Foreign Corrupt Practices Act in Latin America:
Effective Compliance and Risk Mitigation
Walter P. Loughlin
December 6, 2012
Copyright © 2012 by K&L Gates LLP. All rights reserved.
FCPA and Other Anti-Corruption Standards
 The US Foreign Corrupt Practices Act (“FCPA”) makes it illegal
for company personnel to bribe foreign government officials.
 The FCPA defines “government officials” very broadly
 Actions that can be deemed illegal under the FCPA include
providing to foreign government officials




cash
expensive gifts
excessive hospitality
personal favors
1
Anticorruption Laws
 US Foreign Corrupt Practices Act
 UK Bribery Act
 OECD nations, Russia, China
 Local anticorruption laws
2
Global Efforts Against Corruption
 FCPA (1977)
 Seldom enforced during first 25 years
 But recently: a dramatic increase in enforcement
 A “top priority” of US Dept. of Justice
 OECD Convention Against Corruption (1997)
3
What does FCPA prohibit?
 Payment or offer
 Anything of value
 “Foreign official”
 “Corrupt” -- To obtain improper advantage
4
FCPA applies to
 Any action anywhere by:
 US citizens and permanent residents
 US companies
 Companies with securities listed on US exchanges
 Actions in US territory
5
OECD Convention Against Bribery (1997)
6
Perceptions of corruption
7
Key FCPA Risks
Broad definition of “foreign official”
 Includes personnel of state-owned companies
FCPA prohibits paying a third person while “knowing” it will be
passed on to a foreign official
 “Knowing” does not require actual knowledge
Potential liability for acts of third parties
 Agents, consultants, intermediaries
 Even if unauthorized or unknown
8
Key FCPA Risks
 Improper payments violate the law, even if they are:
 customary in the country where you are doing business
 demanded by a government official
 extortionate
9
Key FCPA Risks
 An offer to make an improper payment also violates the
law – even if you don’t follow through.
 Liability for any act “in furtherance of” a plan
 No materiality standard
10
Enforcement
 US Securities and Exchange Commission
 US Department of Justice/FBI
 Liability
 Corporate and individual
 Civil and criminal
11
FCPA Enforcement
 A dramatic increase
 Payments large and small
 Aggressive police tactics
 “Sting” operation
 Potential use of wiretaps
 International cooperation among law enforcement agencies
12
FCPA Actions Against Companies: 2002-2011
45
40
35
30
25
20
15
10
5
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
13
FCPA Enforcement Trends
 Increasing emphasis on:
 Prosecution of individuals
 Criminal prosecutions
 Exchange of information and cooperation with foreign
authorities
14
FCPA actions against individuals: 2002-2011
80
70
60
50
40
30
20
10
0
2004
2005
2006
2007
2008
2009
2010
2011
15
FCPA Enforcement Trends
 Dodd Frank whistleblower bounty provisions
 10 to 30 percent share of recovery
 Tips from employees, former employees, competitors, ex-spouses
 Increased likelihood that authorities will learn of
violations
 Significant pressure for company to self-report
16
FCPA fines and penalties: 2002-2011 (in millions)
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
17
Largest FCPA Settlements
Siemens AG (Germany)
KBR/Halliburton (USA)
BAE plc (UK)
Snamprogetti BV/ENI SpA. (Italy/Netherlands)
Technip, SA (France)
JCG Corp (Japan)
Daimler AG (Germany)
Alcatel-Lucent (France)
Magyar Telekom/Deutsche Telekom (Hungary/Germany]
Panalpina (Switzerland)
$800 million
$579 million
$400 million
$365 million
$338 million
$218.8 million
$185 million
$137 million
$95 million
$81.8 million
2008
2009
2010
2010
2010
2011
2010
2010
2010
2010
18
UK Bribery Act
Applies to
 UK citizens and companies
 Any company “doing business” in UK
More strict than FCPA
 Prohibits corrupt payments to ANY person
 Eases burden of proof for prosecutions
 Strict corporate liability
 Unless “adequate procedures” in place
19
Other anticorruption developments
 UK Bribery Act enforcement
 Limited enforcement to date
 UK authorities looking to send a message
 First cases brought by Australian and Canadian authorities
 Russia joins OECD Convention
 China enacts law prohibiting bribery of foreign officials
20
Examples of corrupt payments
 Cash
 Sporting events
 Inflated invoices/kickbacks
 Payments to reduce taxes
 Hiring of “ghost employees”
 “Facilitating” payments
 Lavish entertainment
 Charitable donations
 Political contributions
 Reimbursement of travel and
lodging costs
21
Sources of risk
 Actions of company personnel
 Third parties
 JV partners
 Agents
 Representatives
 Consultants
 Distributors
22
Reducing risks
 Policy prohibiting bribery
 Preventing accumulation of unaccountable funds
 Accurate books and records
 Internal Controls
23
Reducing risks
 Due diligence on business partners, agents, intermediaries
 Who are you doing business with?
 Review of basic information re:
 Legitimacy
 Reputation
 Market pricing
 Connections to government officials
24
Reducing risks
 Contract provisions
 Agreement not to pay bribes
 Clear specification of services to be provided
 Risks of “success fees”
 Training and awareness
 Red flags
25
Red Flags
 High risk countries
 Reputation for improper
conduct
 Unusually high commissions
 Close family ties to
government officials
 Recommended by government
official
 Lack of experience
 Lack of capacity to perform
 False documentation
26
Key Takeaways
 Be alert to dealings with potential government officials
 Attention to travel, entertainment, gifts for gov’t officials
 Special attention to arrangements with intermediaries interfacing
with gov’t officials
 Obtain agreement not to make improper payments on Company’s
behalf
 Document and retain your due diligence
 Ask questions
27
Questions?
Walter P. Loughlin
212-536-4065
walter.loughlin@klgates.com
28
FOREIGN CORRUPT PRACTICES ACT IN LATIN AMERICA:
EFFECTIVE COMPLIANCE AND RISK MITIGATION
December 6, 2012
30
Chapter 2 - The FCPA: Anti-Bribery Provisions
Some clarity, some opacity
•
•
“Foreign Official” – the Guidance focuses primarily on the entity and not the
individual
•
Entity (“instrumentality”) test includes exhaustive list of factors with key
factor of ownership and control
•
How to know whether an individual is “acting in an official capacity for or on
behalf of” the entity is less clear
Gifts, Travel and Entertainment –
•
•
•
•
examples of improper gifts, T&E that are patently obvious (over $10,000 in
value)
Guidance uses phrase “moderately priced” but does not define it
Note that gifts and travel payments can be small but add up
Acknowledges that customary gift giving is acceptable under the right
circumstances
31
Chapter 2 - The FCPA: Anti-Bribery Provisions (cont’d)
Some clarity, some opacity
• “Facilitation Payments” – continue to be an exception, but no
safe harbor
•
•
•
•
Uses examples of $7,000 up to $166,000 as examples of improper
payments; No mention of mystical $1,000 threshold
“Small” payments unlikely problematic but “modest” payments can
be (?)
Key appears to be discretionary nature of the act
Government clearly discourages (violate other laws)
• Note importance of properly recording all gifts, T&E and
facilitation payments
32
Chapter 3 – The FCPA: Accounting Provisions
Nothing new
• Guidance is generally consistent with previous interpretations
and application of both the Books and Records and the Internal
Controls provisions
• A number of examples provide a “what not to do” guide and
show that the government has seen violations in many forms
• Importance of internal controls in the overall compliance
program
• No specific tangible elements of what constitutes an effective
internal controls environment are given; rather it points out the
need for “flexibility” and a “tailored” approach
33
Chapter 4 – Other Related U.S. Laws
Additional exposure
• Government is able and willing to bring charges for
violations of other laws even if the elements of the FCPA
are not met
• Both individual and corporate defendants have been
charged with Travel Act violations
• Financial industry focus puts spotlight on interplay between
FCPA and money laundering statutes
• AECA and ITAR reporting requirements cross over into
possible bribe activity
34
Chapter 5 – Guiding Principles of Enforcement
Compliance programs are critical
• Ten full pages (more than 10% of the Guidance document)
devoted to compliance programs
• Not a defense, but clearly important: “DOJ and SEC will give
meaningful credit to thoughtful efforts to create a sustainable
compliance program.” (p. 62, emphasis added)
• Note continuous and frequent mention of risk assessment here
and throughout Guidance:
“When assessing a company’s compliance program, DOJ
and SEC take into account whether and to what degree a
company analyzes the particular risks it faces.” (p. 59)
• Government expects that compliance function will evolve with
the company
35
Chapter 5 – Guiding Principles of Enforcement (cont’d)
Due diligence bar is raised
• Significant attention to third-party vetting and pre-transaction
diligence
• Pre-transaction diligence expectations are high:
•
•
•
•
•
•
Review of corporate (government?) records
Industry and source interviews
Background checks on principals
Site visits and pretext calls
Searching media sources
Management – and counsel – interviews
• Post-transaction integration and reporting are also an option
• Guidance acknowledges that level and type of diligence required
may vary based on the nature of the partner
(Consultant/Distributor/JV)
36
Chapter 6 – FCPA Penalties, Sanctions and Remedies
Monitors and independent consultants
• Government will seek additional trade sanctions (again, AECA
and ITAR connections)
• Monitors still on the table but no explanation for general decline
in use
• Independent compliance consultants (civil cases)
• Note correlation between compliance monitor factors and
declination scenarios, especially
•
•
•
Pervasiveness of the conduct
Quality of the compliance program
Remediation efforts
37
Chapter 7 - Resolutions
Cookie cutter declinations
The Guidance provides a significant number of examples of
declinations with several common themes:
•
•
•
•
•
•
Company was alerted to possible corrupt conduct via its compliance
program or internal controls
Possible bribes were self-reported or otherwise voluntarily disclosed
Company conducted a thorough internal investigation and shared
the results
Conduct was not pervasive and consisted of relatively small
payments
Immediate corrective action taken against the bad actors
Compliance program was expanded or enhanced (training, process
improvement, additional internal controls)
38
Takeaways: Key Points to Consider
• Guidance is not law, merely policy
• Government has left itself room to interpret key statute
elements, including “foreign official”
• Defenses and exceptions remain limited, continue to hinge on
fact-specifics and leave company open to other prosecution
• Value of self-reporting still a bit of a mystery, although guidance
clearly suggests it is positively regarded
• Due diligence standard has arguably been raised, especially in
context of JV/M&A activity
• Successful compliance programs, although not an affirmative
defense as under the U.K. law, still remain the best defense in
negotiating resolution
• A successful compliance program is constantly monitored,
evaluated and improved
39
Case Studies
Case 1: Violations of FCPA in logistics
• Large conglomerate operating in Brasil
• Senior management directly involved
•
Various additional complications in the USA
40
Case 2: Identifying FCPA violations during Due Dilligence
•
•
A large American industrial conglomerate decided to acquire a
local small company to compliment its offerings
During the DD process we unveiled suspicious payments
• Eventually, the client declined of the acquisition
41
Thank You For Your Time