Spring 2011
In this issue:
International Shipping Companies Face Increased Risks from U.S. and
U.K. Anticorruption Efforts.......................................................................................... 1
Iran Sanctions.......................................................................................................... 1
New Congress Brings New Priorities – Budget and Fiscal Austerity Dominate Debate............ 2
Above Board
Lawyers and Policy Professionals
to the Maritime Industry
New Withholding Tax Rules on the Maritime Horizon...................................................... 4
Iran Sanctions
By Mike O’Neil, Partner (Washington, D.C.) and Darrell Conner, Government Affairs
Counselor (Washington, D.C.)
Last July 1, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”)
International Shipping
Companies Face
Increased Risks
from U.S. and U.K.
Anticorruption Efforts
went into effect. Passage was overshadowed by the protracted diplomacy and final adoption in June of
By Robert Kritzman, Partner (Miami)
Violations can result in substantial criminal and civil penalties. The regulations, however, apply only to
Matt Morley, Partner (Washington, D.C.)
Ed Fishman, Partner (Washington, D.C.)
new UN Security Council sanctions. Since then, several global companies have pulled out of Iran and
the Secretary of State has declared CISADA a success. Yet, many in the maritime industry appear not to
be concerned. They should be.
Before CISADA, U.S. sanctions against Iran consisted of regulations administered by the U.S.
Department of Treasury’s Office of Foreign Assets Control (“OFAC”). These regulations impose a
comprehensive ban on transactions with Iran, including a ban on exports to and imports from Iran.
U.S. citizens, companies organized and located in the U.S., overseas branch offices of U.S. companies,
and any person or business in the U.S.
CISADA permits the imposition of sanctions for many of the same types of activities prohibited by
Companies engaged in international
OFAC - such as investments in and support to: (i) the petroleum sector in Iran, (ii) Iranian efforts to obtain
business, such as global shipping concerns,
weapons and weapons technology, and (iii) efforts by the Iranian government to stifle dissent. What
face increasingly significant risks from the
distinguishes CISADA from OFAC’s approach is that CISADA permits the imposition of sanctions on any
efforts of both U.S. and U.K. authorities
person, including persons and companies organized and located outside the U.S. In addition, CISADA
to enforce laws against corruption in
allows the imposition of sanctions on a corporate parent with actual knowledge of its subsidiary’s
international business transactions. U.S.
sanctionable activities or any affiliate that knowingly engaged in such activities.
authorities are pursuing unprecedented
numbers of cases and collecting ever-higher
CISADA sanctions can be tough. They can include bans on receiving Export-Import Bank assistance or
fines and penalties for violations of the
U.S. bank loans, denial of foreign exchange transactions or export licenses, bans on property transfers
Foreign Corrupt Practices Act (“FCPA”),
and U.S. government contracts, and prohibitions against dealing in U.S. debt instruments or serving as a
while the United Kingdom has undertaken
repository for U.S. government funds. If sanctions are imposed, at least three of these must be imposed.
a wholesale revision of its antibribery laws
to make them even more rigorous than the
FCPA. Both statutes provide for very broad
jurisdiction, and the risks of running afoul of
these laws, and the consequences of doing
so, have never been greater.
continued on page 7
In addition, CISADA requires a certification from each government contractor that neither it nor any
affiliate it owns or controls engages in any activity that may result in the imposition of sanctions.
Failure to certify means loss of the contract. A false certification will lead to termination of the contract or
suspension from eligibility for contracts for a period of up to 3 years. The U.S. government publishes a
listing of all suspended companies.
continued on page 6
K&L Gates Above Board • Spring 2011
1
New Congress Brings New Priorities –
Budget and Fiscal Austerity Dominate Debate
By Darrell Conner, Government Affairs Counselor (Washington, D.C.),
Yvette Wissmann, Government Affairs Analyst (Washington, D.C.) and
The Honorable Jim Walsh, Government Affairs Counselor (Washington, D.C.)
The tide has turned significantly since the last Congress. After spending much of the 111th
FY12 Budget Takes Wind Out
Congress focused on government spending and other ways to stimulate the economy, the new
of the Sails for Key Maritime
112th Congress has focused predominantly on fiscal austerity measures that include spending
cuts and deficit reduction. The maritime industry finds many of its issues hung up in this political
Programs
tsunami, with many of its programs under the threat of spending cuts and rescissions. The
As Congress negotiates this year’s budget, it is
simultaneous paths being taken by Congress to negotiate funding for the remainder of Fiscal Year
also considering the budget for the next fiscal year,
2011 (FY11) and a Fiscal Year 2012 (FY12) budget increase the complexity of the situation.
2012. The President has proposed a $3.7 trillion
How the budget situation is resolved could have far-reaching and long-term impacts on the
FY12 budget that includes a five-year spending
maritime industry.
Stalemate Looms on Fiscal Year
2011 Funding
Because the 111th Congress failed to enact
any appropriations bills, the U.S. government is
operating under a short-term continuing resolution
(CR) providing funding for programs and operations
of the agencies. Republicans continue to insist on
significant spending cuts, upwards of $100 billion
(on an annualized basis). Democrats are strongly
resisting cuts of that magnitude. As a result, it is
expected that short-term CRs will be dominant in the
near term as Congress seeks to avert a government
shutdown while negotiations continue.
The House Republicans have passed legislation
intended to send a message to the public – and to
the Democratic leadership in the Senate – about
their intent to cut government spending. H.R.
1, a CR that would have funded government
for the remainder of FY11, proposes to cut the
Administration’s FY11 budget proposal by more
than $100 billion, representing the single largest
freeze on non-security discretionary spending. It is
intended to reduce the deficit by over $400 billion
discretionary spending reduction in the history of
over the next decade.
Congress. The legislation proposes cuts to some
The maritime industry did not fare well in the
maritime-related programs, including reduction in
President’s budget request, with the Administration
funding for marine highways, a rescission of the
proposing the following:
Small Shipyard Grant Program. Significant cuts to
food aid programs, such as Food for Peace and
budget of $5 million;
McGovern-Dole Food Aid, were also included in
the House-passed bill.
financing program;
as well as a compromise measure that would cut
• Elimination of the Small Shipyard
Grant program;
H.R. 1 is likely to never be enacted, the measure
offers a glimpse into the mindset of the Republicans
• A rescission of more than $54 million in
unobligated funds from the Title XI ship
Not surprisingly, the Senate failed to pass H.R. 1,
$6.5 billion for the remainder of FY11, and while
• A reduction in the Maritime Administration’s
• No funding for the marine highways initiative
in the House on how they intend to address
(despite the inclusion of a comprehensive
government spending. Negotiations will continue
transportation reauthorization proposal in the
over how to fund the government for the remainder
budget); and
of the year. But it will be difficult to bridge the
significant gap between the positions of the
Republicans and the Democrats. Thus, it is possible
• Significant cuts in the Food for Peace and
McGovern-Dole Food Aid programs.
that government will be funded for this fiscal year
The Maritime Security Program was one maritime-
only through a series of short-term CRs.
related program that survived the budget cuts,
continued on page 3
K&L Gates Above Board • Spring 2011
2
continued from page 2
with the Administration proposing a bump up in
on the President’s proposal to eliminate funding for
will likely be discussed at the hearing, as past
the program to $186 million (from $174 million).
Title XI loan guarantees and about the length of
debate on the topic has focused on liability issues
At that level, the program would be funded at the
time it takes for the agency to process applications.
and who is responsible for providing protection
authorized level of $3.1 million per ship for the 60
ships enrolled in the program.
The House Armed Services Committee has also
against pirates.
issued its oversight plan. Among the issues on
Shippers are expected to continue to push for
their agenda of interest to the maritime sector
amendments to the Shipping Act, including repeal
are: the Quadrennial Defense Review, which
of antitrust immunity. Because the issue is not at the
will make recommendations on changes to the
top of the Republican agenda and the champion of
Maritime Agenda
defense structure (including some that could impact
such legislation last year is no longer in Congress,
the maritime sector); the health of the defense
it is unlikely that this bill will receive much, if any,
The appropriations debate is taking a great deal
industrial base, notably the shipbuilding industry;
attention. The fallout from Deepwater Horizon
of oxygen out of the air in Congress, but the
and the Maritime Administration reauthorization
continues, with continued discussion of legislative
authorizing Committees are plodding along in their
bill. The committee has specifically stated its intent
changes. But given the change in power in the
efforts to review the budgets and programs of the
to hold hearings and briefings to “assess the need
House, legislation addressing these issues will
various government departments and agencies
for legislative action to recapitalize infrastructure
likely focus on issues like the de facto moratorium
under their jurisdiction. The two House Committees
of public and private shipyards constructing or
and permitting delays rather than a complete
of jurisdiction over the maritime industry – the
maintaining Navy vessels and vessels of the
overhaul for the industry as was proposed under the
House Transportation and Infrastructure Committee
National Defense Sealift Force.”
Consolidated Land, Energy, and Aquatic Resources
Beyond Appropriations – Insight
into the Authorizing Committees’
and the House Armed Services Committee – have
Act of 2010. Liability limits for offshore facilities are
issued their agendas for the year.1
While the Senate Commerce, Science and
The House Transportation and Infrastructure
agenda for the year, Sen. Jay Rockefeller (D-WV),
Committee has stated that it plans to review the
Chairman of the Senate Commerce Committee,
Maritime Domain Awareness, Short Sea Shipping,
has outlined an agenda with a focus on jobs,
Congress may also consider the Army Corps
oil spill prevention and response, piracy, ballast
economic security, and growth. Among his priorities
of Engineers and funding for its dredging and
water and incidental discharges, and vessel
is “improving transportation in the highway, rail,
inland waterways infrastructure projects, as well
capacity issues in the international trades. It has
pipeline, and maritime sectors.” It is expected,
as a discussion surrounding repeal of the harbor
also indicated a desire to “review efforts to improve
however, that much of the Committee transportation
maintenance tax. However, these issues will be
the efficiency and effectiveness” of the U.S. Army
agenda will be focused on a transportation
impacted by the budgetary constraints as well as
Corps of Engineers civil works program, which
reauthorization bill. In fact, during a Senate
the restrictions on earmarks.
includes dredging financing of harbor and inland
Commerce Committee hearing on the Department
waterways infrastructure, and implementation of
of Transportation’s FY12 budget, the only discussion
water resource projects.
of maritime-related programs was on funding for the
Its Coast Guard and Maritime Transportation
Subcommittee has already held a FY12 budget
hearing for the U.S. Coast Guard, Federal Maritime
Commission, and the Maritime Administration.
Members at the hearing expressed concern about
Transportation Committee has not released an
there will be a push in that chamber for liabilityrelated legislation.
Conclusion
Marine Highway Grant Program, which Secretary
The budgetary pressures and attention on fiscal
LaHood indicated could be funded through the
austerity will continue to squeeze many businesses.
infrastructure bank proposed in the FY12 budget
As the current debate indicates, the maritime
instead of as a separate budget item within the
industry will not be spared in the process, and
Maritime Administration.
many of the programs the industry utilizes could
the strain on the Coast Guard’s budget and about
The budget will not be the only matters on
the proposed budget increase for the FMC. On the
Congress’ plate in the coming year. Piracy and the
Maritime Administration budget, members focused
U.S. response to piracy attacks continue to receive
attention, particularly on U.S.-flag vessels and
1 House Transportation & Infrastructure Committee
Oversight Plan: http://transportation.house.gov/
Media/File/112th/112th_Oversight_Plan.pdf
House Armed Services Committee Oversight Plan:
http://armedservices.house.gov/index.cfm/oversight-plan.
a priority for some senators and it is expected
especially since four Americans were recently killed
by pirates. As of the time of this writing, Chairman
face cuts in spending. Cargo preference programs,
the Title XI loan guarantee program, shipyard
grant programs, and many others are expected
to see cuts in funding. In the end, from a budget
perspective this will not be the year of the rabbit; it
will be the year of the bear.
LoBiondo’s House subcommittee is scheduled to
hold a hearing on the issue. Legislative proposals
K&L Gates Above Board • Spring 2011
3
New Withholding Tax Rules on
the Maritime Horizon
By Mary Burke Baker, Government Affairs Advisor (Washington, D.C.) and
Pat Heck, Partner (Washington, D.C.)
Amid all the clamor about deficits and budgets on Capitol Hill, little attention has been paid to an
reporting and withholding is approximately 99%;
obscure income tax withholding provision affecting government contractors that is slated to take
the compliance rate on other types of payments
effect in January 2012. If the measure proceeds as planned, the Department of Defense will be
declines as information reporting and withhold-
required to withhold 3% of the gross amount payable from any payments for goods and services
ing do not occur. Payments made by government
made to maritime operators.
entities, both to corporations and individuals,
were, and remain, subject to information reporting
What is the 3%
annually, and payments made in connection with
Withholding Tax?
Section 511 of the Tax Increase Prevention and
Reconciliation Act of 2005 (TIPRA) requires a 3%
withholding tax on certain payments for goods
and services made by government entities. In general, any payments for goods and services made
by the Federal government and all units of state
and local governments, including counties and
parishes, to government contractors are subject to
a public assistance or public welfare program
The Government Accountability Office conducted
for which eligibility is determined by a needs or
a series of studies that found widespread tax non-
income test. As enacted, the provision applied to
compliance among government contractors even
payments made after December 31, 2010. The
with information reporting. For example, one study
effective date was delayed to apply to payments
of Department of Defense and IRS records showed
made after December 31, 2011 in the American
that over 27,000 Federal contractors owed about
Recovery and Reconstruction Act of 2009. When
$3 billion in unpaid taxes.
originally enacted, the provision was estimated to
raise $6.4 billion over ten years.
Referring to the IRS research and GAO findings,
the 3% withholding tax was included in the Joint
a 3% withholding tax. The withholding tax does
History and Rationale for the
not apply to payments already subject to withhold-
3% Withholding Tax
ing under another code section, payments made
before and after enactment of 3% withholding.
on classified or confidential contracts, payments
The Internal Revenue Code requires withholding
to tax exempt entities and foreign governments,
on payments for wages and certain other types
payments for interest and real property, intergov-
of payments. In general, non-wage payments for
ernmental payments, payments made by a politi-
goods and services are not subject to withholding.
cal subdivision of a state or instrumentality thereof
IRS research demonstrates that the voluntary com-
making less than $100 million of such payments
pliance rate for wages subject to both information
Committee on Taxation’s “Options to Improve
Tax Compliance and Reform Tax Expenditures,”
released in 2005, and was enacted shortly
thereafter in TIPRA.
continued on page 5
Withholding can be applied only against income
taxes, not employment or other types of taxes.
K&L Gates Above Board • Spring 2011
4
continued from page 4
How Does the 3% Withholding
3%, so withholding could exceed any profit
Tax Apply to Maritime
Operators?
and any income tax liability
• Withholding can be applied only against
income taxes, not employment or other
In general, any payments made to govern-
types of taxes. If a contractor’s income
ment contractors from government entities will
tax liability is less than amounts withheld,
be subject to the 3% withholding tax, meaning
the contractor has overpaid and will be
contractors will receive only 97% of gross amounts
required to file a claim for refund and wait
receivable from the government. For example,
to get its own money back
assuming an annual $1 million contract, maritime
operators doing business with the Department of
• Profit margins on contracts may be less than
Immediate Risks
It is important to address this issue immediately because 3% withholding applies to payments made
after December 31, 2011. It will take considerable time and expense for government entities to
put systems in place to implement the new rules.
Maritime operators and other government contractors need to know how to determine the terms of
their contracts, including profit margins; how to
manage cash flow and tax deposit issues; and
• Federal, state and local governments with
whether to expend resources on systems program-
Defense (DOD) will receive $970,000 in actual
funding shortages may have insufficient
ming to accommodate the changes that will ensue
payments. The remaining $30,000 will be with-
funds to implement the new law. The
when 3% withholding is in place.
held by the DOD and remitted to the IRS. If pay-
Department of Defense has estimated it will
ments subsequently are made to sub-contractors
cost the agency $17 billion to implement
or third parties, there is no authority in the statute
the new requirement
to allow general contractors to withhold 3% from
those payments.
Possible Options to Address
Maritime operators may incur substantial costs
the Concerns
to reprogram business systems to track amounts
withheld and to manage changes in cash flow
patterns, or to renegotiate contracts to ensure that
cash flows are adequate and that profit margins
There are several options to address concerns
about 3% withholding:
are sufficient to absorb the new withholding
requirement (profit margins on certain government
contracts may be less than the rate of withholding). The effect on cash flow may affect the avail-
• Repeal the provision; however, finding a
viable offset may be difficult
• Delay the effective date again
• Revise the statute to allow general
Even if Congress decides to delay or repeal the
new requirements, it could take considerable time
to accomplish this. Since the enactment of 3%
withholding, various proposals have been introduced to repeal it, but the cost is more than $6
billion to repeal. Senator Vitter introduced legislation in January 2011 to repeal the law, and Senator Snowe filed an amendment on the FAA bill to
repeal it. Representative Herger has introduced
similar legislation in the House. Recent experience
demonstrates that even with bi-partisan, bi-cameral
agreement, actually getting a bill across the finish
line is problematic. Examples include modifying
the 6707A penalty for failure to disclose a report-
contractors to withhold 3% on payments
able transaction, a penalty that disproportionately
to sub-contractors; small businesses may
Some Concerns with the 3%
harmed small businesses. It took 16 months for
find this practice onerous, similar to their
the change to become law, even with agreement
Withholding Provision
position on the expanded Form 1099
in both chambers and both parties. Also, the
reporting requirements in the health care bill
expanded Form 1099 requirements in the health
ability and cost of surety bonds.
The 3% withholding provision raises several con-
cerns, including:
• Cash flow is reduced by 3%
• Substantial programming costs may be
against employment taxes
• There is no authority in the statute for
general contractors to withhold 3% on
• Reduce the withholding rate from 3% to
a lesser amount to address lower profit
margins and cash flow issues
incurred to track amounts withheld and to
manage cash flows
• Allow amounts withheld to be applied
care bill are not expected to be acted on in the
House at least until March, and even then the
pay-for may be at issue. It is unclear when repeal
of the new 1099 rules will be completed, leaving
taxpayers in limbo whether they need to gear up
for them or not.
• Allow exceptions for credit card sales,
which will be reported under the new credit
card reporting rules
payments to subcontractors and third
parties, further impairing cash flows
K&L Gates Above Board • Spring 2011
5
continued from page 1
Iran Sanctions
CISADA permits state and local governments to
A last example involves a very basic question
prohibit investment or require divestment by state
about CISADA. Generally, the new law appears
or local government institutions (e.g., state pension
to allow for the imposition of sanctions on those
funds) in companies that invest $20 million in
engaged in providing services and goods
the energy sector of Iran, including companies
into Iran, because that is how Iran will receive
that provide “oil or liquefied natural gas tankers,
prohibited support to its refining capacity, refined
or products used to construct or maintain
petroleum products, or weapons, but it is possible
pipelines” to Iran. In addition, semi-annual public
to contemplate circumstances in which exports
U.S. government reports will identify specific
from Iran could also result in sanctions. For
investments, imports and joint ventures made in the
example, “directly and significantly” facilitating
energy sector of Iran.
Iran’s domestic refining capacity almost certainly
How to interpret CISADA is a problem because
many of its terms are broad in scope, but the
U.S. government has issued only limited guidance
on how they will be interpreted. The result is
deliberate ambiguity that only adds to the caution
occurs when a company ships refining equipment
to Iran, but if a company also ships refining
equipment from Iran for repair abroad, that too
might fall within the activities subject to CISADA
sanctions.
foreign companies will necessarily employ in
Such uncertainties can make CISADA due
interpreting CISADA.
diligence difficult. The Act was also written to
For instance, sanctions may be imposed on
companies that provide goods, services,
technology, information or support that “directly
and significantly” facilitate the maintenance or
expansion of Iran’s domestic refining capacity.
Presumably, shipping machinery critical to the
operation of a refinery meets this test, but what
about shipping chemicals that can be used both in
refineries and cement plants? Available guidance
says such questions will be evaluated on a caseby-case basis.
Uncertainty also arises in determining the dollar
thresholds that must be met for the imposition
of sanctions. CISADA subjects to sanctions
transactions involving shipment of refined
petroleum products to Iran worth $1 million, or
a number of such transactions over a 12-month
period worth $5 million in the aggregate. Either
the value of the services (e.g., shipping) or the
value of the goods shipped may be used for this
calculation, but when multiple transactions are to
be counted, there is no guidance as to when the
make investigation mandatory in the face of
credible evidence and the imposition of sanctions
automatic, unless an exception applies. There
are several such exceptions, but each has a
downside. Investigation is not required, nor
must sanctions be imposed, if those in question
no longer conduct sanctionable activities and
undertake not to knowingly engage in such
activities again. Also, sanctions can be waived,
but only after a public report is submitted to
Congress beforehand identifying the person.
Waivers must be renewed in the same way.
CISADA is aggressively and deliberately broad
ranging. The U.S. government simply urges
companies to “minimize their exposure to the
Iranian energy sector and to exercise as much
due diligence as possible.” Global firms wishing
to do business in the U.S., whose stock is publicly
traded, and that are paid in dollars need to
weigh possible CISADA sanctions against their
involvement in Iran. For many, compliance with
CISADA makes good economic sense.
12-month period begins. This makes calculations
of what shipments could result in the imposition of
sanctions all the more difficult. K&L Gates Above Board • Spring 2011
6
continued from page 1
do, anywhere in the world, regardless of
International Shipping Companies Face Increased
Risks from U.S. and U.K. Anticorruption Efforts
any specific connection to the U.K.. U.K.
These risks can be addressed by developing and
and significant jail time, and the imposition of
implementing policies and procedures designed
enormous fines on companies. U.S. authorities
to prevent improper payments. A well-designed
are now employing the kinds of aggressive
corporate compliance program can reduce the
investigative methods, such as “sting” operations,
potential consequences of an FCPA violation, and
previously reserved primarily for narcotics and
in the case of the U.K. Bribery Act, can serve as
organized crime cases.
a complete defense to corporate liability in many
circumstances.
1. The US Foreign Corrupt
Practices Act.
Under the FCPA, it is a federal civil and criminal
offense to pay or promise to pay anything of
value to a foreign government official to obtain
a business-related benefit. Included within the
definition of a “foreign official” are not only
executive, legislative or judicial officers or
employees, but also those employed by stateowned or state-controlled enterprises—even
where those companies are engaged in ordinary
commercial activities.
authorities say they will prosecute such
companies for bribery undertaken on their
behalf, regardless of where it occurs.
• Commercial bribery. The Act covers
not only improper payments to foreign
government officials, but private commercial
bribery as well.
• Strict corporate liability. Companies
subject to the Bribery Act will be strictly
Many FCPA violations result from payments made
liable for bribes given or offered on their
by agents, consultants and other intermediaries,
behalf, by any person, acting anywhere in
as companies can bear responsibility for improper
the world, and without regard to whether
payments made on their behalf, even where such
anyone in the company had knowledge of
payments were unauthorized. For the maritime
the bribe. This means that it will be easier
industry, the use of port agents, local customs
for U.K. authorities to prove a violation of
brokers and clearing agents, and other contractors
the Bribery Act than for U.S. authorities to
raises particular risks in this regard. U.S.
establish an FCPA violation.
prosecutors are already focused on this area, as
signaled by recent settlements involving Panalpina,
the Swiss shipping and logistics company, and six
of its customers in the oil services industry, who
paid U.S. authorities a total of $236.5 million
to resolve potential FCPA charges. The probe
had focused on whether Panalpina, through
various agents and contractors, paid officials in
• Adequate procedures defense. The
Bribery Act provides a complete defense to
strict corporate liability where a company
can establish that it had “adequate
procedures” to prevent corrupt payments
from occurring. This creates a compelling
reason for companies to ensure that they
have effective compliance mechanisms to
U.S. companies, citizens and permanent residents
places including Nigeria, Saudi Arabia, Algeria
are subject to these provisions regardless of
and Kazakhstan to expedite services, such as
where in the world their actions take place. They
clearing drilling rigs and other equipment though
also apply to companies with securities listed
customs. These and other recent cases highlight
on US exchanges, and to persons who use the
the importance of bringing third party agents
The U.K. authorities have issued preliminary
instrumentalities of U.S. interstate commerce—
and contractors within the reach of an effective
guidelines as to the components of such
such as U.S. banking or telecommunications
compliance program, and suggest that ocean
“adequate procedures,” and these guidelines
networks—in furtherance of an FCPA violation.
carriers, forwarders and logistics companies
essentially embody current best practices for
should consider performing due diligence reviews
Companies that have securities listed on U.S.
corporate anticorruption compliance programs.
of their own foreign subsidiaries and affiliates to
exchanges are also subject to what are known as
Companies subject to the FCPA are not required
understand their business practices.
to have such programs, but those that do
the FCPA’s “accounting” provisions, which require
that companies maintain books and records
that fairly reflect the company’s transactions as
2. The U.K. Bribery Act
authorized by management, and that companies
The U.K.’s new Bribery Act is expected to take
have a system of internal controls designed to
effect in mid-2011. While similar to the FCPA in
produce materially accurate financial statements.
many some (which one- many or some) respects,
U.S. authorities say that FCPA violations are
one of their top priorities—one that they often
mention in the same breath with the fight against
international terrorism. Recent cases have
increasingly stressed the criminal prosecution of
individuals, with the prospect of individual fines
there are some important differences.
prevent improper payments.
3. Preventative steps.
may face reduced sanctions for any violations
that do occur, while companies without such
programs may be subjected to particularly harsh
consequences. The U.K. guidance sets out six
elements that will be found in any procedures that
U.K. authorities will consider to be “adequate” to
prevent bribery.
• Aggressive assertion of jurisdiction. The
Act applies not only to U.K. persons and
1. Risk Assessment. Companies are expected
to acts taken in the U.K., but also extends,
to identify and evaluate the risks their employees
for companies doing even a small amount
or others acting on their behalf will pay a bribe,
of business in the U.K., to everything they
continued on page 8
K&L Gates Above Board • Spring 2011
7
continued from page 7
and use this knowledge as a basis for developing
4. Clear, Practical and Accessible Policies
procedures are sufficient to mitigate the risks
appropriate measures to reduce those risks. This
and Procedures. The company’s policies and
identified. Effective compliance programs
assessment should take into account the nature
procedures to prevent bribery should be known to
often include:
of the company’s business, including the sectors
all relevant personnel, and clear guidance should
and markets in which it operates, and should
• A policy prohibiting improper payments.
be provided as to how to follow them, such as
be revisited as the company’s business changes,
how to properly provide gifts, entertainment and
• Controls over gifts and entertainment.
expands or develops. charitable contributions. • Due diligence procedures to evaluate the
2. Top Level Commitment. Senior management
5. Effective Implementation. Simply having
should establish a culture in which bribery is
a “paper program” is not sufficient. Compliance
never acceptable. The company’s policy against
must be assured through appropriate internal
bribery must be clearly communicated to all levels
controls, and responsibility for implementation of
of management, the workforce and any relevant
the program should be clearly assigned.
external actors. A senior officer should be
legitimacy and reputation of third parties
that may act on the company’s behalf
(such as agents, consultants, and other
intermediaries) and joint venture partners.
• Employee training.
• Procedures to monitor and assure
designated to oversee the company’s antibribery
6. Monitoring and Review. Companies must
efforts, and its response to any incidents of bribery
undertake efforts to monitor compliance with their
that occur.
antibribery measures, and follow up on issues
Corporate violations of anticorruption laws can
as they arise. This generally requires financial
3. Due Diligence. Companies need to
result in substantial fines and penalties, negative
monitoring and internal audit procedures, as well
publicity, and debarment from public contracts,
know whom they are doing business with, and
as internal reporting mechanisms (“hotlines”) for
while the individuals may face imprisonment or
assure themselves that business relationships
employees and others to report concerns about
the ruin of their careers. By taking some relatively
are “transparent and ethical.” This requires
potential policy violations.
simple and inexpensive preventative measures,
appropriate efforts to identify and address the
risks of bribery in these relationships, particularly
The starting point for any company is to identify its
those with their agents, intermediaries, and
points of contact with foreign government officials,
business partners. and to consider whether its existing policies and
compliance.
however, companies can make it less likely that an
improper payment will be made in the first place,
and significantly reduce consequences of any
violation that does occur.
K&L Gates Above Board • Spring 2011
8
For more information on our Maritime practice, please visit klgates.com or contact one of the
individuals listed below:
Miami
Robert M. Kritzman
Partner
+1.305.539.3303
robert.kritzman@klgates.com
Washington D.C.
Jonathan Blank
Of Counsel
+1.202.661.6250
jonathan.blank@klgates.com
Singapore
Raja Bose
Partner
+65.6507.8125
raja.bose@klgates.com
Darrell L Conner
Government Affairs Counselor
+1.202.661.6220
darrell.conner@klgates.com
Rolf Marshall
Partner
+1.202.661.6249
rolf.marshall@klgates.com
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K&L Gates includes lawyers practicing out of 37 offices located in North America, Europe, Asia and the Middle
East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth
and middle market companies, entrepreneurs, capital market participants and public sector entities. For more
information, visit www.klgates.com.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to
any particular facts or circumstances without first consulting a lawyer.
©2011 K&L Gates LLP. All Rights Reserved.
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