The FCPA & the Panalpina Case - Risks
presented for brokers & freight forwarders in
managing agents & operations in foreign
countries
Texas Brokers & Freight
Forwarders
Annual Conference
October 8, 2010
Arcie I. Jordan
Jackson Walker L.L.P.
100 Congress, Suite 1100
Austin, Texas 78701
512.236.2209
ajordan@jw.com
What is the “Panalpina” Case?
• Panalpina World Transport Holding Ltd, a Swissowned multi-national logistics, freight
forwarding and customs house brokerage giant.
• Had a 40 year history of providing oil & gas
supply chain services internationally, including
in Nigeria.
• In Feb. 2007, US DOJ launched an investigation
into allegations of Panalpina’s activities in
Nigeria that would represent violations of the
FCPA
• Alleged violations:
– Making illegal payments to Nigerian Customs
agents to secure preferential customs treatment
– Covering up illegal payments by
• falsifying proof of payment receipts
• categorizing payments as “local processing” or
“administrative/transport” expenses
– Failing to provide customs valuation invoices
since some goods not declared
– Improperly importing goods into Nigeria
– Failing to post bonds with sufficient funds to
cover duties & tariffs
– Failing to maintain adequate internal controls
• Investigation first came to the public’s attention in
early 2007 when 3 subsidiaries of Vetco Grey
Controls, a Houston-based oil service company with
substantial operations in Nigeria and one of
Panalpina’s customers, pled guilty to violating the
FCPA for paying more than 378 bribes in Nigeria
totaling about $2.1M to employees of the Nigerian
Customs Service
– through a “major international freight
forwarding and customs clearance company”
to clear customs, obtain licenses and obtain
other preferential treatment in the customs
process from at least September 2002 through
April 2005.
• In July 2007, the investigation was extended beyond
Panalpina’s Nigerian operations to its operations in
Kazakhstan and Saudi Arabia.
• Panalpina reportedly suspended all domestic logistics
and freight forwarding operations in Nigeria in
September 2007 for all oil & gas-related customers.
• In August 2008, Panalpina announced that compliance
concerns had forced it to withdraw completely from the
Nigerian domestic market and that it was selling its local
Nigerian operation to a Nigerian group and would retain
no ownership interest therein. That transaction was
closed in November, 2008.
Lessons:
• The FCPA applies to freight forwarders and
customs brokers.
• The government’s visibility into conduct that
may violate the FCPA may arise from a broad
variety of sources, including your customers (&
vice versa).
• It’s important that freight forwarders and
customs brokers understand the FCPA if they
are responsible for customs clearance and
related supply chain services in foreign
jurisdictions.
What Should You Do?
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Understand the FCPA
Develop Meaningful Policy
Develop Meaningful Procedures
Conduct Effective Training/Auditing
Understanding the Federal Corrupt
Practices Act (FCPA)
• Enforced by the Securities & Exchange
Commission & the Department of Justice
• Anti-Bribery Provisions
• Exchange Act Provisions
• Civil & Criminal Penalties, Disgorgement of
Proceeds & Monitors
Understanding the FCPA
• Criminal & Civil Penalties can be
substantial:
– On Feb. 19, 2010, Jean Fourcand of Miami, FL
pled guilty to role in remitting bribes to Robert
Antoine, a Haitian telecommunications official, on
behalf of U.S. telecommunications companies.
– Fourcand faces up to 10 years in prison & a fine
of the greater of $250,000 or 2xs the value of
the funds he helped to transfer. Antoine agreed to
forfeit $1.6M he received & faces up to 20 years
in prison, plus a fine of the greater of $250,000
or 2xs the value of the funds he received.
Penalties can be substantial …
• Another example:
– On March 16, 2010, Nexus Technologies and 3 of
its employees pled guilty to conspiring to bribe
Vietnamese officials to obtain contracts to supply
the Vietnamese government with a variety of
equipment and admitted to paying bribes over a 9year period totaling more than $250,000 that they
recorded as “commissions.”
– Nexus must cease operations & faces a fine of
up to $27M.
– The employees face prison terms of up to 30-35
years.
Penalties can be substantial …
• Another example:
– On April 20, 2010, Charles Paul Edward Jumet
was sentenced to 7 years & 3 months in prison
after pleading guilty to violating the FCPA and
making a false statement to federal agents
regarding an $18,000 “dividend” check to a
Panamanian official. In addition, he must pay a
$15,000 and serve 3 years of supervised
release after his release from prison.
– His co-conspirator, John W. Warwick, forfeited
the $331,000 he derived from the scheme and
faced up to 5 years in prison and a fine of up to
$660,000.
Cases Illustrate
• Substantial civil & criminal penalties
• Explosion in FCPA enforcement actions:
– In 2009, 40 cases initiated by Dept. of Justice (DOJ)
and the Securities & Exchange Commission (SEC).
– As of the end of April, 2010, 140 FCPA matters
pending investigation at DOJ.
– Increased prosecution of individuals:
• 2009: 17 prosecutions/4 of which went to trial
• 2008: 60% of prosecutions against individuals
Understanding the FCPA
• Whether large or small, the FCPA applies to
“Covered Persons”:
– Domestic Concerns (U.S. businesses, corps,
partnerships, sole proprietorships) (even when
acting for foreigner not subject to the FCPA)
– U.S. Persons (citizens, nationals, residents)
– Persons located in the U.S. (visitors,
nonimmigrant workers)
– Foreign subsidiaries wholly owned or controlled
by U.S. companies (control > 50% ownership)
Understanding the FCPA
• “Covered Persons” includes
– Issuers (all companies whose securities are
listed in the U.S.)
– Foreign corps/businesses with a principal place
of business in the U.S.
– Other persons if they participate in a prohibited
activity as an officer, director, employee,
representative (including a stockholder acting on
behalf of the company) or agent of any such
business concern (whether in the U.S. or not).
Understanding the FCPA
• Anti-Bribery Prohibitions
– Using mail or any means or instrumentality of
interstate commerce to
– Give or offer anything of value
• including a promise, authorization, payment, gift
– directly or indirectly
• through agents, attorneys, consultants,
contractors, distributors, brokers, suppliers, etc.
– to any foreign official
• Broadly defined to include an officer, employee
or other person acting in an official capacity
for:
– A foreign government (including any dept.,
agency or instrumentality thereof)
– State-owned enterprises & quasigovernmental entities (e.g., Dr. employed
by govt. hosp.)
– Public International Organizations (e.g.,
the U.N., World Bank, etc.)
– Foreign political party
– Foreign political candidate
– With knowledge of or intent that some or all of
same
– Is for the purpose of influencing such foreign
official to act or refrain from acting
• Inducing foreign official to do or omit from any act in
violation of his or her lawful duty
• Inducing foreign official to influence or affect any act
or decision of government
– In order to assist the company in obtaining or
retaining or directing business to any covered
person or allowing such person to obtain an
improper advantage.
Knowledge Requirement
• U.S. vs. Kay (5th Cir. 2007) rejected
defendant’s contention that specific intent to
violate the FCPA is required. The App. Ct.
held that the FCPA does not require that the
actor have actual knowledge that the FCPA
prohibits his conduct, but only that his
conduct is generally unlawful.
– Government doesn’t have to prove that the
defendant knowingly and specifically
sought to violate the FCPA. (The U.S.
Supreme Ct. denied to hear the Kay petition,
so the App. Ct’s reasoning stands.)
Knowledge Requirement
• U.S. vs. Bourke & Kozeny (NY D. Ct.,
Southern Dist. Oct. 2009) found that the
FCPA’s knowledge requirement was satisfied
because Bourke took affirmative steps to
avoid learning of bribery payments.
– Confirmed knowledge may be proved if the
defendant “suspects the fact, realized its
high probability, but refrained from
obtaining the final confirmation because he
wanted to be able to deny knowledge.”
– Important lesson: Cannot self-blind.
Understanding the FCPA
• Exchange Act Provisions
– Accurate Books & Records Requirement
– Internal Accounting Controls Requirements
• Easier for government to establish
violation – ex:
– NATCO Group, Inc., provider of oil & gas equipment,
whose subsidiary’s employees paid “extorted fines” to
obtain work visas for workers. Govt alleged violation of
books & records requirements since booked
reimbursement to workers as “bonus payments” and
“visa fines.” (NATCO settled though may have had a
defense to an anti-bribery charge.)
Additional SEC guidance re: Knowledge
Requirement
– Case against United Industrial Corp. for alleged
violations of the FCPA’s anti-bribery, books & records,
and internal control provisions, the SEC alleged UIC’s
violations stemmed from its subsidiary’s payments to
a third-party agent’s payments to Egyptian Air Force
officials. Based on emails between the subsidiary’s
former president and the agent, SEC established the
former president “knew or consciously disregarded
the high probability the agent would offer, provide or
promise at least a portion of [his] payments to Egyptian
air officials” in order to influence the award of contracts
to the subsidiary. UIC settled on 05/29/2009.
– Important lessons: Direct knowledge unnecessary;
direct involvement unnecessary; the sub’s
involvement & first-hand knowledge sufficient.
Understanding the FCPA
• As a result of 1988 amendments, FCPA
specifically allows
– Certain payments the purpose of which is to
expedite or secure performance of routine
governmental action, e.g.:
• Obtaining permits, licenses to qualify an entity
to do business in a foreign country
• Processing papers, such as visas
• Providing police protection, mail service, certain
inspections
• Providing utility services, loading or unloading
cargo
• Actions of a similar nature
• But watch out:
– The exception is limited & recent
enforcement actions reveal the
government’s approach is to narrowly
construe it
• Only applicable when foreign government
official has no discretion in exercise of his
official function, except timing of
performance
• If payment appears to influence official to
do something should not do or refrain from
doing something should do, it may not fall
within the exception
• So ask:
• Is a payment to a foreign customs official
designed to get products into the country
promptly?
• Or is it for the purpose of getting products
into the country when they would not
otherwise qualify to clear customs for some
reason (e.g., absence of requisite certificates,
licenses or accompanying paperwork)?
• Or is it for the purpose of obtaining a lower
duty rate for the products?
Understanding the FCPA
Also, in order to qualify for facilitating payment
exception under the FCPA, the payment must be
legal under the foreign country’s domestic laws.
E.g., UK’s Bribery Act 2010 doesn’t contain exception
for facilitation payments.
Understanding the FCPA
• Also Allows
– Travel & Promotional Expenses
• Provided they are reasonable and bona
fide expenses; and
• Directly related to promotion,
demonstration, explanation of products,
technology; and
 Are lawful under the written laws and
regulations of the recipient’s country.
Meaningful Policy & Procedures
Required
• BAE Systems plc pled guilty on March 1, 2010 to
providing false statements about its
implementation of policies & procedures to
ensure it complied with the anti-bribery provisions
of the FCPA and the OECD Anti-Bribery
Convention. Government alleged BAE willfully
failed to adopt the kinds of measures necessary
to ensure compliance and profited thereby.
• BAE agreed to pay $400M criminal fine. It must
obtain & retain an independent monitor for 3
years.
Meaningful Policy & Procedures
Required
• Federal Sentencing Guidelines
– Establish guidance regarding the requisite adequacy of
compliance programs
– Establish that U.S. based companies bear the same
legal responsibility for the actions of a foreign agent as
they do for the actions of their own U.S. employees
– Both DOJ and SEC have confirmed that the quality of a
company’s due diligence on foreign business
partners/agents will be considered when fashioning
penalties for companies when their business
partners/agents have violated the FCPA
Develop a Meaningful FCPA Policy
• Understand your own risks
– Conduct company-wide assessments
– Analyze challenges presented in different countries
• Make the Policy meaningful
– Adapt it to your operations
– Address your risks
– Don’t just rely on cookie cutter templates
Adopting Meaningful Procedures
• Due diligence procedures on 3rd parties should be more
than window dressing:
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Develop appropriate questionnaire
Obtain references
Validate through U.S. Embassy & independent sources
Interview in person
Train, certify, periodically retrain & recertify
• Panalpina now conducts compliance assessments in high
risk countries & undertakes intensified compliance
measures in critical countries, including on-site interviews,
definition of corrective action items & follow up
• Establish controls at various levels (manual/computerized)
– Audits
– Cash monitoring
• Require appropriate contractual commitments &
certifications
Panalpina’s Response is Illustrative
• Has set the tone at the top, involving the company’s Board
directly
• Has appointed dedicated compliance resources
• Has redesigned internal audit program, including making
compliance matters a part of the program and standard checks
on every audit
• Prior to commencing audits, internal auditors now review plan
with compliance department
• Compliance findings are reported to compliance department and
audit committee
• HR and legal departments are integrally involved in compliance
efforts
• Code of Conduct has been revised to, among others, prohibit
anti-bribery, provide guidance on permissible facilitation
payments, gifts, hospitality & entertainment, and establish
procedures & provide translations to insure employee
understanding and commitment thereto
Developing Necessary Training Programs
• Initial Training
– Who? All employees
– What? Should be tailored to employee level/duties
– How? E-learning, on-site training, adapted to
culture/location
• Recurrent Training
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Who?
What?
How?
How often?
What should you do if a problem is
detected?
• Consult with an attorney
• Implement disciplinary measures
• Identify necessary corrective measures in
policy, procedures, training & auditing
protocols
• Implement corrective measures
• Consider voluntary disclosure
Final Thoughts
• Corrective action can be much more costly than
due diligence and compliance:
– Monetary Outlays
• Attorneys Fees
• Forensic Accountant Fees
• Consultants Fees
– Investment/distraction of Company Resources & Time
– Other Costs
• Business reputation
• Restructuring operations
Questions?
Arcie I. Jordan
Jackson Walker LLP
100 Congress, Suite 1100
Austin, Texas 78701
512.236.2209
ajordan@jw.com
Jackson Walker possesses a team of FCPA professionals,
including litigators & counselors.