Foreign Corrupt Practices Act (FCPA) 15 U.S.C.A. § 78dd-1 et seq. - PowerPoint PPT Presentation

Title: Foreign Corrupt Practices Act (FCPA) 15 U.S.C.A. § 78dd-1 et seq.


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DELVACCA Presents Contracts Commercial Law CLE
Institute Corporate Governance Programs for
Reporting Concerns What Companies are Doing
September 14, 2010 The Union League of
Philadelphia
DELVACCA thanks Thorp Reed Armstrong for their
generous sponsorship of this event
One Commerce Square 2005 Market Street, Suite
1000 Philadelphia, PA 19103 215 640 8500 215 640
8501 Fax www.thorpreed.com  
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Foreign Corrupt Practices Act(FCPA)15 U.S.C.A.
78dd-1 et seq.
Lourdes Sanchez Ridge, Esq. 412 394
2462 lridge_at_thorpreed.com
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Foreign Corrupt Practices Act

• Bribing a foreign official for the purpose of
  obtaining and retaining business and/or
  inaccurately representing the bribe in the books
  is PROHIBITED!

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Todays Focus

• Why should Corporate Counsel be concerned?
• What conduct Violates the FCPA?
• How to Avoid Liability?

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Trend in Enforcement

• Increase in prosecution of individuals (jail
  time)
• Focus on small to midsize companies
• Increase in hiring enforcement personnel
• Increase in amount recovered in penalties
• Multi-jurisdictional prosecutions
• Increase in forfeitures/disgorgement
• Implementation of aggressive prosecution tools
  (undercover sting operations, wiretapping,
  confidential informants)

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Trend in Enforcement(Contd.)

• Novel charging statutes (i.e. Travel Act, Money
  Laundering, Conspiracy)
• Increase in prosecutions of foreign entities and
  individuals
• Focus on particular industries (i.e., extraction
  industry, pharma and medical device)
• Increase in prosecutions of foreign individuals
  under a conspiracy theory
• Novel use of non-prosecution and
  deferred-prosecution agreements by the SEC

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Consequences ofViolating the FCPA
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FCPA - Jurisdiction

• SEC
• Public companies and individuals
• DOJ
• Individuals, private and public companies
• Domestic
• Overseas if corrupt payment touches US
  territory

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Consequences of Violating the FCPA

• CRIMINAL PENALTIES
• Violation of Books Records Provision
• By a corporation up to 25,000,000
• By an individual up to 5,000,000
• 20 years in jail
• Violation of Anti-Bribery Provision
• By a corporation up to 2,000,000
• By an individual up to 100,000
• 5 years in jail

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Consequences of Violating the FCPA (Contd.)

• CIVIL PENALTIES
• 10,000 for individuals and corporations

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Other Consequences

• Reputational damage
• Expensive compliance monitor
• Loss of business with federal government
• Loss of eligibility for export licenses
• Suspension or debarment from governmental agency
  programs, i.e. Medicare, SEC
• Securities fraud, derivative and/or RICO actions
• Loss of research grant

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What Conduct Violates the FCPA?
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FCPA Anti-Bribery Provision

• It shall be unlawful to make use of mails or
  other means . . . corruptly in furtherance of an
  offer, payment, promise to pay or authorization
  of a payment . . . of anything of value to a
  foreign official . . . for the purposes of
  obtaining or retaining business or other unfair
  advantage

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What the FCPA Prohibits Payments, Offers,
Promises or Authorizations to Pay

• Actual payment is not necessary
• Direct or indirect payment to a government
  official

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Anything of Value

• Anything of benefit to the recipient
• No minimum amount
• Intangible items (e.g. enhanced reputation or
  prestige)
• Exception
• If item is given in good faith and directly
  relates to the reasonable promotion,
  demonstration or explanation of your services or
  products

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Examples of Items of Value

• Dow Chemical
• Less than 100 payments found to violate FCPA
• Monsanto Company
• Building a house for an officials wife violates
  the FCPA
• Syncor de Mexico
• Granting personal loans to state employed
  physicians without expectation of payment
• Paying physicians personal expenses
• Paying for physicians office equipment, software
  and furniture

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Examples of Items of Value Gifts

• For purposes of good will
• Promotional gifts a mug with company logo
• Hospitality gifts
• Not in the form of money
• Nominal value
• Permitted under local customs or laws
• Given with transparency in the presence of others

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Foreign Official

• Foreign Official any officer or employee of
• Foreign government or department, agency or
  instrumentality
• Foreign government-controlled enterprise
• Public international organization (Red Cross,
  World Bank, United Nations, etc.)
• Foreign political party or candidate for
  political party

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To Affect Any Act or Influence a Decision

• to obtain business
• to retain business
• to obtain access to decision maker
• to gain an unfair advantage
• to make ordinary business processes less onerous

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Books Records Provision

• Inaccurate reflection of transactions
• Red Flags
• Commissions
• Consulting Fee
• Miscellaneous and others
• Marketing
• Petty Cash
• Refunds or Rebates
• Travel and Entertainment

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Scienter

• DOJ Criminal
• Knowing
• Willful blindness high probability that an
  illicit payment will be made to a third party
• SEC Civil
• Strict Liability
• Foreign subsidiary
• Officers of parent company are strictly liable
  for acts committed by foreign subsidiary or third
  party
• Acquiring company is liable for acts committed by
  the acquired company prior to the acquisition

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How to Avoid Liability

• Compliance Program
• Due Diligence
• Opinion Letter from Department of Justice
• Opinion Letter from counsel in foreign country
• Reasonable Fees must be justified

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Compliance Program

• Thou shall not pay bribes
• Establish a culture that demands ethical conduct
• Communicate and educate standards to all
  employees
• Monitor the Compliance Program
• Audit
• Enforce
• Implement Reporting Methods

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Due Diligence
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Third-Party Affiliates
Your company is responsible for illicit acts
committed by

• law firms
• accounting firms
• lobbying firms
• public relations firms
• vendors
• distributors
• others who transact on your behalf
• subsidiaries

• representatives
• consultants
• agents
• sponsors
• joint ventures
• partners
• intermediaries
• sales representatives

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Hiring Third-Party Affiliate

• Due diligence is required on Third-Partys
• reputation
• ownership
• financial soundness
• professional capabilities
• trustworthiness
• prior criminal record
• prior compliance with anti-bribery laws

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Due Diligence Steps

• To investigate Third-Party Affiliates Reputation
  contact
• Community organizations such as Chambers of
  Commerce and Better Business Bureaus
• U.S. Embassies and Consulates
• U.S. Department of Commerce International Trade
  Administration http//trade.gov/cs/index.asp
• International Company Profiles www.export.gov/sa
  lesandmarketing/ICP.asp
• Dun Bradstreet
• or hire specialized firms

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Hiring Third Party Affiliates

• Questionnaire completed by company must contain
• description of necessity of hiring third party
• description of expertise of third party
• approval of hiring third party by Compliance
  Officer
• Questionnaire completed by third party should
  containdetailed questions capable of revealing
  whether third party is
• legitimate
• has any affiliations with foreign officials

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Hiring Third Party Affiliates(Contd.)

• Investigation of third party
• Certifications
• Contractual provisions

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Red Flags Third Parties (Contd.)

• No office or staff (potential shell company)
• Lack of required expertise
• Insistence on unconventional contractual
  procedures, i.e., payment in cash or bearer
  instruments, payments sent to an unrelated
  country
• Insistence on receiving unusually high commission
  or excessive line of credit
• Insistence on being paid in advance
• Insistence by a Government official that a
  particular third party be hired

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Voluntary Disclosures of Violations of the
International Trading Rules
John P. Donohue, Esq. 215 640 8528 jdonohue_at_thorpr
eed.com
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The Overriding Question

• Do I advise the client to voluntarily disclose a
  violation of criminal law?
• Factors to consider
• What is the likelihood of the offense being
  detected?
• What is the likelihood of short or long term
  incarceration of members of management?
• What is the effect of disclosure on the
  organization?
• Does the application of other laws require
  disclosure (e.g. SEC laws)?
• Is the corporation an alter ego of management?

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Relevant Agencies of Government

• Bureau of Customs and Border Protection - within
  the Department of Homeland Security
• Office of Foreign Assets Control within the
  Department of Treasury (trade to embargoed
  countries)
• Directorate of Defense Trade Controls - within
  the Department of State (Munitions Control List)
• Bureau of Industry and Security - within the
  Department of Commerce (Export Administration
  Regulations)

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When the Decision is Made to Disclose Violations
of the Trade Laws

• What is my maximum exposure?
• Criminal prosecution
• Denial of export privileges
• Fine
• Understanding maximum exposure
• The Pentax case
• The antidumping cases

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What Are the Benefits of a Voluntary Disclosure?

• Minimize the likelihood of a criminal prosecution
  
• Control the destiny and outcome of the case
• Minimize the likelihood of loss of export
  privileges (suspended denial of export
  privileges)
• Minimize the amount of any fine imposed

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What Are the Pecuniary Benefits of a Voluntary
Disclosure?

• Customs Benefits of disclosure are statutory -
  19 USC 1592(c)(4)
• OFAC Benefits are regulatory See, OFAC
  Matrix, Materials, page 10
• BIS and DDTC Great Weight standard, but
  agencies reserve the right to apply their own
  criteria on a case by case basis

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Will the Agency Agree that My Disclosure is
Voluntary?

• What are the tests for the timing of a voluntary
  disclosure?
• Customs - Disclosure must be made before or
  without the knowledge of the commencement of an
  investigation
• 19 USC 1592(c)(4) Materials, pages 5-6
• OFAC Disclosure must be made before any other
  federal, state or local government agency or
  official discovers the violation

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Will the Agency Agree that My Disclosure is
Voluntary?(Contd.)

• DDTC Before the Department of State or any
  other agency or bureau of the U.S. Government
  obtains substantially similar knowledge AND
  commences an investigation
• BIS Before the OEE or any other agency of the
  U.S. Government has learned the substantially
  similar facts AND commences an investigation

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Suppose You Lack All the Facts?

• All agencies allow for initial notification -
  See, e.g. 19 CFR Part 162.74(b)(4)
• All four agencies provide that disclosure is
  valid as of the date of the initial
  notification letter

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To Whom Is the Disclosure Made?

• For Customs matters
• to the Commissioner of Customs through the port
  of entry
• For BIS matters
• to the Director, Office of Export Compliance,
  with copy to OEE Office at the port of export
• For OFAC and Directorate of Defense Trade
  Controls matters
• at Washington, D.C. Headquarters

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Agency Disclosure in Multiple Agency Cases

• X Corp. exports military equipment to Iran.
  Disclosure is made to both OFAC (with
  jurisdiction over trade with Iran) and DDTC (with
  jurisdiction of the trade of goods under the U.S.
  Munitions list)
• Y Corp. imports medical devices mismarked with
  country of origin. Disclosure is made to Customs
  only and Customs will confer with FDA in
  assessment of penalty
• At all times negotiate the global settlement.
  Agencies will expect one disclosure to resolve
  all Agency issues

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What Is Disclosed

• Customs
• Material violations of law (but note Customs will
  consider even statistical errors material
  omissions of information)
• Description of the merchandise involved
• Entry number, port of entry and dates of entry
• All material false statements or omissions made
• The true and correct information

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What Is Disclosed (Contd.)

• Office of Foreign Assets Control
• A report in sufficient detail to afford a
  complete understanding of an apparent violation,
  and should be followed up by responsiveness to
  any follow up inquiries
• Directorate of Defense Trade Controls
• description of the violation
• statement of facts and circumstances surrounding
  the violation

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What Is Disclosed (Contd.)

• Directorate of Defense Trade Controls (contd.)
• identities of all persons, domestic and foreign,
  involved in the violation
• the export license numbers, if applicable
• description of the merchandise involved
• description of the corrective action taken
• names and addresses of the disclosing officials
• information and belief certification as to the
  truthfulness of the information submitted
• all relevant documents, commercial, governmental
  and corporate

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What Is Disclosed (Contd.)

• BIS
• the results of a five year review of exports
• the violation involved
• explanation of how and when the violation
  occurred
• identities of all persons involved
• list of all license numbers involved
• list of the merchandise involved

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What Is Disclosed (Contd.)

• BIS (contd.)
• statement of the value of the merchandise, in
  U.S. dollars
• statement of the ECCN numbers by which the
  exported goods were classified
• list of mitigating circumstances
• commercial, corporate, and governmental documents
  relevant
• information and belief certification of an
  authorized official that the statements in the
  disclosure are truthful

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Mitigating Factors in Compromising Penalties

• Customs
• Cooperation with the Agency
• Contributory governmental error
• Remedial action
• Inexperience in importing
• Prior good record
• Inability to pay

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Factors in Compromising Penalties

• Export Agencies
• Was the act willful, intentional or reckless
• Inability to pay
• Is a compliance program in place
• Participation by senior management
• Was this an isolated act or part of a larger
  pattern of conduct
• Was there actual or constructive notice to the
  offender of possible violation

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Factors in Compromising Penalties (Contd.)

• Did the conduct harm or impair the larger
  objectives of the program
• If goods were exported without a license, would a
  license have been granted if applied for
• Did the parties cooperate with the government
• How long were the sanctions in place at the time
  of the offense disclosed
• Have there been other enforcement proceedings by
  OFAC or other agencies
• Will the imposition of a harsh penalty have a
  deterrent effect

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Aggravating Factors in the Resolution of an
Enforcement Proceeding

• Concealment of the violation
• Disclosing party evidenced a disregard for the
  program
• Conduct adversely affected the program for which
  licensing was established or for which specific
  harm was identified (Toshiba Machinery case)
• Quantity, value and number of shipments were all
  high
• Complained of facts were also in violation of
  other Agency laws
• Prior history of violations
• Lack of a compliance program in place