Mark F. Mendelsohn

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Avoiding Corruption in InternationalMining
Projects Risk Management and Compliance
Strategies A Presentation For MineAfrica's
9th Annual Investing In African Mining Seminar

• Mark F. Mendelsohn
• March 8, 2011

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Combating Corruption Is A Growing Priority

• We know that countries are more likely to prosper
  when governments are accountable to their people.
  So we are leading a global effort to combat
  corruptionwhich in many places is the single
  greatest barrier to prosperity, and which is a
  profound violation of human rights. Thats why
  we now require oil, gas and mining companies that
  raise capital in the United States to disclose
  all payments they make to foreign governments.
  And its why I urged the G-20 to put corruption
  on its agenda and make it harder for corrupt
  officials to steal from their people and stifle
  their development.
• Remarks of President Barack Obama, September
  22, 2010, Millennium Development Goals Summit,
  U.N. Headquarters, New York, New York

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History of the FCPA

• First 20 Years 1977 to 1997
• Law created after Watergate scandal
• 17 companies and 33 individuals named in FCPA
  enforcement actions
• Little foreign bribery legislation or enforcement
  outside the United States
• UN and World Bank decline to address corruption
• Next 10 Years 1998 to 2008
• OECD Convention implemented and tax deductibility
  of bribes eliminated
• 1998 FCPA amendments expand its jurisdictional
  reach
• Increased financial improprieties lead to
  increased oversight of corporate conduct (e.g.
  Sarbanes Oxley)
• 50 companies and 70 individuals named in FCPA
  enforcement actions
• Current FCPA Enforcement
• Enforcement has surged
• Historic increases in monetary penalties in 2009
  and 2010
• Industry-wide sweeps
• Increase in multi-jurisdictional investigations
  and prosecutions with closer coordination between
  prosecutors
• In 2009 and 2010 alone, 41 companies and 75
  individuals named as defendants in FCPA
  enforcement actions

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Key FCPA Concepts

• An overview of the FCPA Two Parts
• Anti-Bribery Provisions Prohibits corrupt
  offers or payments to foreign government
  officials to assist in obtaining or retaining
  business
• Accounting Provisions Requires (1) accurate
  books and records and (2) appropriate accounting
  and controls systems
• Long jurisdictional reach of the FCPA
• Anti-Bribery Provisions apply to
• (1) US persons (individuals and companies)
  wherever they are
• (2) anyone in the territory of the US and
• (3) non-US companies with stock listed on US
  exchanges (includes those that issue certain
  American Depository Receipts)
• Issuers, US companies (including subs of foreign
  companies) and individuals are liable if they
  take improper actions using the US mails, wires
  or other means of interstate commerce (e.g.
  telephone calls, emails, wire transfers)
• Foreign companies are liable of they take
  improper action while within the territory of the
  US
• US government has asserted broad jurisdiction
  over foreign companies and individuals, including
  bringing charges for "conspiring to violate" or
  "aiding and abetting violations" of the FCPA
• Important concepts broadly defined
• "Money or anything of value" includes cash
  gifts, hospitality and entertainment travel
  scholarship or admission to university jobs
  interest in a business dividends
• "Foreign official" covers officers or employees
  of a foreign government, including
  government-owned or controlled organizations
  (SOEs like national oil companies state-run
  hospitals) officers or employees of a public
  international organization police and military
  officials customs and border officials advisor
  to a government political party or candidate for
  office
• "Obtain or retain business" includes sale of
  goods grant or renewal of a contract/concession
  regulatory approval reduction in taxes avoiding
  customs duties
• Indirect payments also prohibited corrupt
  payments through a third party, such as a sales
  representative, consultant, joitn venture
  partner, or lawyer are prohibited if authorized,
  directed or had knowledge
• "Knowledge" defined to include that a person
  believes conduct is highly probable or
  substantially certain to occur imputed knowledge
  of facts purposely avoided ("conscious
  disregard")

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International Framework

• OECD Convention
• Came into force in February 1999, focusing
  strictly on supply-side official corruption
• Signed by 34 OECD member countries and 4
  non-member countries
• Requires national implementing legislation,
  including a foreign bribery offense corporate
  liability effective, proportionate and
  dissuasive sanctions
• Gold standard peer review mechanism
• In June 2010, the OECD released for the first
  time data on foreign bribery enforcement efforts
  by the 38 Parties to the Convention.
• 148 individuals and 77 entities have been
  criminally sanctioned for foreign bribery in 13
  Parties between the time the Convention entered
  into force in 1999 and the end of 2009. Of these
  13 Parties, 7 have sanctioned both companies and
  individuals.
• At least 40 of the sanctioned individuals were
  sentenced to prison for foreign bribery.
• Combined fines of up to EUR 1.24 billion have
  been imposed on companies for foreign bribery.
• Approximately 280 investigations are ongoing in
  21 Parties to the Anti-Bribery Convention, with
  no activity in the other 17.
• OECD Good Practice Guidance establishes global
  anti-corruption compliance standards.
• UN Convention Against Corruption
• First global, comprehensive anti-corruption
  treaty
• 140 signatories as of March 1, 2011
• Addresses demand and supply side corruption
  international and domestic corruption asset
  seizure, forfeiture and repatriation technical
  assistance
• Peer review mechanism under development

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Canada

• Corruption of Foreign Public Officials Act
  (CFPOA)
• Canada ratified the OECD Convention and adopted
  national implementing legislation effective
  February 1999.
• CFPOA modeled very closely on the US FCPA
• Key differences
• CFPOA has no accounting provisions or civil
  enforcement or sanctions
• CFPOA has narrower jurisdiction, requiring "real
  and substantial link" to Canada
• CFPOA has no nationality jurisdiction, resulting
  in OECD criticism for failure to implement the
  Convention in this respect
• CFPOA does have a "facilitation payments"
  exception, like the FCPA
• RCMP has established special units in Calgary and
  Ottawa to investigate overseas corruption
• One corporation and, in July 2010, one individual
  charged under the CFPOA.
• A major, listed Canadian oil and gas exploration
  and production company is reportedly under
  investigation
• International peer pressure on Canada to improve
  its enforcement record is likely.

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United Kingdom The Bribery Act

• The United Kingdom A new legislative and
  institutional framework is coming.
• The UK Bribery Act of 2010
• Expected to come into force three months after
  guidance is finalized probably by end of 2011.
• Active and passive bribery offenses covering
  public official and private sector bribery.
• New offense of foreign official bribery.
• No facilitation payments exception prosecutorial
  discretion
• No safe harbor or provision for promotional and
  marketing expenses, although this is likely to be
  addressed in guidance.
• New strict liability corporate offense of failure
  to prevent foreign official bribery.
• Affirmative defense of adequate procedures
  draft guidelines suggest that standards will be
  in line with USSG and OECD Good Practice Guidance
• Affirmative defense is not available where senior
  management is involved in the crime.
• Jurisdictional reach covers commercial
  organizations which "carry on a business, or any
  part of a business, in any part of the United
  Kingdom"
• Prosecution of cases
• A new, unified economic crime agency may be
  formed, merging parts of the Financial Services
  Authority (FSA), the Serious Fraud Office (SFO),
  and the Office of Fair Trading .
• Unclear whether the new agency will have enhanced
  powers.
• In the meantime, the SFO is prosecuting
  settling cases under the old laws.

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Dodd-Frank Act Disclosure of Payments by
Resource Extraction Issuers

• Proposed rules under the Dodd-Frank Act require
  extraction issuers to include in their annual
  reports disclosure of payments by the issuer, a
  subsidiary or other controlled entity to a
  non-U.S. government or the U.S. federal
  government for the purpose of the commercial
  development of oil, natural gas or minerals.
• Covered payments include production entitlements
  corporate taxes on income, profits and
  production royalties bonuses license and
  concession fees etc.
• Disclosure obligation has no exception for local
  law restrictions or contractual confidentiality
  obligations.
• Rules prescribe specific format and content of
  disclosure.
• Disclosure will be furnished rather than
  filed, resulting in no liability for material
  misstatements or omissions
• Final rules to be adopted by April 15, 2011, with
  first annual disclosures likely due in annual
  reports for FY ending on or after April 15, 2012.

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Foreign Corrupt Practices Act (FCPA) Current
Anti-corruption Compliance Best Practices

1. Mineral resources are often in markets suffering
   from weak rule of law and high levels of
   corruption Congo, Sierra Leone, Afghanistan,
   Mongola, Papua New Guinea, etc.
2. Common use of finders, commissioned agents, local
   partners, and other third parties in the
   acquisition of mining rights and concessions
3. Importance of relationships with and support of
   local and tribal communities and leaders
4. Heavy dependence on local police and military for
   security and protection
5. Prevalence of joint venture and other teaming and
   co-investment relationships
6. Mergers and acquisitions are a regular feature of
   the industry

Mining Sector Corruption Risks
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Foreign Corrupt Practices Act (FCPA) Current
Anti-corruption Compliance Best Practices

1. Use of cash and lack of sophisticated banking
   system in certain countries of operation
2. Need for approvals, permits, water, power and
   labor result in frequent interactions with
   government bureacracies
3. Must deal with tax, finance and mining
   authorities
4. Customs issues with the importation of
   equipment, tools and personnel and the export of
   minerals
5. Intersection of the mining sector and national
   security and state secrets issues

Mining Sector Corruption Risks
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Foreign Corrupt Practices Act (FCPA) Focus on
the Executive Suite and the General Counsel

• There will always be rogue employees who decide
  to take matters into their own hands. They are a
  fact of life. But when the right tone is set at
  the top in the executive suite and in the
  general counsels office you significantly
  reduce the risk of criminal conduct. And your
  jobs become easier. We are not interested in
  prosecuting corporations or executives or lawyers
  who are working hard to do the right thing. We
  are not interested in making cases for their own
  sake. We bring cases only when the facts and the
  law convince us that we can prove guilt beyond a
  reasonable doubt. Indeed, just as we will not shy
  away from bringing any case when the
  circumstances warrant, we also aim to reward
  responsible corporations corporations that
  maintain strong compliance programs and remedy
  and disclose wrongdoing when they discover it.

Compliance as the Best Defense
Assistant Attorney General Lanny A. Breuer of the
Criminal DivisionSpeaks at the Annual Meeting of
the Washington Metropolitan Area Corporate
Counsel Association McLean, VA Wednesday,
January 26, 2011
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Foreign Corrupt Practices Act (FCPA) Current
Anti-corruption Compliance Best Practices

• Written, corporate anti-corruption policy
• Strong, visible senior management commitment to
  anti-corruption policy
• Well-designed compliance standards and
  procedures, applicable to all directors, officers
  and employees, and extended to third-parties and
  business partners, which address
• Gifts
• Charitable donations and sponsorships
• Hospitality, entertainment and expenses
• Facilitation payments
• Customer travel
• Solicitation and extortion
• Political contributions

Anti-Corruption Compliance Standards
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Foreign Corrupt Practices Act (FCPA) Current
Anti-corruption Compliance Best Practices
(continued)

• Tailor compliance policy, standards and
  procedures based on assessment of risks facing
  your company
• Review anti-corruption compliance policy,
  standards and procedures no less than annually
  and update
• Assign responsibility for implementation and
  oversight of anti-corruption compliance system to
  a senior corporate executive, with sufficient
  resources, independence and authority, and with a
  direct report to independent monitoring bodies,
  e.g. the Board of Directors, an appropriate
  committee of the Board, and internal audit
• Maintain a system of financial and accounting
  procedures and internal controls reasonably
  designed to ensure accurate recordkeeping and to
  prevent corporate assets, records and accounts
  from being used to carry out or conceal foreign
  bribery

Anti-Corruption Compliance Standards
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Foreign Corrupt Practices Act (FCPA) Current
Anti-corruption Compliance Best Practices
(continued)

• Effectively communicate anti-corruption
  compliance policy, standards and procedures,
  including
• Periodic training for directors, officers,
  employees, agents and business partners
• Annual training and compliance certifications for
  directors, officers, employees, agents and
  business partners
• Maintain compliance advice, hotline, and
  whistleblower mechanisms which
• are readily available on an urgent basis and
  throughout global operations
• provide for confidential reporting by and
  protection for whistleblowers, both internal and
  external
• respond promptly to complaints and undertake
  appropriate action

Anti-Corruption Compliance Standards
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Foreign Corrupt Practices Act (FCPA) Current
Anti-corruption Compliance Best Practices
(continued)

• Maintain remediation policies and procedures
  which
• discipline those who violate anti-corruption laws
  and policies
• address the harm resulting from violations
• take steps to prevent further, similar misconduct
• Institute due diligence and compliance
  requirements pertaining to agents and business
  partners including
• conduct risk-based due diligence
• exercise oversight of agents and business
  partners
• inform agents and business partners of your
  commitment to integrity and anti-corruption
  compliance policy and procedures
• obtain a reciprocal commitment from your agents
  and business partners

Anti-Corruption Compliance Standards
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Foreign Corrupt Practices Act (FCPA) Current
Anti-corruption Compliance Best Practices
(continued)

• Include the following contractual provisions in
  agreements with agents and business partners
• anti-corruption representations and warranties
• audit rights
• termination rights upon violation of law or
  representations and warranties
• Periodic review and testing of anti-corruption
  compliance policy and procedures
• corruption audits
• Conduct anti-corruption diligence in connection
  with mergers, acquisitions and investments

Anti-Corruption Compliance Standards