The FCPA & Why It May Matter to You

Arcie I. JordanJackson Walker L.L.P.100 Congress, Suite 1100Austin, Texas 78701512.236.2209ajordan@jw.com

Texas District Export CouncilsState Conference

May 13, 2010

The presentations, documents and materials on this website were created on the dates delineated and are not periodically updated. Applicable laws and rules often change and, therefore, material presented in these materials may be out of date. Furthermore, the materials on this website are not intended to and do not constitute an opinion as to corporate, immigration, tax, import/export, or trade laws or any other matter and law. They are not intended or written to be used, and may not be relied upon, for any purpose including the purpose of avoiding penalties that may be imposed by any jurisdiction, including any state or federal tax, import/export, immigration, corporate, trade law or otherwise and shall not be used to promote, market or recommend any transaction or matter addressed herein. This statement is made in accordance with Treasury Circular 230 and other applicable laws.

Why would the FCPA Matter to You?

• Do your goals include:– Becoming an acquisition target?– Growing & merging with another business?– Going public?– Avoiding …

• High costs of due diligence & corrective action?• Business interruption (e.g., Debarment)?• Devaluation of your business?• Damage to your reputation?

• If so, and you’re engaged in international business transactions, the FCPA should matter to you!

Debunking the Myths

• The FCPA doesn’t apply to me because …– I’m just a small business conducting limited

foreign operations– My company is not publicly traded– I don’t use foreign intermediaries; I go through a

U.S. representative for all my foreign operations– I only make payments abroad that everyone else

doing business in the same foreign places are paying (so I can compete)

– I’m not on the government’s radar screen

I’m not on the government’s radar screen …

• Increase in FCPA prosecutions deriving from:– Whistleblowers & disgruntled employees– Competitor denunciations– M&A due diligence (& development of successor

liability concepts – even in asset acquisitions, if purchasing entity is merely a continuation of the selling entity)

• Whether true or false, you will spend time defending

• Defense much harder if haven’t paid attention to FCPA requirements

My business is small & not publicly traded …

• 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)– 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).

I will deal with FCPA issues, when I need to …

• Neglected Due Diligence & Correction is Much More Costly– Monetary Outlays

• Attorneys Fees• Forensic Accountant Fees• Consultants Fees

• Investment of Company Resources & Time• Other Costs

– Restructuring foreign distribution network– Impact to value of business in future transactions– Loss of alternative business opportunities

What Should You Do Now?

• Understand the FCPA• Develop Meaningful Policy & Procedures• Conduct Effective Training• Perform Necessary Audits

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 is scheduled to be sentenced on May 14th. He faces 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

Understanding the FCPA

• Anti-Bribery Prohibitions

– Giving or offering 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• 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.

Understanding the FCPA

• 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

• Allows– Certain Facilitating or Expediting Payments

• 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 As long as they do not violate the foreign

country’s domestic laws. Ex: UK’s Bribery Act 2010 doesn’t contain

exception for facilitation payments.

Understanding the FCPA

• Allows– Travel & Promotional Expenses

• Must be reasonable and bona fide expenses• Travel and lodging expenses must be directly

related to promotion, demonstration, explanation of products, technology.

Provided payments are lawful under the written laws and regulations of the recipient’s country.

Developing the Policy & Procedures

• Understand your own risks• Make the Policy meaningful

– Adapt it to your operations– Address your risks– Don’t just rely on cookie cutter templates

• Implement meaningful procedures– Vet up front; obtain references; interview in person– Establish controls at various levels

(manual/computerized)– Require appropriate contractual commitments &

certifications– Push requirements down to third party providers, if you

can

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.

Conducting Effective Training

• Initial Training– Who?– What?– How?

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

Keep ’em Honest: Perform Audits

• What type?• Of what?• Of whom?• 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

• Other countries have or are adopting anti-bribery legislation, ex:– UK’s Bribery Act of 2010– OECD Convention on Bribery of Foreign Public

Officials

• The U.S. and non-U.S. enforcement agencies are increasingly coordinating & pursuing companies outside of the U.S.

• Federal Sentencing Guidelines – Establish some guidance regarding the adequacy

of compliance programs

Questions?

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

For additional information contact:Arcie I. JordanJackson Walker LLP100 Congress, Suite 1100Austin, Texas 78701512.236.2209ajordan@jw.com