailed,” and “transparent” guidance on the enforcement issues.

Comparing and Contrasting the FCPA and the U.K. Bribery Act

The FCPA applies only to bribery of foreign officials whereas The UK Bribery Act covers both commercial bribery and bribery of foreign political officials.

The FCPA does not apply to the receipt of a bribe. The provisions of the UK Bribery Act relating to foreign political officials are consistent with the FCPA. The commercial bribery provisions go further to prohibit not just the offer but the acceptance of a bribe as well.

The FCPA permits facilitation payments for low-level payments for certain routine government actions. The UK Bribery Act does not permit an exception for facilitation payments. This has caused great controversy. Many companies are now disallowing the use of facilitating payments.

The FCPA contains accounting provisions which have been used successfully for many cases. The UK Bribery Act does not address accounting issues.

Global Expansion of Anti-Corruption Per TRACE’s Global Enforcement Report 2011, 24 countries have pursued enforcement of their foreign bribery laws and just 40 have pursued enforcement of their domestic bribery laws against foreign citizens or companies in the last 34 years. First-time domestic bribery investigations were initiated in several countries, including Croatia, Cuba, Georgia, Israel, Latvia and Poland.

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The largest number of enforcement actions involves alleged bribe payments to officials in China, Iraq and Nigeria.

China In 2011 there were six FCPA enforcement actions regarding corrupt activity in China. The Chinese government also pursued anti-corruption matters. China’s government approved an amendment to the Chinese Criminal Law prohibiting Chinese citizens from giving any "property to any foreign public official or official of an international public organization" to obtain any "illegitimate commercial benefit." In addition on December 21, 2011 the Supreme People’s Court announced the following principles:

State workers who use the position of their office to seek benefits for a requester of favor, and who in name "go into business" with the requestor and earn "profits" without actually contributing capital to the company or participating in its operation or management, shall be treated as having accepted bribes;

State workers who, knowing that a party is requesting favors, accept money or property from that party, shall be deemed as having promised to "seek benefits for another" whether or not they actually seek or succeed in seeking benefits for another;

State workers who use the position of their office to seek benefits for a requester of favor, and who purchase houses and other property from the requester at prices clearly below market value, shall be treated as having accepted bribes, and the value of the bribes shall be calculated by the difference between the local market price at the time of the transaction and the actual price paid; and

A determination that bribes were accepted shall not be affected if, having accepted money or property, state workers return the money or property in order to cover up the crime after learning that the matter is under investigation.

Per a report delivered at the National People’s Congress, the Supreme People’s Procuratorale investigated nearly 10,000 civil servants for suspected corruption-related offenses in 201l. One of the strongest deterrents of crime used in China is the death penalty. Chinese courts usually reserve the death penalty for corruption involving millions of Yuan ($200,000), and even then sentences are often reduced to life imprisonment after two years. Some senior officials want the amount reduced in half saying no official would take that risk. Despite these harsh penalties U.S. companies surveyed in China Business Report 2011-2012 said their business activities in China have been hindered by corruption and fraud. More than ten percent of the 315 participating companies said corruption was worse in 2011 that it was in 2010. Companies reported customer kickbacks as by far the most common form of corruption they encountered. Employee fraud and corruption in granting government tenders were second and third most common, respectively.

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The report named the healthcare and energy sectors as the most corrupt, saying recent accelerated growth in those fields has outpaced authorities’ ability to regulate. Russia In January 2011, Russian President Dmitry Medvedev said Russian authorities had failed to cope with widespread corruption. After hearing a report that 34 percent of all corruption crimes in 2010 were committed by law enforcement officials he stated, “We created anti-corruption laws but they failed to reach their objectives.” Another senior official disclosed that. To stifle this rise Medvedev signed into law in April 2011 a bill to raise fines on bribery. Federal Law on Amendment to the Criminal Code and the Code of Administrative Offenses of the Russian Federation to Improve State Anti-Corruption Management raises fines for giving or taking bribes depending on the gravity of the offense 10-fold to up to 100 times the amount of the bribe with the maximum fine at $500 million rubles ($18.3 million). Canada The Corruption of Foreign Public Officials Act passed in 1999, but the country has been criticized for weak enforcement. The Act is also considered ineffective because it has a narrow jurisdiction. Canada’s first foreign bribery prosecution was a minor one in 2005, involving Hydro-Kleen, and the next charge didn’t arise until July 2010. In 2011 Niko Resources was charged for bribery of public officials in Bangladesh and paid a $9.5-million fine and received a Probation Order under which Niko will be subject to Court supervision and regular independent audits to confirm its compliance with the CFPOA. Costs of compliance with the Probation Order will be borne by Niko. The Niko case appears to signal a new era of aggressive enforcement of foreign anti-bribery

rules in Canada. Additional prosecutions or settlements are expected in the near future as it

is understood that the RCMP has approximately 30 other ongoing, foreign corruption

investigations.