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FCPA Update & Overview
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1© 2009 Shearman & Sterling LLP
The FCPA Year in Review
Recent InvestigationsCompliance Programs
July 22, 2009 2© 2009 Shearman & Sterling LLP
Anti-Corruption History
July 22, 2009 3© 2009 Shearman & Sterling LLP
Common Anti-Corruption Provisions
Anti-Bribery ProhibitionsBooks & Records RequirementsProceeds of Corruption Provisions
July 22, 2009 4© 2009 Shearman & Sterling LLP
US Books & Records Provisions - “Issuers” only
Two requirements: Maintain books and records which, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets Devise & maintain internal controls that reasonably assure
the books and records are accurate and transactions are pursuant to specific or general management direction
Civil and Criminal Penalties Criminal fine of up to $5,000,000 for natural persons and $25,000,000 for legal
persons Imprisonment for not more than 20 years Disgorgement Bar on employment, professional disqualifications
July 22, 2009 5© 2009 Shearman & Sterling LLP
Elements of US Anti-Bribery Offense
(i) Issuer, domestic concern, or “any person”
(ii) Use of mails or interstate commerce
(iii) Corruptly
(iv) In furtherance of payment, offer, or promise, or authorization of payment, offer, or promise
(v) Of money or anything of value
(vi) To a public official, political party, party official, candidate for public office, or intermediary
(vii) To cause the official to do something, to refrain from doing something, or to use his or her influence
(viii) To assist in obtaining or retaining business for any person
July 22, 2009 6© 2009 Shearman & Sterling LLP
Defenses and Exceptions
Facilitating or expediting payments “routine governmental action”
Reasonable and bona fide expenditures Promotion, demonstration, or explanation of products or services Execution or performance of a contract with a government
Lawful payments to government officials Lawful under the written law of the official’s country
July 22, 2009 7© 2009 Shearman & Sterling LLP
U.S. Cases Brought
3 1 36 7
17
955
7 6
21
16
8
4 3
0
5
10
15
20
25
30
35
40
2002 2003 2004 2005 2006 2007 2008 2009ytd
Total SEC/DOJ Matters Initiated: 2002-present
DOJ
SEC
Total SEC/DOJ Matters Initiated: 2002-present
DOJ
SEC
3 3
75
5
2
5
10
6
11
15
3
3
02468
1012141618
2002 2003 2004 2005 2006 2007 2008 2009ytd
Individuals Charged:2002-Present
DOJ
SEC
DOJ
SEC
11
2 2 1
7107
188
4431
3
0
5
10
15
20
25
30
2002 2003 2004 2005 2006 2007 2008 2009ytd
Total Corporate Matters Initiated: 2002-present
U.S. Corporations
Foreign Corporations
U.S. Corporations
Foreign Corporations
2
July 22, 2009 8© 2009 Shearman & Sterling LLP
Rise in Corporate Prosecutions Post-Enron Corporate Fraud Task Force Voluntary Disclosures resulting from Sarbanes Oxley
Focus by auditors on internal controls and “fraud” reporting Management certifications Whistleblower provisions
Increased availability of foreign evidence Rise in Prosecution of Foreign Corporations
Increased cooperation and coordination with foreign law enforcement Impatience with pace of foreign enforcement of OECD laws Expansive interpretation of territorial jurisdiction over foreign companies
Growth in “Consolidated” or “Industry” Investigations U.N. Oil for Food (17 corporations report open investigations; 9 corporations settled with DOJ & SEC) Freight Forwarders & Customs Brokers (12 corporations report open investigations) Medical Devices (11 corporations report open investigations)
Trends in U.S. Cases
July 22, 2009 9© 2009 Shearman & Sterling LLP
Potential Sanctions in FCPA Matters
Civil Penalties Fine of $325,000 (Tier II) or $650,000 (Tier III) per
violation
Disgorgement of ill-gotten profits (SEC only)Criminal Penalties Organizations
$ 2 million per violation; or Twice the “Gross Gain”
Individuals 5 years in prison $100,000 per violation
Collateral Consequences Debarment Shareholder & other actions Foreign Prosecutions
Corporate Deferred Prosecution Agreement / Non Prosecution Agreements Penalties & Restitution Reporting Compliance measures Monitors Cooperation, including waiver of attorney-client
privilege
July 22, 2009 10© 2009 Shearman & Sterling LLP
Trends in Sanctions
Company: Fines, Civil Penalties, Disgorgement & Interest
$ 800 million Siemens (+ € 596 in Germany) 579 million KBR/ Haliburton 44 million Baker Hughes 32 million Wilbros 28 million Titan 26 million Vetco II 22 million Lockheed II 19 million Volvo 17 million Fiat 16 million ABB
Individual: 84 months Steindler & Stanley 63 months Murphy 46 months Williams
155.1
36.328.22.7
87.20
0.0
581
893.4
0100200300400500600700800900
2002 2003 2004 2005 2006 2007 2008 2009ytd
Total Criminal and Civil Fines Imposed on Corporations: 2002-present
Am
ou
nt
in M
illio
ns (
$) Amounts Pertaining to
Siemens 2008 and KBR 2009
July 22, 2009 11© 2009 Shearman & Sterling LLP
Number of FCPA Proceedings by Country
Africa Asia Europe Middle East North America South America
Nigeria 25 China 17 Turkey 4 Iraq 19 Canada 6 Costa Rica 6
Rwanda 6 Indonesia 14 Germany 3 Egypt 6 Mexico 2 Brazil 5
Senegal 4 India 8 France 2 Saudi Arabia
4 Panama 4
Benin 3 Azerbaijan 7 UK 2 UAE 4 Argentina 3
Angola 2 Kazakhstan 6 Belgium 1 Bahrain 2 Colombia 3
Kenya 2 South Korea 6 Greece 1 Iran 2 Ecuador 3
Liberia 1 Thailand 5 Italy 1 Israel 2 Jamaica 3
Taiwan 3 Luxemburg 1 Dom. Rep. 2
Bangladesh 2 Poland 1 Venezuela 2
Philippines 2 Spain 1 Bolivia 1
Russia 2 Nicaragua 1
Mongolia 1
Turkmenistan 1
Uzbekistan 1
43 75 17 39 8 33
July 22, 2009 12© 2009 Shearman & Sterling LLP
U.S. Criminal Dispositions
,,
Compliance Monitor16% (16)
Deferred/Non-Prosecution Agreements
21% (23)
Pleas44% (48)
Withdrawals1% (1)
Convictions4% (5)
Dismissals3% (3)
Fugitives5% (6)
Acquittals6% (7)
July 22, 2009 13© 2009 Shearman & Sterling LLP
Siemens Settlement - Facts
According to U.S. pleadings, $ 805,500,000 intended in whole or in part as corrupt payments to foreign officials
Corrupt conduct included: Off-books accounts Consultant agreements with no legitimate business purpose Conduit payments False invoices Misaccounting for corrupt payments Limited audits of consultant payments Accumulating profit reserves as liabilities in internal balance sheet accounts Removable Post-It notes as approval forms Failure to follow four-eyes principle Backdating agreements Use of “agency agreements” to avoid prohibitions on consultants Kickbacks in connection with the UN’s Oil for Food Program Contracts
July 22, 2009 14© 2009 Shearman & Sterling LLP
Siemens Settlement – U.S. Sanctions
DOJ Fine reduced to $ 450 million
U.S. Sentencing Guidelines range of $ 1.35 – 2.75 billion Express recognition of Siemens’ “extraordinary cooperation,” its new Compliance program and remediation
efforts, and penalties imposed in German enforcement actions Imposition of a Monitor
SEC Requires disgorgement of $ 350 million of profits Imposition of a Compliance Monitor
Both DOJ and the SEC required Siemens to retain a monitor Dr. Theo Waigel appointed compliance monitor for four-year term Regularly scheduled reporting to SEC Report improper activities to Siemens’ Audit Committee Report to US government any improper activity that may constitute significant violation of law
July 22, 2009 15© 2009 Shearman & Sterling LLP
Siemens Settlement - German Proceedings
October 2007 proceedings relating to Siemens Com € 201 million fine € 179 million tax penalty relating to € 450 million in “non-deductible
expenses” December 2008 proceedings relating to failure of former Managing
Board to fulfill its supervisory duties € 395 million fine
Continuing investigations of former Managing Board, employees and others
July 22, 2009 16© 2009 Shearman & Sterling LLP
KBR / Halliburton
Facts: Halliburton acquired M.W. Kellogg Company in 1996 and merged it with Brown & Root to form KBR Kellogg and then KBR was part of a consortium to build LNG “trains” in Nigeria Between 1994 and 2002, KBR and the other partners paid $182 million to two agents to pay bribes to
senior and mid-level Nigerian officials
Sanctions: DOJ Criminal Fine - $ 402 million SEC disgorgement – $ 177 million Monitor for KBR Compliance consultant for Halliburton
Individuals: Former KBR senior officer pleaded guilty and will serve up to 84 months in prison Former agent (a U.K. solicitor) and former KBR officer, both UK citizens, charged. UK authorities
have arrested the agent and are seeking the officer. U.S. has stated it will seek extradition.
July 22, 2009 17© 2009 Shearman & Sterling LLP
Other 2008 Developments
Two DOJ Review Releases on M&A Due Diligence Fourth Revision of “Principles of Federal Prosecution of Business
Organizations” ( Holder, Thompson, McNulty, Filip Memo) Written DOJ Policy on the Selection & Duties of a Monitor
July 22, 2009 18© 2009 Shearman & Sterling LLP
An Investigation: Steps
Trial AnalysisStatutory
ElementsSubpoena
Smell Test
Random Event
July 22, 2009 19© 2009 Shearman & Sterling LLP
An Investigation: How It Starts & What It Typically Means
Typical triggers for investigations Typical initial issues
Government actionE.g. prompted by complaint, whistleblower, legal assistance request, international institutions, press reports (see Siemens, Daimler, Oil for Food cases, Statoil)
Initial fatal mistakes (e.g. lack of proper dawn raid policy) Lack of control over procedure Business disruption / distraction Public relations issues
M&A transactionsE.g. bidder due diligence or vendor due diligence (see StatoilHydro, Titan, ABB)
Timing constraints Diverging interests of seller and bidder(s) Impact on transactions (show stopper? no
action letter? timing of closing? reps & warranties? escrow?)
Self-reportingFollowing internal findings, e.g. whistleblower, internal audit
Control over procedure & evidence Control over timing Control over public relations Persuasion of internal constituencies Selective disclosure?
July 22, 2009 20© 2009 Shearman & Sterling LLP
Dawn Raids & Search Warrants
Have a policy that provides explicit instructions and contact information Call counsel immediately. Until counsel arrives senior employee acts as leader
Do not agree to interviews or informal chats with employees unless counsel so advises All requests for information other than the location of materials cover by the warrant /order should be referred to counsel.
Do NOT resist or interfere with police activity – offer assistance to minimize disruption to the company’s records, equipment, and employees Ask to assist in electronic data gathering so as to not damage data or media Offer a conference room for the officers to use where you will deliver requested materials
Make a record of your cooperation and the government’s actions: Note the time the officers arrive. Ask to see each officer’s credentials, write down names agency & contact information Review warrant / order for apparent validity, addressee & limitations & make a copy Get a detailed receipt specifically listing anything removed from premises and if possible copies
July 22, 2009 21© 2009 Shearman & Sterling LLP
Anti Corruption Compliance Programs
Seven elements of an effective program:1) Establish compliance and ethics standards and procedures to be followed by employees
and other agents2) Board of directors must exercise reasonable oversight and assignment of overall
responsibility 3) Due diligence in delegation of substantial authority 4) Implement training programs and information dissemination5) Implement monitoring and auditing systems, including use of a reporting system 6) Implement and consistently enforce appropriate disciplinary mechanisms 7) Respond appropriately to misconduct and take all reasonable steps to prevent similar
offenses
July 22, 2009 22© 2009 Shearman & Sterling LLP
Mergers & Acquisitions: Due Diligence
Inadequate due diligence can result in liability Successor liability for pre-acquisition conduct Direct liability for continuing post-acquisition conduct
FCPA due diligence before mergers and acquisitions is increasingly expected by the U.S. government. Recent guidance suggests that due diligence coupled with disclosure and cooperation may result in a
post-acquisition “grace period” to impose new controls and clean house Due diligence includes:
Due diligence questionnaire Interviews with key executive and operational personnel Thorough review of target's books and records Identify and review third parties retained by target - level of review based on business volume and
geographic risk profile Interviews with critical third party personnel Review of books and records by agreement or by audit rights
Appropriate response to “red flags” Retention of external counsel Forensic accounting review
July 22, 2009 23© 2009 Shearman & Sterling LLP
Third Parties (Agents, Suppliers, Wholesalers, Customers):Due Diligence & On-Going Risk Assessment
Existing contract due diligence Internal controls Look for conduit payments Ensure proper finance structure Check for red flags
Examples on next slides
Compliance Program Ensure proper due diligence Oversee compliance training
and maintain certifications Anti-corruption SOPs Maintain help lines Ensure prompt enforcement
and discipline Periodic compliance auditing
Partner/agent due diligence Partner/agent contract terms Check for red flags
Sales&
Marketing
Finance&
Controls
Legal&
Compliance
Red flags: May signal a compliance issue that requires further/heightened due
diligence Periodic re-review may be necessary
July 22, 2009 24© 2009 Shearman & Sterling LLP
RED FLAGS: Agent/Vendor I
Agent/Vendor
Relatedto customer or
government officialQuestionable
past
Incorporated in high risk country
Primary strengthis influence
Lacks experience
Lacks references
Government official referred
Was referredby customer
Commercialcapability
Establishedfacilities
Experiencein the region
Favorable businessreferences
No government contracts
Based in lowrisk country
Commercial directory listings
Past relationship with company
July 22, 2009 25© 2009 Shearman & Sterling LLP
RED FLAGS: Agent/Vendor II
Agent/Vendor
AnonymityRefuses corruption contract provisions
Misleading payment structure
False documents Subcontracting to third party
Excessive compensation
Success fee
Transparent payment process
Accuratedocumentation
Detailed scopeof work
Concretedeliverables
Effort-based compensation
On-budget, on-time performance
Interface withqualified staff
July 22, 2009 26© 2009 Shearman & Sterling LLP
RED FLAGS: Payments
Payment
Third countriesor parties
Shell companies
Post office boxes
Unexpected bonuses or loans
Requests negotiable currency
Larger payments during bid process
Third country banks
Invoices paidtoo quickly
Established banks
Matches commercial capability
Regular channelsCommercially
reasonable terms
Reasonable compensation
Payment incountry
July 22, 2009 27© 2009 Shearman & Sterling LLP
RED FLAGS: Operations
Operations
Requests backdatingor fraudulent
documentation
Connection with government or
customer emerges
Suspicious documentation
Becomes subject to investigation
Suspicious expenses or travel
Refuses to certify compliance
Well-trainedemployees
Anti-corruptionprogram
Accurate documentation
Performanceconsistent with
proposals
July 22, 2009 28© 2009 Shearman & Sterling LLP
Discussion Questions
1.) In a normal international M&A transaction, should the anti-corruption due diligence match the standard set out in recent DOJ Review Releases on that topic?
2. In an offering by a foreign issuer does a US underwriter risk FCPA liability if the issuer makes a corrupt payment traceable to the offering proceeds?
3.) How much economic stimulus aid can a foreign corporation receive before it becomes a governmental “instrumentality” so that its employees are “foreign officials” under the FCPA?