The FCPA & the Panalpina Case - Risks presented for brokers & freight forwarders in managing agents & operations in foreign countries Arcie I. Jordan Jackson

The FCPA & the Panalpina Case - Risks presented for brokers & freight forwarders in

managing agents & operations in foreign countries

Arcie I. JordanJackson Walker L.L.P.100 Congress, Suite 1100Austin, Texas [email protected]

Texas Brokers & Freight Forwarders

Annual ConferenceOctober 8, 2010

What is the “Panalpina” Case?

• Panalpina World Transport Holding Ltd, a Swiss-owned multi-national logistics, freight forwarding and customs house brokerage giant.

• Had a 40 year history of providing oil & gas supply chain services internationally, including in Nigeria.

• In Feb. 2007, US DOJ launched an investigation into allegations of Panalpina’s activities in Nigeria that would represent violations of the FCPA

• Alleged violations:– Making illegal payments to Nigerian Customs

agents to secure preferential customs treatment

– Covering up illegal payments by • falsifying proof of payment receipts

• categorizing payments as “local processing” or “administrative/transport” expenses

– Failing to provide customs valuation invoices since some goods not declared

– Improperly importing goods into Nigeria– Failing to post bonds with sufficient funds to

cover duties & tariffs– Failing to maintain adequate internal controls

• Investigation first came to the public’s attention in early 2007 when 3 subsidiaries of Vetco Grey Controls, a Houston-based oil service company with substantial operations in Nigeria and one of Panalpina’s customers, pled guilty to violating the FCPA for paying more than 378 bribes in Nigeria totaling about $2.1M to employees of the Nigerian Customs Service

– through a “major international freight forwarding and customs clearance company” to clear customs, obtain licenses and obtain other preferential treatment in the customs process from at least September 2002 through April 2005.

• In July 2007, the investigation was extended beyond Panalpina’s Nigerian operations to its operations in Kazakhstan and Saudi Arabia.

• Panalpina reportedly suspended all domestic logistics and freight forwarding operations in Nigeria in September 2007 for all oil & gas-related customers.

• In August 2008, Panalpina announced that compliance concerns had forced it to withdraw completely from the Nigerian domestic market and that it was selling its local Nigerian operation to a Nigerian group and would retain no ownership interest therein. That transaction was closed in November, 2008.

Lessons:• The FCPA applies to freight forwarders and

customs brokers.

• The government’s visibility into conduct that may violate the FCPA may arise from a broad variety of sources, including your customers (& vice versa).

• It’s important that freight forwarders and customs brokers understand the FCPA if they are responsible for customs clearance and related supply chain services in foreign jurisdictions.

What Should You Do?

• Understand the FCPA• Develop Meaningful Policy• Develop Meaningful Procedures• Conduct Effective Training/Auditing

Understanding the Federal Corrupt Practices Act (FCPA)

• Enforced by the Securities & Exchange Commission & the Department of Justice

• Anti-Bribery Provisions• Exchange Act Provisions• Civil & Criminal Penalties, Disgorgement of

Proceeds & Monitors

Understanding the FCPA

• Criminal & Civil Penalties can be substantial:

– On Feb. 19, 2010, Jean Fourcand of Miami, FL pled guilty to role in remitting bribes to Robert Antoine, a Haitian telecommunications official, on behalf of U.S. telecommunications companies.

– Fourcand faces up to 10 years in prison & a fine of

the greater of $250,000 or 2xs the value of the funds he helped to transfer. Antoine agreed to forfeit $1.6M he received & faces up to 20 years in prison, plus a fine of the greater of $250,000 or 2xs the value of the funds he received.

Penalties can be substantial …

• Another example:

– On March 16, 2010, Nexus Technologies and 3 of its employees pled guilty to conspiring to bribe Vietnamese officials to obtain contracts to supply the Vietnamese government with a variety of equipment and admitted to paying bribes over a 9-year period totaling more than $250,000 that they recorded as “commissions.”

– Nexus must cease operations & faces a fine of up to $27M.

– The employees face prison terms of up to 30-35 years.

Penalties can be substantial …• Another example:

– On April 20, 2010, Charles Paul Edward Jumet was sentenced to 7 years & 3 months in prison after pleading guilty to violating the FCPA and making a false statement to federal agents regarding an $18,000 “dividend” check to a Panamanian official. In addition, he must pay a $15,000 and serve 3 years of supervised release after his release from prison.

– His co-conspirator, John W. Warwick, forfeited the $331,000 he derived from the scheme and faced up to 5 years in prison and a fine of up to $660,000.

Cases Illustrate• Substantial civil & criminal penalties

• Explosion in FCPA enforcement actions:– In 2009, 40 cases initiated by Dept. of Justice (DOJ)

and the Securities & Exchange Commission (SEC).– As of the end of April, 2010, 140 FCPA matters

pending investigation at DOJ.– Increased prosecution of individuals:

• 2009: 17 prosecutions/4 of which went to trial

• 2008: 60% of prosecutions against individuals


• Whether large or small, the FCPA applies to “Covered Persons”:

– Domestic Concerns (U.S. businesses, corps, partnerships, sole proprietorships) (even when acting for foreigner not subject to the FCPA)

– U.S. Persons (citizens, nationals, residents)– Persons located in the U.S. (visitors, nonimmigrant

workers)– Foreign subsidiaries wholly owned or controlled by

U.S. companies (control > 50% ownership)


• “Covered Persons” includes

– Issuers (all companies whose securities are listed in the U.S.)

– Foreign corps/businesses with a principal place of business in the U.S.

– Other persons if they participate in a prohibited activity as an officer, director, employee, representative (including a stockholder acting on behalf of the company) or agent of any such business concern (whether in the U.S. or not).


• Anti-Bribery Prohibitions

– Using mail or any means or instrumentality of interstate commerce to

– Give or offer anything of value • including a promise, authorization, payment, gift

– directly or indirectly • through agents, attorneys, consultants,

contractors, distributors, brokers, suppliers, etc.

– to any foreign official

• Broadly defined to include an officer, employee or other person acting in an official capacity for:

– A foreign government (including any dept., agency or instrumentality thereof)

– State-owned enterprises & quasi-governmental entities (e.g., Dr. employed by govt. hosp.)

– Public International Organizations (e.g., the U.N., World Bank, etc.)

– Foreign political party– Foreign political candidate

– With knowledge of or intent that some or all of same

– Is for the purpose of influencing such foreign official to act or refrain from acting

• Inducing foreign official to do or omit from any act in violation of his or her lawful duty

• Inducing foreign official to influence or affect any act or decision of government

– In order to assist the company in obtaining or retaining or directing business to any covered person or allowing such person to obtain an improper advantage.

Knowledge Requirement

• U.S. vs. Kay (5th Cir. 2007) rejected defendant’s contention that specific intent to violate the FCPA is required. The App. Ct. held that the FCPA does not require that the actor have actual knowledge that the FCPA prohibits his conduct, but only that his conduct is generally unlawful. – Government doesn’t have to prove that the

defendant knowingly and specifically sought to violate the FCPA. (The U.S. Supreme Ct. denied to hear the Kay petition, so the App. Ct’s reasoning stands.)

Knowledge Requirement• U.S. vs. Bourke & Kozeny (NY D. Ct.,

Southern Dist. Oct. 2009) found that the FCPA’s knowledge requirement was satisfied because Bourke took affirmative steps to avoid learning of bribery payments. – Confirmed knowledge may be proved if the

defendant “suspects the fact, realized its high probability, but refrained from obtaining the final confirmation because he wanted to be able to deny knowledge.”

– Important lesson: Cannot self-blind.


• Exchange Act Provisions– Accurate Books & Records Requirement– Internal Accounting Controls Requirements

• Easier for government to establish violation – ex:– NATCO Group, Inc., provider of oil & gas equipment,

whose subsidiary’s employees paid “extorted fines” to obtain work visas for workers. Govt alleged violation of books & records requirements since booked reimbursement to workers as “bonus payments” and “visa fines.” (NATCO settled though may have had a

defense to an anti-bribery charge.)

Additional SEC guidance re: Knowledge Requirement

– Case against United Industrial Corp. for alleged violations of the FCPA’s anti-bribery, books & records, and internal control provisions, the SEC alleged UIC’s violations stemmed from its subsidiary’s payments to a third-party agent’s payments to Egyptian Air Force officials. Based on emails between the subsidiary’s former president and the agent, SEC established the former president “knew or consciously disregarded the high probability the agent would offer, provide or promise at least a portion of [his] payments to Egyptian air officials” in order to influence the award of contracts to the subsidiary. UIC settled on 05/29/2009.

– Important lessons: Direct knowledge unnecessary; direct involvement unnecessary; the sub’s involvement & first-hand knowledge sufficient.

Understanding the FCPA• As a result of 1988 amendments, FCPA

specifically allows– Certain payments the purpose of which is to

expedite or secure performance of routine governmental action, e.g.:

• Obtaining permits, licenses to qualify an entity to do business in a foreign country

• Processing papers, such as visas• Providing police protection, mail service, certain

inspections• Providing utility services, loading or unloading

cargo• Actions of a similar nature

• But watch out:– The exception is limited & recent

enforcement actions reveal the government’s approach is to narrowly construe it

• Only applicable when foreign government official has no discretion in exercise of his official function, except timing of performance

• If payment appears to influence official to do something should not do or refrain from doing something should do, it may not fall within the exception

• So ask:

• Is a payment to a foreign customs official designed to get products into the country promptly?

• Or is it for the purpose of getting products into the country when they would not otherwise qualify to clear customs for some reason (e.g., absence of requisite certificates, licenses or accompanying paperwork)?

• Or is it for the purpose of obtaining a lower duty rate for the products?

Also, in order to qualify for facilitating payment exception under the FCPA, the payment must be legal under the foreign country’s domestic laws.

E.g., UK’s Bribery Act 2010 doesn’t contain exception for facilitation payments.



• Also Allows

– Travel & Promotional Expenses• Provided they are reasonable and bona

fide expenses; and

• Directly related to promotion, demonstration, explanation of products, technology; and

Are lawful under the written laws and regulations of the recipient’s country.

Meaningful Policy & Procedures Required

• BAE Systems plc pled guilty on March 1, 2010 to providing false statements about its implementation of policies & procedures to ensure it complied with the anti-bribery provisions of the FCPA and the OECD Anti-Bribery Convention. Government alleged BAE willfully failed to adopt the kinds of measures necessary to ensure compliance and profited thereby.

• BAE agreed to pay $400M criminal fine. It must obtain & retain an independent monitor for 3 years.

Meaningful Policy & Procedures Required

• Federal Sentencing Guidelines – Establish guidance regarding the requisite adequacy of

compliance programs

– Establish that U.S. based companies bear the same legal responsibility for the actions of a foreign agent as they do for the actions of their own U.S. employees

– Both DOJ and SEC have confirmed that the quality of a company’s due diligence on foreign business partners/agents will be considered when fashioning penalties for companies when their business partners/agents have violated the FCPA

Develop a Meaningful FCPA Policy

• Understand your own risks– Conduct company-wide assessments– Analyze challenges presented in different countries

• Make the Policy meaningful– Adapt it to your operations– Address your risks– Don’t just rely on cookie cutter templates

Adopting Meaningful Procedures

• Due diligence procedures on 3rd parties should be more than window dressing:– Develop appropriate questionnaire

– Obtain references

– Validate through U.S. Embassy & independent sources

– Interview in person

– Train, certify, periodically retrain & recertify

• Panalpina now conducts compliance assessments in high risk countries & undertakes intensified compliance measures in critical countries, including on-site interviews, definition of corrective action items & follow up

• Establish controls at various levels (manual/computerized)– Audits– Cash monitoring

• Require appropriate contractual commitments & certifications

Panalpina’s Response is Illustrative

• Has set the tone at the top, involving the company’s Board directly

• Has appointed dedicated compliance resources• Has redesigned internal audit program, including making

compliance matters a part of the program and standard checks on every audit

• Prior to commencing audits, internal auditors now review plan with compliance department

• Compliance findings are reported to compliance department and audit committee

• HR and legal departments are integrally involved in compliance efforts

• Code of Conduct has been revised to, among others, prohibit anti-bribery, provide guidance on permissible facilitation payments, gifts, hospitality & entertainment, and establish procedures & provide translations to insure employee understanding and commitment thereto

Developing Necessary Training Programs

• Initial Training– Who? All employees– What? Should be tailored to employee level/duties– How? E-learning, on-site training, adapted to

culture/location

• Recurrent Training– Who?– What?– How?– How often?

What should you do if a problem is detected?

• Consult with an attorney• Implement disciplinary measures• Identify necessary corrective measures in

policy, procedures, training & auditing protocols

• Implement corrective measures• Consider voluntary disclosure

Final Thoughts

• Corrective action can be much more costly than due diligence and compliance:– Monetary Outlays

• Attorneys Fees• Forensic Accountant Fees• Consultants Fees

– Investment/distraction of Company Resources & Time

– Other Costs• Business reputation• Restructuring operations

Questions?

Arcie I. JordanJackson Walker LLP100 Congress, Suite 1100Austin, Texas [email protected]

Jackson Walker possesses a team of FCPA professionals, including litigators & counselors.

Documents

The FCPA & the Panalpina Case - Risks presented for brokers & freight forwarders in managing agents & operations in foreign countries Arcie I. Jordan Jackson