Lessons Learned about AntiBribery Foreign Corrupt Practices from Recent Cases

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Lessons Learned about Anti-Bribery Foreign
Corrupt Practices from Recent Cases

• Ted Acosta Ernst Young
• Keith Korenchuk Covington Burling
• Daniel Garen - Siemens

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The Global Regulatory Maze

• The FCPA
• OECD Convention on Combating Bribery
• U.K. Anti-Bribery Provisions
• Other Multilateral Initiatives
• Specific Country Laws/Guidelines
• EU Directive 2001/83/EC
• Industry Codes
• The WHO Criteria
• The IFPMA Code
• EFPIA Code
• ABPI Code

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The U.S. Governments View of the Importance of
the FCPA
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The Foreign Corrupt Practices Act

• The FCPA addresses the prohibition against
  foreign bribery.
• The bribery provisions of the FCPA apply to all
  companies, regardless of whether they have stock
  registered with the SEC.
• The FCPA also sets forth provisions on
  record-keeping and accounting practices which are
  aimed at prohibiting the establishment of
  corporate slush funds used to finance illegal
  payments.
• The record-keeping and accounting provisions
  apply to all U.S. companies that have stock
  registered with the SEC and not just those with
  foreign operations.

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FCPA Details How Are the FCPA Bribery Provisions
Violated?

• An offer, payment or gift of any money or thing
  of value is made
• To any foreign official or other person while
  knowing that some or all of the payment will be
  passed on to a foreign official
• For the purpose of obtaining or retaining
  business or obtaining any improper advantage

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FCPA Details When Is a Payment "Improper"?

• A payment is for the purpose of obtaining or
  retaining business if it is made to reward a
  foreign official for using or endorsing the
  companys products
• A payment is for the purpose of obtaining an
  improper advantage if it is made to obtain a
  favourable regulatory decision

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FCPA Details How Are the FCPA Accounting
Provisions Violated?

• A company and its subsidiaries must maintain
  accurate books and records that reflect
  transactions in reasonable detail
• A company and its subsidiaries must maintain
  appropriate controls
• Showing a bribe on the books as a payment for a
  consulting arrangement is a violation
• Supporting payment of bribe with an invoice for a
  consulting arrangement is maintaining a false
  record

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FCPA Details Who Is a "Foreign Official"?
Anyone employed by a government agency, or by a
government-owned commercial enterprise, including
physicians or other healthcare professionals
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Permissible Payments And Affirmative Defenses

• Facilitating (grease) payments
• Induce a non-U.S. official to expedite routine
  ministerial government action (e.g., document
  processing, phone service, mail collection)
• Payment lawful under written laws of country
• Not sufficient that similar payments are routine
  and/or not subject to prosecution
• Hospitality Payments that are reasonable and
  bona fide expenditures, such as travel and
  lodging expenses directly related to
• The promotion, demonstration, or explanation of
  products or services or
• The execution or performance of a contract with a
  non-U.S. government or agency thereof.
• No safe harbor if there is a quid pro quo if
  corruptly made, then not reasonable or bona fide
  and affirmative defense not applicable.

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OECD Convention

• Convention on Combating Bribery of Foreign Public
  Officials in International Business Transactions
  (adopted 1997, entered into force 1999)
• 36 countries ratified as of year-end 2005
• Monitoring Phase I Implementation
• Evaluates adequacy of a countrys legislation to
  implement the Convention
• Monitoring Phase II Enforcement
• Assesses whether a country is applying its
  legislation effectively
• OECD has launched an inquiry into why the U.K.s
  Serious Fraud Office dropped its investigation
  into BAE Systems alleged corrupt dealings with
  Saudi Arabian contracts (a possible violation of
  the OECD Convention)

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 1

• Senior non-U.S. government regulator sought a
  charitable contribution from a U.S. companys
  European subsidiary
• The charity the regulators favourite is
  legitimate
• The regulator has a lot of influence over the
  subsidiarys business
• He makes clear that it would be in the
  subsidiarys interest if the contribution is made
• Total contribution exceeds the managers
  authorization
• So the contribution was made in several smaller
  payments
• Not described properly in the accounting records

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 1

• Consequences
• Anti-bribery/Anti-corruption VIOLATION
  inaccurate accounting records
• Anti-bribery/Anti-corruption VIOLATION
  inadequate internal controls
• FINE 500,000
• (Schering-Plough, 2004)

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 1

• Lesson
• Companies must have standard due diligence
  procedures and controls governing charitable
  contributions

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 2

• Several subsidiaries of a U.S. healthcare company
  gave commissions and gifts to non-U.S. doctors
• Cash, computers, digital cameras, wine,
  wristwatches
• Leisure travel and sponsoring lavish social
  events
• Officers of the U.S. parent company knew about
  the gifts
• The gifts were not properly recorded
• Recorded as capital or business expenses
• On the books of a foreign subsidiary (enforcement
  was less strict)

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 2

• Consequences
• Anti-bribery/Anti-corruption VIOLATION
  anti-bribery provisions
• Anti-bribery/Anti-corruption VIOLATION
  accounting and internal controls provisions
• FINES PENALTIES 2.5 million
• EXTERNAL Anti-bribery/Anti-corruption MONITOR
• (Syncor, 2002)

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 2

• Lesson
• Companies must have clear policies and
  procedures governing gifts and entertainment
  provided to non-U.S. healthcare providers and
  other government officials

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 3

• A U.S. manufacturer had a global distribution
  network of independent dealers
• One dealer paid bribes to government officials to
  avoid penalties for late delivery
• Executives of the manufacturer knew there was a
  high probability of bribery were paid, and took
  no action
• In one case, they even authorized payments that
  helped subsidize the dealers cost for paying the
  bribes
• They also knew there was a high probability that
  similar payments were made in other markets

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 3

• Consequences
• Anti-bribery/Anti-corruption VIOLATION
  anti-bribery provision
• Anti-bribery/Anti-corruption VIOLATION
  inaccurate accounting records, inadequate
  internal controls
• DISGORGEMENT OF PROFITS 618,000
• CIVIL PENALTY 500,000
• MONITORING External compliance monitor imposed
  on company for two years
• ENFORCEMENT ACTION Sales Manager charged with
  Anti-bribery/Anti-corruption violation 65,000
  fine
• (Invision, 2005)

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 3

• Lesson
• Companies must have standard due diligence
  procedures and controls for selecting, retaining
  and overseeing distributors, consultants, and
  other key third parties

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 4

• A company was tendering in a developing country
• Company sponsored training programs and travel
  for several government employees who were
  responsible for evaluating the companys offer
• Company paid all expenses and per diem payments
  to the government employees of 120-200 per day
• The average income in the government employees
  country was under 800 per year
• The per diem payments were distributed in cash
  from a paper bag and were disguised using false
  invoices

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 4

• Consequences
• Anti-bribery/Anti-corruption VIOLATION
  anti-bribery provisions
• Anti-bribery/Anti-corruption VIOLATION
  accounting provisions
• FINE 13 million
• DISGORGEMENT 15.5 million
• (Titan, 2005)

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How Companies Get in Anti-bribery/Anti-corruption
Trouble Real World Lesson 4

• Lesson
• Companies must have clear procedures that are
  designed to prevent and detect potentially
  improper sponsorship and travel expenditures

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FCPA - Accounting Practices, Record-keeping, and
Internal Controls

• Despite the recent focus on bribery of foreign
  officials, the FCPA has much broader application
• The FCPA imposes on public companies (SEC
  registrants) specific requirements for
  accounting, record-keeping and internal controls
• These provisions are designed to complement the
  anti-bribery focus of the FCPA by making it much
  harder for companies to make and hide corrupt
  payments
• At the same time, these requirements apply to ALL
  of the registrants books and records and
  transactions, not just those that are somehow
  related to foreign government officials or
  overseas business

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FCPA - Accounting and Internal Control
Requirements

• Issuer must make and keep books, records, and
  accounts, which, in reasonable detail, accurately
  and fairly reflect the transactions and
  dispositions of the assets of the issuer.
• Issuer must also devise and maintain a system of
  internal accounting control sufficient to provide
  reasonable assurances that
• Transactions are executed and access to assets is
  permitted only in accordance with management
  authorization and that
• Transactions are recorded in a way to permit
  financial statements to be prepared in accordance
  with GAAP.

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FCPA - Accounting and Internal Control
Requirements

• Reasonable detail and reasonable assurance
  mean the level of detail and degree of assurance
  as would satisfy prudent officials in the conduct
  of their own affairs.
• No direct knowledge requirement
• Issuer is subject to penalties even if issuers
  officers do not know of the inaccuracies
• Effectively strict liability for inaccurate books
  of all subsidiaries whose books roll up into
  issuers financial statements
• 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 as a fee or other seemingly
  innocuous transaction
• Records violations can occur in immaterial
  contexts.

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FCPA Accounting Requirements

• All amounts must be accurately recorded on the
  companys books
• Reasonable detail means such level that would
  satisfy prudent officials in the conduct of their
  own affairs
• There is NO MATERIALITY STANDARD under the FCPA,
  all funds must be recorded accurately regardless
  of amount
• Inadvertent mistakes will not give rise to
  enforcement actions or prosecution

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FCPA Accounting Requirements

• Violations include
• Records that simply fail to record improper
  transactions
• Records that are falsified to disguise aspects of
  improper transactions that were otherwise
  recorded correctly
• Records that correctly set forth the quantitative
  aspects of the transactions but fail to record
  the qualitative aspects of the transactions that
  would have revealed their illegality or
  impropriety

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FCPA Accounting Requirements

• Examples of transactions often recorded
  improperly
• Bribes to foreign government officials
• Payments to agents
• Commercial bribes or kickbacks
• Expediting payments on imports/exports
• Facilitating payments
• Gifts
• Excessive entertainment

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FCPA Accounting Requirements

• Examples of FCPA Accounting Violations
• Knowingly false invoice paid and kept in
  companys files
• Knowingly false description of improper payment
  on employees TE
• Booking a bribe as a facilitating payment
• Booking a bribe as a fee-for-service payment
• Booking a bribe as a promotional expense
• Making an improper payment out of subsidiary A on
  behalf of subsidiary B and then recording it on
  the books of subsidiary A

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FCPA Accounting Requirements

• Bottom Line
• If you have an improper transaction, and it is
  not fully disclosed in the business or accounting
  records, you may have an FCPA Books and Records
  violation

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FCPA Internal Control Provisions

• Issuer must devise and maintain a system of
  internal accounting control sufficient to provide
  reasonable assurances that
• Transactions are executed and access to assets is
  permitted only in accordance with management
  authorization and, that
• Transactions are recorded in a way to permit
  financial statements to be prepared in accordance
  with GAAP.
• Reasonable assurance the level of assurance as
  would satisfy prudent officials in the conduct of
  their own affairs.

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FCPA Internal Control Provisions

• Typical FCPA Internal Control Issues
• Unauthorized payments/off-books accounts
• Payments contrary to company policies
• Payments without prior due diligence
• Payments just under authority limits
• Payments without adequate documentation

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FCPA Internal Control Provisions

• Key Elements
• Accounting and financial controls surrounding
  cash, petty cash, expense authorization and
  reimbursement
• Controls around gift giving, travel and
  entertainment of government officials, and
  charitable contributions including pre-approval
  process and transparency for transactions
• Controls around the selection and approval of
  vendors and third parties, including consultants
• Controls around fee-for-service arrangements,
  tender processes, and
• Documentation of FCPA internal control processes

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FCPA Internal Control Provisions

• Foreign Operations Financial Control
  Priorities
• Government Dealings
• Regulatory approval, coverage and reimbursement
  decisions, procurement and tender, pharmacists
  and clinicians, hospital personnel
• Vendor approval, maintenance, and payment
• Agents and Consultants
• Cash
• Petty Cash
• Customs
• Gifts
• Executive TE
• Training of Financial Personnel

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TYPES
WHERE THEY MAY BE FOUND
SAMPLE MONITORING TASKS
SAMPLE AUDITING TASKS
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Siemens Headlines
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What is the Siemens Anti-Corruption
Implementation Toolkit Rollout about?
A comprehensive Compliance Program has been
defined with a focus on Prevent Detect - Respond

• "Tone from the top"

• Compliance organization

• Training
• Policies and Procedures
• Programcommunication
• Centralization

• Consequences for misconduct
• Global case tracking
• Monitoring effectiveness

• Forensic and part of standard audits
• Compliance reviews
• Compliance controls

Continuous improve-ment

• Compliance helpdesk (incl. Global Ombudsman
  function)

• Integration with personnel processes

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Siemens Implementation Toolkit - Overview of 10
Focus Areas
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'Tone from the Top'
Implementation of Policies and Procedures
Compliance
Third parties
Organization
Tender Contracts
Training ProgramCommunication
Gifts Hospitality
Finance Accounting
Case
Integration with Personnel Processes
Tracking
Monitoring Effectiveness
10
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CEO and CFO Responsibilities

• Appointment of an Implementation Manager by the
  CEO and CFO
• Weekly CEO and CFO briefings throughout the
  length of the implementation
• Endorsement of the controls as effective and
  adequate by CEO and CFO

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Ongoing Interactions