What You Don't Know Can
Hurt You: Red Flags in
International Real Estate
Transactions
September 15, 2011
Marsha Z. Gerber
Fulbright & Jaworski L.L.P.
When You Think COMPLIANCE,
Think Fulbright.TM
Agenda

Foreign Corrupt Practices Act (“FCPA”)

Recent FCPA Investigations Involving Or With Potential
Nexus to Commercial Real Estate Industry

FCPA Elements

Potentially Permissible Payments

Books and Records

Recent Enforcement Trends

Key Compliance Issues

Risk Mitigation Strategies
2
FCPA
3
FCPA

Enacted in 1977 following a SEC investigation that
uncovered hundreds of U.S. companies made improper
payments to foreign officials

Two components
●
Anti-bribery provisions that prohibit payments or offers or
authorizations of payments of “anything of value” to foreign
officials to obtain business or business advantages
●
Accounting and internal controls provisions that require U.S.
public companies to maintain good records and internal
controls

Civil and criminal liability for companies and individuals

Enforced by SEC and DOJ
4
Why Is the FCPA Important To the
Commercial Real Estate Industry?

Recent enforcement activities and public pronouncements indicate that
enforcement agencies are scrutinizing industries as a whole.

More companies in virtually every U.S. industry have increased
international elements to their business operations.

The international links are not always immediately apparent: one example
is sovereign wealth fund investments in commercial real estate.

Historically, the commercial real-estate industry was considered to be a
relatively low risk industry for anti-corruption scrutiny.

Recent enforcement activity suggests that risk of FCPA enforcement
activities in the real estate industry .are becoming more frequent.

The newly enacted UK Bribery Act extends the reach of anti-corruption
regulation to companies that the FCPA may not reach.
5
FCPA
6
FCPA

Enacted in 1977 following a SEC investigation that
uncovered hundreds of U.S. companies made improper
payments to foreign officials

Two components
●
Anti-bribery provisions that prohibit payments or offers or
authorizations of payments of “anything of value” to foreign
officials to obtain business or business advantages
●
Accounting and internal controls provisions that require U.S.
public companies to maintain good records and internal
controls

Civil and criminal liability for companies and individuals

Enforced by SEC and DOJ
7
Recent FCPA
Investigations
8
Recent FCPA Investigations

Morgan Stanley (pending)
●
In 2009, Morgan Stanley announced that it had recently
uncovered actions initiated by an employee based in
China in an overseas real estate subsidiary that appeared
to violate the FCPA. Morgan Stanley terminated the
employee’s employment, reported the activities to
authorities and is continuing to investigate the matter.
●
As reported in an anti-corruption blog in June 2011, the
investigation is ongoing according to Morgan Stanley’s
lawyers who report that they continue to “represent
Morgan Stanley in connection with a publicly disclosed
internal investigation into potential FCPA violations in
China.”
9
Recent FCPA Investigations

Goldman Sachs (pending)
●
According to the Wall Street Journal, the SEC is investigating whether Goldman Sachs
and other financial firms violated anti-corruption laws in dealings with Libya’s
sovereign-wealth fund.
●
The SEC is reportedly reviewing documents that detail the Goldman Sachs’
relationships with the Libyan Investment Authority, which was controlled by
Moammar Gadhafi.
●
Among other things, SEC officials reportedly are interested in a $50 million fee that
Goldman agreed to pay the Libyan sovereign-wealth fund as part of a proposal by the
bank to help the fund recoup losses. It is alleged that the Libyan Investment Authority
would have passed on the $50 million payment to an outside adviser, Palladyne
International Asset Management, which was run at the time by the son-in-law of the
head of Libya’s state-owned oil company.
●
The $50 million payment was never made because discussions between Goldman and
the sovereign-wealth fund stalled before violence erupted in Libya in February.
●
The investigation is ongoing since an agreement itself to make a prohibited payment
can be a violation of the FCPA, even if the payment is not made.
10
Recent FCPA Investigations

CB Richard Ellis (pending)
●
In 2010, CB Richard Ellis (“CBRE”) voluntarily disclosed to the SEC and
DOJ that some of its employees in China made payments in violation of
Company policy to local governmental officials, including payments for nonbusiness entertainment and in the form of gifts, and that it was conducting an
internal investigation of such payments.
●
Additionally, in the third quarter of 2010, CBRE began another internal
investigation, involving the use of a third party agent in connection with a
purchase in 2008 of an investment property in China for one of the funds.
●
In March 2011, CBRE reported in its 10-K US filing that it had concluded its
investigation into the issues regarding payments made by certain China
employees and that the DOJ and SEC closed their review without any action.
The press release does not indicate whether the second investigation has been
closed.
11
FCPA Elements
12
FCPA Elements

Five Elements of an FCPA Violation
●
Regulated person
●
Payment or offer
●
Covered recipient
●
Corrupt intent
●
Improper purpose
13
Who is a Regulated Person?

First Element: Regulated Person
●
“Domestic concerns”
 Any individual who is a citizen, national, or resident of the U.S.
 Any entity having a principal place of business in the U.S. or
organized under the laws of the U.S.
●
“Issuers”
 Companies that have securities registered in the U.S. or that are
required to file periodic reports with the SEC
 Need not be publicly traded to meet this criteria
●
Other persons
 Any person in the U.S.
 Agents or other representatives of Regulated Persons
14
Regulated Persons in Practice

FCPA can apply to any company, director, officer, employee,
agent, or other individual who violates or aids in violating the
FCPA

U.S.-based individuals and companies can be held liable for
acts wherever they occur (in the U.S. and abroad)

U.S. parent can be liable for authorizing or directing foreign
subsidiary, or foreign agents, representatives, or other third
parties to violate the FCPA

Foreign individuals and companies can be held liable for acts
occurring in the United States

All are interpreted by enforcement agencies very broadly
15
Regulated Persons: Examples

British citizen working on a U.S. company’s behalf meets in
London with an officer of a sovereign wealth fund regarding
in a commercial real estate venture

U.S. citizen employee of a U.S. company has business
discussions regarding a commercial real estate development
with a Saudi Arabian prince

Chinese national working in China as employee or agent of
non-U.S. subsidiary of U.S. company sends e-mail invoice to
U.S. parent company for services provided

Again, the term has been defined broadly by the enforcement
agencies
16
What Constitutes a Payment?


Second Element: Payment
●
Payment of money or anything of value
●
Offer or promise of anything of value
●
Gift, entertainment, charitable contribution, or donation
●
In-kind service, e.g., providing a free service
Regulated persons can also be liable under the FCPA for
acts in furtherance of payments, including disguising or
mischaracterizing payments in a Company’s accounting
records.
17
Who is a Covered Recipient?

Third Element: Covered Recipient
●
Foreign official, i.e., any officer or employee of:
 Any non-U.S. government, whether national, state, provincial, local,
tribal, or other
 Any department, instrumentality, or agency of a non-U.S. government
 A foreign state-owned/controlled entity (e.g., a sovereign wealth fund or
other state-controlled utility)
 Any public international organization (e.g., UNESCO)
 Any person acting in any official capacity for one of the above
●
Any non-U.S. political party
●
Candidates for foreign political office
●
Any other person with knowledge that the payment or any part thereof will be
used in violation of the FCPA
18
Foreign Officials-Examples

Potentially, member of the royal family of a non-U.S.
country

A secretary in the Japanese Ministry of Industry

Teller at the Bank of China branch in New York City

A U.N. procurement officer

This element is broadly defined
19
What Constitutes Corrupt Intent?

Fourth Element: Corrupt Intent
●
Intent to induce the Covered Recipient to misuse his/her/its
official power
●
An attempt counts: an offer or promise of a corrupt payment to
a Covered Recipient, even if never made, can be a violation
●
Intent to make the payment is relevant, not intent to violate the
FCPA
●
Lack of knowledge of the FCPA is not a defense
20
What is a Business Purpose?

Fifth Element: Business Purpose
●
●
The business purpose test is met if the payment is related to a specific
business purpose:
 Obtaining business
 Retaining business
 Directing business to any person
 Obtaining an unfair advantage
● Covers illicit payments to assist in obtaining or retaining business
even indirectly, such as reducing taxes, which in turn lower a
company’s overall expenses in a particular market
U.S. v. Kay (5th Cir. 2004, 2007)
Applies to any business, not limited to business with government
customers
 Payment to government official to ensure a transaction between a
private company and another private company will receive necessary
approvals
21
Permissible Payments
22
Permissible Payments Under the FCPA

Two Limited Affirmative Defenses:
●
Payments that are lawful under the foreign country’s
written laws, and
●
Payment is a “reasonable and bona fide expenditure” to
demonstrate or promote a product or execute a contract:
 Must be “directly related” to
demonstration/promotion of goods/services or
execution/performance of a company’s facilities and
 Sponsorship of attendance at legitimate company
training programs
23
Permissible Payments - What is Reasonable
and Bona Fide?



Reasonable: Reasonableness is fact-dependent:
●
Airline tickets, hotel accommodations, and entertainment
expenses may be reasonable
●
Generally not considered reasonable to pay airfare for
Foreign Official’s spouse to travel
Bona Fide
●
Paying reasonable hotel accommodations for a Foreign
Official based on a legitimate receipt is bona fide
●
Paying a hotel bill for a Foreign Official based on his
statement that he stayed there when you know he stayed
elsewhere is not bona fide
Documentation is key
24
Potentially Permissible Payments - Facilitating
Payments

Payments to facilitate “routine governmental actions,” sometimes known as
“expediting payments” are currently acceptable under the FCPA although there has
been recent movement by certain companies away from allowing such payments.
Further, such indicators as OECD guidance and the new UK Bribery Act suggest that
in the future there may be a U.S. legislative move away from facilitating payments.

A “routine governmental action” is non-discretionary

Payment must be small

Most local laws prohibit facilitating payments as does the new U.K. Bribery Act,
which also could apply to some global commercial real estate ventures

“Routine governmental action” does not include decisions on:
●
Awarding new business
●
Continuing to do business
●
Conditions under which to do business
●
Some companies prohibit all facilitating payments or require pre-approval. Consult with
your legal department to determine if facilitating payments are permitted or if preapproval
is required.
25
Potentially Permissible Payments - Facilitating
Payments
Examples according to the Department of Justice:
●
Obtaining copies of permits, licenses, official documents
●
Processing governmental papers (e.g., visas)
●
Providing police protection
●
Delivering mail
●
Providing utilities (phones, power, water)
●
Scheduling inspections
26
Gifts & Entertainment

Gifts and entertainment to Foreign Officials fall within scope of the FCPA

This includes meals, entertainment, and nominal, socially customary gifts

There is no de minimis threshold – even a $1 or $2 gift is subject to the
FCPA

Giving small gifts or reasonable and bona fide entertainment may be
permissible (consult with legal to determine any pre-approval requirements)
if:
●
Permissible under the written laws of the country
●
Reasonable and bona fide expenditure in connection with promotion of a
product or service or the execution of a contract
●
Small token consistent under local custom
●
Not for a “corrupt” purpose:
 Not for obtaining or retaining specific business opportunity
 Not for directing specific business opportunity to another
27
UK Bribery Act
28
UK Bribery Act 2010

The UK Bribery Act 2010 came into force July 1, 2011 and is, in several respects, broader than
the FCPA.

The UK Bribery Act:
●
Prohibits offering/giving and requesting/receiving a financial or other “advantage”;
●
Applies to government officials and private sector persons;
●
Prohibits facilitating payments;
●
No specific exception for corporate hospitality; and
●
Creates liability for companies that fail to prevent bribery;
●
Unlimited fines.

Broad jurisdiction - Act applies to both U.K. and foreign companies with nexus to the U.K.,
even if offenses take place in a third country and are unrelated to U.K. operations (e.g., U.S.
company has a U.K. branch and engages in bribery in Asia, that U.S. company may have
liability under the Bribery Act).

As a result of its broad jurisdiction reach and more stringent requirements, including commercial
bribery, the UK Bribery Act has serious implications for the real estate industry.
29
Books and Records
30
FCPA: Books and Records Requirements

Applies to “issuers”; registered on U.S. exchange or required
to make certain regular reports

Accurate record keeping and effective internal controls is key
to compliance for any company

Requirement is to:
●
Make and keep books, records and accounts which, in reasonable
detail, accurately and fairly reflect the transactions and dispositions
of the company
●
Devise and maintain systems of internal accounting controls that
provide reasonable assurances that management has proper control
over transactions
31
Books and Records (cont.)
What does books and records compliance mean
in practice?

Maintaining robust anti-corruption compliance policies

Maintaining effective internal controls and taking reasonable
steps to ensure affiliates maintain appropriate internal controls

Recording all transactions accurately and transparently

Retaining receipts and other support for transactions

Records should be made and kept consistent with overall
document retention and record-keeping policies
32
Recent Enforcement
Trends
33
Recent Enforcement Trends

Top enforcement priority and increased resources
●
Significant growth in both the number of FCPA reported
enforcement actions and the size of the penalties imposed
●
Dedicated Department of Justice (“DOJ”) and Securities
and Exchange Commission (“SEC”) FCPA teams

Increase in industry-wide investigations and proactive
enforcement techniques

Large penalties

Individual liability

Increased international enforcement and cooperation
34
Recent Enforcement Trends (cont.)


Increased use of industry-wide investigations and growth
in the number of industries under scrutiny
Some industries recently under review include:
●
Financial services
 Sovereign wealth funds
●
●
●
●
●
●
Commercial Real Estate (e.g., Morgan Stanley and C.B.
Richard Ellis)
Oil & gas
Medical devices & pharmaceuticals
Insurance
Construction & engineering
Computer & information technology
35
Recent Enforcement Trends (cont.)

More proactive enforcement techniques
●
●

SEC and DOJ are sending letters to industry participants following
voluntary reports by suppliers or competitors (e.g., Panalpina-related
cases)
Remember: Goldman Sachs, Morgan Stanley, and CB Richard Ellis have
made recent FCPA-related disclosures
Traditional law enforcement techniques
●
●
Wiretaps and “stings”
The “Gun Sting” (January 2010)




22 defendants in the military and law enforcement products industry were arrested and
indicted for FCPA violations
Search warrants were executed in 14 locations across the United States and in London
Defendants allegedly participated in a scheme to pay a 22% commission to a sales
agent who represented the minister of defense for a country in Africa in exchange for
part of a $15 million contract to provide products to the country’s presidential guard
First large-scale use of traditional undercover law enforcement techniques in an FCPA
investigation
36
Recent Enforcement Trends (cont.)


Both the DOJ and SEC are seeking increasingly large
penalties
●
Nearly $2 billion in fines and penalties were levied against
companies for FCPA-related offenses in 2010
●
From 2009 to 2010, the total number of enforcement actions
nearly doubled, increasing from 45 actions (against 12
companies and 33 individuals) to 76 (23 companies and 53
individuals).
Both agencies are also focused on prosecuting individuals
with more focus and frequency and have made public
statements to that effect
37
Recent Enforcement Trends (cont.)

DOJ and SEC are increasingly utilizing expansive
theories of liability, including aiding and abetting,
agency, and conspiracy theories

Anti-corruption enforcement is reaching more prominent
global recognition
●
International enforcement agencies have increased the number
of anti-corruption related investigations and prosecutions
●
Cooperation is increasingly routine
●
New anti-corruption legislation is being enacted
●
U.S. style approaches to investigations and resolutions are
being adopted by other nations’ enforcers
38
The Importance of Compliance
39
The Importance of Compliance –
Bribery Violation Penalties

Criminal Penalties
●
Criminal penalties—Anti-Bribery Provisions
 Up to a $2 million fine per violation for companies
 Up to a $250,000 fine and 5 years in prison per violation for individuals
●
Criminal Penalties—Accounting and Internal Control
Provisions
 Up to a $25 million fine per violation for companies
 Up to a $5 million fine and up to 20 years in jail for individuals
●
Fines for both companies and individuals may be even higher
than the ones included in the FCPA statute (up to 2x the
benefit sought or received) under a federal alternative fine
provision
40
The Importance of Compliance –
Bribery Violation Penalties

Civil Penalties:
●
FCPA statute permits both the DOJ and SEC to impose a basic
$10,000 per violation civil fine upon individuals and companies
●
The SEC may also impose additional civil penalties ranging between
$5,000 to $100,000 upon individuals and $50,000 to $500,000 upon
companies
 These additional penalties, and the SEC basic FCPA civil fine, are
adjusted for inflation
 Alternatively, the SEC may impose a civil penalty equal to the gross
pecuniary gain to an individual or company

Company may not reimburse individual fines
41
The Importance of Compliance –
Bribery Violation Penalties

FCPA violations may result in
●
Debarment from government contracts
●
Corporate monitor
●
De-listing from stock exchanges
●
Reputation damages

Employee litigation

Private cause of action brought by civil plaintiffs for damages under RICO,
or under other federal and state securities and fraud laws

Lawsuits brought by customers and/or competitors for unfair competition
or fraud

Additional penalties may be imposed under other applicable laws, such as
the UK Bribery Act
42
Key Compliance Issues
43
Key Compliance Issues

Business Courtesies

Facilitating Payments

Third Parties (Placement Agents, Third-Party Marketers,
Consultants & Lobbyists)

Joint Ventures

Mergers & Acquisitions

Red Flags
44
Business Courtesies

Effective anti-corruption compliance policies should
require that business courtesies (i.e., gifts, entertainment,
and travel-related expenses) be pre-approved by an
appropriate supervisor or the company’s compliance
officer

Permissible expenditures for Foreign Officials should not
be lavish or frequent and must be compliant with local
laws

Transparency is the best way to avoid any appearance of
corrupt intent
45
Facilitating Payments


Effective anti-corruption policies generally prohibit
or place strict limits on facilitating payments,
including
●
Pre-approval procedures
●
Procedures to ensure such payments are accurately
recorded on the company’s books and records
Again, may not be allowed under local law and are
prohibited under the U.K. Bribery Act
46
Third Parties


The FCPA and other anti-corruption laws prohibit direct and
indirect corrupt payments
Enforcement activity routinely involves third parties
●
Often the relevant question is whether you “know” the payment will go
to a government official



“Knowing” as defined by the FCPA includes conscious disregard and deliberate
ignorance of issues that a reasonable person would review before proceeding with a
particular transaction
Many other criminal statutes incorporate a similar “willful blindness” theory
Many types of third parties can put you at risk
●
●
●
●
●
●
Subsidiaries or other affiliates
Sales agents, sponsors, representatives, distributors, consultants (e.g.,
anyone acting on your behalf)
Freight forwarders and customs brokers
Relatives and friends of government officials
Companies owned by government officials
Joint venture and merger partners
47
Third Parties (cont.)

Including robust anti-corruption provisions in
all contract agreements with third parties is
one way of mitigating potential anti-corruption
risks presented by those relationships
●
It is not always easy to predict when a third
party might interact with foreign officials
48
Joint Ventures

Joint venture partners, and the joint venture itself, can
raise substantial compliance issues
●
For example, several recent FCPA resolutions all arose out of a
single Nigerian joint venture
 That joint venture was with a Nigerian government agency and some
joint venture employees were employees of that agency
 The DOJ/SEC alleged that bribes were paid through the joint venture
and have imposed nearly $1.3 billion in penalties against companies
involved in the joint venture

As with third parties, keys to joint venture compliance
involve careful due diligence and the incorporation of
robust anti-corruption provisions into the joint venture
agreement
49
Mergers & Acquisitions

Anti-corruption liability has often arisen in connection
with mergers and acquisitions
●

A U.S. company may acquire FCPA liability even if the target
was not subject to the FCPA when it made an improper
payment
Avoiding liability in the merger and acquisition context
requires robust due diligence
50
Issues - Red Flags

“Red flags” are facts that evidence a potential compliance issue
and should be addressed before proceeding with a transaction

“Red flags” are not in themselves violations but instead are
indicators that require further due diligence

Examples of red flags from the DOJ
●
Unusual payment patterns or financial arrangements with prospective
sales agent or other transaction partner
●
History of corruption in the country where business would occur
●
Refusal by foreign transaction partner to certify that it will comply
with applicable anti-corruption laws
51
Issues - Red Flags
Red flags are very fact-specific:
●
●
●
●
●
●
●
●
●
Prospective agent proposes unusually high commissions
Agent demands fees in cash as opposed to wire transfer
Third party is politically active
Third party has close relationships with foreign officials
Incomplete or inaccurate information or misrepresentations provided
during due diligence
Third party requests payment be made to someone else or to bank
account outside country of domicile
Lack of experience with relevant product or industry
Unwilling to enter into written agreement
Evidence of past violations of local law or policy by transaction partner
52
Risk Mitigation
Strategies
53
Risk Mitigation Strategies

Robust Compliance Programs With Substantial
Management Oversight

Regular internal audits and internal investigations when
required

Voluntary Reporting Considerations
54
Robust Compliance Programs

May result in the limitation of criminal, regulatory, and
civil liability

Key features include
●
Periodic compliance assessments and changes based on
location and industry exposure
●
In-person training (and ongoing training) to help employees
identify and resolve “red flags”
●
Open line of communication to GC or CCO and management
buy-in
●
Compliance hotline
●
Due diligence of transaction partners
●
In other words, not a “paper” program
55
Robust Compliance Programs (cont.)

The U.S. Sentencing Guidelines for Organizations outline
seven aspects of effective compliance
●
Compliance standards and procedures
●
Organizational leadership and a culture of compliance
●
Reasonable efforts to exclude prohibited persons
●
Training and communication of standards and procedures
●
Monitoring, auditing, and evaluating program effectiveness
●
Performance incentives and disciplinary actions
●
Response to criminal conduct and remedial action
56
Independent Internal Investigations


Allow company to determine the scope of potential problem
and proactively demonstrate compliance/remediation
Initiated as soon as the company has reason to believe a
problem may exist and typically includes
●
●
●
●
●
●
Retention of experienced outside counsel, and if needed, outside
forensic accountants, who report directly to Board of Directors or
Audit Committee
Cessation of the potentially problematic conduct and evidence
preservation
Formulation of a properly scoped investigative plan
Consideration of voluntary disclosure to DOJ/SEC and applicable
securities laws disclosure obligations
Consideration of modifications to compliance program
Documentation of all investigative steps and privilege preservation
57
Voluntary Reporting

Advantages
●
●
●

Disadvantages
●
●
●
●

Allows company to present its own internal findings at a time it chooses
Permits company to present evidence of misconduct and evidence of its
overall compliance commitment at the same time
May translate, in turn, to a reduction in penalties and the DOJ/SEC’s
pursuit of civil rather than criminal penalties
May still lead to DOJ/SEC enforcement actions
Other countries may decide to investigate the corruption allegations
Companies that make filings with the SEC may have to disclose the
internal investigation in their filings
May result in the waiver of privilege in follow-on civil litigation
Seek advice from counsel before making a decision on selfreporting.
●
The decision should be made at the highest level of the company.
58
Questions
59
Fulbright's White Collar Crime Practice

Experienced in the management of complex federal and
state court litigation

Preventative counseling and compliance programs

Reducing the risk of civil and criminal litigation
60
Marsha Z. Gerber
 Over 25 years of experience





Named “Best FCPA Lawyer Outside of
D.C.,” Main Justice (2011)
Established relationships with
government officials
Conducts internal investigations on
behalf of the client;
Analysis of and advice regarding key
client documents throughout the
investigation and response period
Provides advice and counsel in reaching
resolution of investigations
61
Fulbright’s Real Estate Practice

All aspects of the commercial real estate industry, including:
●
Acquisition and disposition
●
Economic development incentives and programs
●
Workout and collateral enforcement
●
Financing Project Finance
●
Retail Office/Commercial Projects
●
Industrial and Manufacturing Facilities
●
Land and Urban Development
●
Health Care Facilities
Jane Snoddy Smith
Partner
jsmith@fulbright.com
D: +1 512 536 5238
Amy M. Mitchell
Sr. Counsel
amitchell@fulbright.com
D: +1 512 536 4525
Jennifer Sherrill
Counsel
jsherrill@fulbright.com
D: +1 512 536 5249
62
Marsha Z. Gerber, +1-713-651-5296 or
mgerber@fulbright.com
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