Mitigating Risk Associated with Anti-Corruption & Anti-Bribery Laws (ACAB)

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Mitigating Risk Associated with Anti-Corruption & Anti-Bribery Laws (ACAB)

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Today’s Presenters

Travis MillerAssent ComplianceGeneral Counsel

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Agenda

History of ACAB Laws

Government Officials

Yates & Personal Liability

Typical ACAB Programs

Gaps, Fines, & Issue Spotting

Supply Chain Due Diligence

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Mitigating ACAB RisksTravis Miller, General Counsel, Assent Compliance USA







United States passes first ACAB law in 1977◆ Prior to the passage of the Federal Corrupt Practices Act (FCPA) there were not specific laws

on the books prohibiting the bribing of public officials purely for business purposes

◆ The FCPA was triggered by investigations following the Watergate scandal into sitting U.S. President Richard Nixon

◆ The results of the investigation were staggering, revealing over 400 U.S. companies had “slush funds” where they had channeled hundreds of millions of dollars to governments as bribes.

The History of ACAB

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The FCPA was slow to make a difference◆ Companies were originally adamant that prohibiting the

ability to bribe government officials would lead to competitive disadvantages.

◆ The SEC was cautious about proceeding with enforcement; in fact only 4 cases were settled in the first 3 years of the law’s existence.

◆ This limited enforcement is remarkable considering the number of corporations that the SEC had already investigated and whom had admitted to the illegal practices during the Watergate investigation.

◆ Companies did not fear the impact and largely the FCPA was left as a dead piece of legislation.

The History of ACAB

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◆ In 1988, the U.S. government made a fundamental change to the law by expanding its scope to include foreign companies that commit offenses within the U.S.

◆ The amendment further required the President to pursue an international anti-bribery agreement with the member countries of the Organization of Economic Cooperation and Development (OECD)

◆ This amendment would prove to be the critical element that would change the global view of corruption and bribery permanently

The History of ACAB

Enforcement continued at a limited pace until 1988

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Enforcement and Legal Enhancements FollowThe History of ACAB

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1992 – The first major eye opening enforcement action occurs, when GE is hit with a

record $70M fine.

2015 – Yates Memo comes out, directing enforcement to

focus on individuals and criminal prosecutions

2002 – The Enron collapse and Worldcom scandals occur; the U.S.

government reacts by passing Sarbanes-Oxley, which makes

senior executives personally liable for financial disclosures and frauds

conducted by public companies

2004 – The Oil for Food scandal breaks resulting in dozens of FCPA prosecutions due to $1.8 billion in

bribes paid to Iraq government.

2007 – U.S. Federal Bureau of Investigations (FBI) adds a specific

division dedicated to FCPA enforcement; the next year Siemens pays record $1.6

billion dollar fine for pervasive global bribery

1992 2002 2004 2007 2015







Foreign Official Definition◆ Any officer or employee of a foreign government or

any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.

That is unreasonably broad◆ The government has declined to define

“instrumentality”

◆ The court’s have also not elected to take up the challenge, instead opting for the current definition “state-owned companies may qualify as government instrumentalities depending on the facts…”

This forces us to adopt a hyper-conservative stance

Before the government's recent focus on individual prosecutions, there was seldom any litigation. However, in recent years, litigation has ensued, which has started to define through case law who exactly is a government official within the definitions of the FCPA.

Privately-owned, no state funding, does not have any ownership that has any relationship to the government or government appointed officials.

Everybody else.

Government Officials - Defining the Illegal Behavior

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The Yates Memo Raises the StakesThe DOJ is Not Messing Around◆ For some reason, people have historically under-estimated the

implications of the FCPA.

◆ This is despite the fact that the legislation has cost companies billions and billions of dollars in fines, regulatory control spend, and legal fees.

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The Yates Memo Raises the StakesThe DOJ is Not Messing Around◆ For some reason, people have historically under-estimated the

implications of the FCPA.◆ This is despite the fact that the legislation has cost companies

billions and billions of dollars in fines, regulatory control spend, and legal fees.

Why is this?◆ The DOJ believe this is because they have been exerting pressure in

the wrong place.◆ The law has always focused on taking profits from the company

and investors. However, by the time the case is settled the bad actors likely have already left the company and been paid bonuses or commissions for the illegal activities that won business.

◆ Yates is reacting to this reality, by focusing prosecution on the person(s) responsible for the bad actions, and the managers or persons who were charged with oversight of those individuals.

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Global Perspective The World is now Flush with Legal Restrictions on Bribery

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Global Perspective - One to Watch UK Bribery Act◆ 2011 - Law came into force.

◇ The UK Bribery Act is broader in scope that the US FCPA

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◇ The UK Bribery Act is broader in scope that the US FCPA◇ This is important, because it forces companies with operations in the UK to also have to review

and adopt programs to prevent bribes offered to any person■ The US FCPA focus’ on transactions with “government officials”

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◇ The offense: the briber must intend to bring about or to reward improper performance of a function or activity, which is evaluated under a “reasonable person” standard■ The UK law also makes the person receiving the bribe liable

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◇ The crime has special provisions applicable to public officials:■ briber intends to influence the foreign public official in his capacity as such, and ■ he intends to obtain or retain business (or an advantage in the conduct of business) and ■ the payment/advantage is not permitted or required by the written law applicable to the

foreign public official.

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◇ The crime has special provisions applicable to public officials:■ briber intends to influence the foreign public official in his capacity as such, and ■ he intends to obtain or retain business (or an advantage in the conduct of business) and ■ the payment/advantage is not permitted or required by the written law applicable to the

foreign public official.

Key Policy Impact: Bribes to non-governmental persons are in scope.

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Global Perspective - One to Watch

PRC - 9th Amendment to Criminal Law◆ 2015 - 9th Amendment passes

◇ The ACAB provisions of the PRC Criminal Law make it a crime to offer a bribe to:■ State Work Personnel (SWP)■ Former SWP■ The immediate relatives or associates with close

relationships to a current or former SWP

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relationships to a current or former SWP◇ The law brings increased prosecution against individuals

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relationships to a current or former SWP◇ The law brings increased prosecution against individuals◇ Flexibility to prosecute government officials

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relationships to a current or former SWP◇ The law brings increased prosecution against individuals◇ Flexibility to prosecute government officials◇ No sentence reductions or parole for serious offenders

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relationships to a current or former SWP◇ The law brings increased prosecution against individuals◇ Flexibility to prosecute government officials◇ No sentence reductions or parole for serious offenders◇ Reductions in mitigating effect of self-reporting

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relationships to a current or former SWP◇ The law brings increased prosecution against individuals◇ Flexibility to prosecute government officials◇ No sentence reductions or parole for serious offenders◇ Reductions in mitigating effect of self-reporting◇ Loss of professional licenses if found guilty

Key Policy Impact: Bribing people with ties to government officials are in scope.

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So… Why do I care?(I assume you are asking yourself right now)

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Understanding the Typical Corporate ACAB ProgramCompanies have focused on internal controls◆ This made a lot of sense, when companies were getting in serious trouble for internal control breakdowns

(e.g. Enron and Worldcom)

◆ However, internal focused whistleblower hotlines, internal training, and internal focused policies are not managing modern ACAB risk.

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Understanding the Typical Corporate ACAB ProgramCompanies have focused on internal controls◆ This made a lot of sense, when companies were getting in serious

trouble for internal control breakdowns (e.g. Enron and Worldcom)◆ However, internal focused whistleblower hotlines, internal training,

and internal focused policies are not managing modern ACAB risk.

Why is this?◆ Internal staff have been trained. Therefore, we have reached a point

where the return on investment for internal focused programs is diminishing.

◆ Moreover, most serious penalties and ACAB cases no longer originate from internal policy and program breakdowns. Rather they are originating from malfeasances being conducted by third party intermediaries in the supply chain.

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Gaps, Fines and Issue Spotting

What kinds of gaps existing in ACAB programs?◆ Most global companies have three principal components to their

ACAB programs:◇ Internal training and whistleblower hotlines◇ Internal financial auditing/controls◇ Policies defining acceptable gifts, expenses, and

engagement expectations.

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engagement expectations◆ Significantly fewer global companies have:

◇ ACAB supply chain due diligence inquiries◇ An externally facing whistleblower hotline◇ Investigation or screening into third party agents,

distributors, or consultants related to ACAB risks

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engagement expectations◆ Significantly fewer global companies have:

◇ ACAB supply chain due diligence inquiries◇ An externally facing whistleblower hotline◇ Investigation or screening into third party agents,

distributors, or consultants related to ACAB risks

Why is this the case, when so many cases have been a result of third party activities?

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Gaps, Fines & Issue SpottingWhat kinds of gaps existing in ACAB programs?The three principal reasons companies ignore ACAB supply chain risk

Supply chain due diligence is difficult, it involves another supply chain survey and the need to dedicate internal resources to reviewing and assessing responses.

Many of the “high risk” individuals in ACAB are pseudo customers (distributors) or are solving a significant corporate problem (consultants helping the company get access to a market). Companies are nervous about interrogating these individuals and potentially harming sales.

Companies do not know what to ask, there traditionally has not been a normalized ACAB supply chain vetting standard in place, so companies have not had a way to investigate or assess what is reasonable ACAB supply chain due diligence.

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Let’s take a look at a few examples from this year to expand on why this thinking is risky.







Gaps, Fines & Issue SpottingWhat can we learn from recent enforcement?◆ PTC Inc. (February 2016) demonstrates how the new attention on individuals can yield

SEC results.◇ PTC through its Parametric Technology (Hong Kong) Ltd. and Parametric

Technology (Shanghai) Software Co., Ltd. business units was paying for luxury vacations and travel for Chinese government officials.

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◇ PTC subsidiary staff hid these expenses by charging increased fees for software sales executed by the Hong Kong and Shanghai offices.

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◇ A Chinese citizen, Yu Kai Yuan, was one of PTC’s sales executives who facilitated the transactions.

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◇ A Chinese citizen, Yu Kai Yuan, was one of PTC’s sales executives who facilitated the transactions.

◇ Mr. Yuan cooperated fully with the SEC helping them to uncover the books and records violations under the FCPA, resulting in a $28M USD settlement agreement, in exchange for a 3-year deferred prosecution agreement for Mr. Yuan.

Key Takeaways: Individual prosecutions often result in increased disclosure by the individual focused on trying to mitigate personal liability.

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Gaps, Fines & Issue SpottingWhat can we learn from recent enforcement?◆ In the Matter of Ignacio Cueto Plaza (February 2016) demonstrates how the use of 3rd party

intermediaries can result in personal liability for the C-Suite.◇ Ignacio Cueto Plaza is the CEO of South American LAN airlines, which was engaged in a

labor dispute between the company’s Argentina based employees.

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labor dispute between the company’s Argentina based employees.◇ Mr. Plaza authorized the payment of $1.15M USD to a consultant hired under the

presumption that they would analyse and prepare a report of flight traffic and support negotiations with the union.

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◇ The facts of the case evidenced no report was prepared, but the consultant passed on a portion of the fees to the labor union to get them to agree to receive a less advantageous labor settlement.

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◇ The facts of the case evidenced no report was prepared, but the consultant passed on a portion of the fees to the labor union to get them to agree to receive a less advantageous labor settlement.

◇ Mr. Plaza admitted no responsibility but agreed to personally pay $75,000 USD for his authorization of the payments.

Key Takeaways: Third party consultants need to be vetted; personal liability flows through to the authorizer.

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Gaps, Fines & Issue SpottingWhat can we learn from recent enforcement?◆ Nordion and Mikhail Gourevitch (March 2016) demonstrates how the use of 3rd party intermediaries can

result in costly investigations and personal liability for mid-level individuals.

◇ Nordion was a former publicly traded medical isotope provider taken private by a Canadian firm.

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◇ Nordion was a former publicly traded medical isotope provider taken private by a Canadian firm.◇ Mr. Gourevitch was an engineer, who hired a Russian based third party consultant to facilitate

Nordion’s ability to license, register, and distribute its products in Russia. $235,043 in fees were paid to the consultant, but market access was never obtained.

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◇ During post acquisition due diligence, Nordion identified that the distributor/agent, had little to no experience with the product types, Nordion had no experience in the Russian market, Nordion had not provided adequate ACAB training, and that Mr. Gourevitch had received $100,000 in undisclosed payments from the Russian agent/distributor.

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◇ During post acquisition due diligence, Nordion identified that the distributor/agent, had little to no experience with the product types, Nordion had no experience in the Russian market, Nordion had not provided adequate ACAB training, and that Mr. Gourevitch had received $100,000 in undisclosed payments from the Russian agent/distributor.

◇ Nordion eventually performed a voluntary disclosure after identifying a portion of the fees were paid to bribe government officials, resulting in successor liabilities and settlements for Nordion of $375,000 and Mr. Gourevitch $178,950.

Key Takeaways: The lack of supply chain due diligence and employee oversight/training can result in significant

penalties even if a voluntary disclosure occurs.

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What Do Businesses Have to Do?







Looking at the last few years’ data◆ The SEC take a sampling of “Spotlighted” SEC

enforcement actions that is publishes on its website: https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml

◆ A few interesting realities emerge as you review the data

◇ There is an increasing trend toward SEC attention on DIstributor, Vendor/Consultant, and Subsidiary FCPA enforcement actions.

◇ In essence, supply chain ACAB violations are coming under increased scrutiny.


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https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml

https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml


ACAB Risk Extends Throughout the Supply ChainACAB risk comes in many forms, for example:

◆ A subsidiary paying a bribe can result in the organization being liable;


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◆ A subsidiary paying a bribe can result in the organization being liable;◆ A joint venture or joint venture partner paying a bribe to win work for a joint venture,

creates ACAB risk for all participants;


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creates ACAB risk for all participants;◆ A procurement manager of a customer or client demanding a bribe in exchange for a

contract award creates liability for both organizations;


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contract award creates liability for both organizations;◆ A client of the organization requiring the organization to appoint a specific

sub-contractor or supplier in a circumstances where a manager of the client or public official may benefit personally creates the risk of ACAB liability;


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◆ An agent or third party representing the organization who pays a bribe to a manager of the organization’s customer on behalf of the organization makes the represented organization liable;


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◆ An agent or third party representing the organization who pays a bribe to a manager of the organization’s customer on behalf of the organization makes the represented organization liable; and

◆ A supplier or sub-contractor paying a bribe to a procurement manager in exchange for a contract award creates liability for both organizations.


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Each supply chain level requires different ACAB governanceEvery level has a devil...

◆ Subsidiary due diligence requires financial controls, policies, and programs in place, but caution to not over engage to run the risk of creating grounds to pierce the corporate veil

◆ A joint venture or joint venture partner requires initial due diligence and continued surveillance

◆ Customer or client bribe demands are de facto bribes under the UK rules

◆ A client mandated sub-contractor or supplier can be very high risk

◆ Agents or third party representatives are some of the most common forms of modern ACAB offenses

◆ Supplier or sub-contractor paying a bribe to a procurement manager for preferential treatment


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Each supply chain level requires different ACAB governanceEvery level has a devil...

◆ Subsidiary due diligence requires financial controls, policies, and programs in place, but caution to not over engage to run the risk of creating grounds to pierce the corporate veil◇ Recommended to use independent third parties to evaluate and test programs

◆ A joint venture or joint venture partner requires initial due diligence and continued surveillance◇ Recommended to insist on sufficient internal controls that at least align with internal program

◆ Customer or client bribe demands are de facto bribes under the UK rules◇ Recommended strong ACAB ethics training and whistleblower program

◆ A client mandated sub-contractor or supplier can be very high risk◇ Recommended strong investigation of the third party in advance of engagement

◆ Agents or third party representatives are some of the most common forms of modern ACAB offenses◇ Recommended supply chain due diligence survey, supplier training, and annual updates to

monitor responses and third party policies/programs◆ Supplier or sub-contractor paying a bribe to a procurement manager for preferential treatment

◇ Recommended supply chain due diligence survey, annual updates, supplier training programs, and strong internal training with a whistleblower component


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ACAB Due Diligence Standards Developing

Dec. 17, 1997 Feb. 15, 1999 Dec. 14, 2005 2009 2011 Fall 2016

OECD Convention Signed

OECD Enters into Force

UN Convention Against ACAB

OECD Guideline Updates

OECD ACAB Recommendation

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ISO/DIS 37001 Management

There is an opportunity to align with a new ACAB supply chain standard







Standards are Critical to Supply Chain ComplianceThe current ISO/DIS 37001 is going to be important

◆ There are a significant number of ACAB laws and legal requirements globally

◆ Enforcement actions are progressively paying greater attention to a corporation's management system and how they resemble corporate best practices.

◆ However, best practices are subjective and are not frequently well understood by organizations except in very vague or idealist terms, usually derived from service providers presentations or briefings.

◆ ISO/DIS 37001 offers a very detailed and concrete guidance on what best practices are and a prescriptive approach to what companies should be doing.


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Standards are Critical to Supply Chain ComplianceYour customers, and possibly your suppliers, are going to survey you

◆ It is almost an inevitability with any new regulation…◇ The law passes◇ Industry reacts and eventually forms a standard◇ If the standard is logical, functional and saves the effort of

re-inventing a new program, it gets picked up and globally adopted

◇ Companies who have adopted the standard drive it through the supply chain

◇ You get a form or survey request


We are all going to have to prepare for this and devise ways to make it as EASY as possible.

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Assent ACABSolving the Most Complicated Compliance Risks






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