What Every Inside Counsel
Needs to Know About the FCPA
Presented for the Association of Corporate Counsel,
Washington Chapter, March 31, 2015
Panelists
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Gina Culbert, Counsel, BakerHostetler
Jimmy Fokas, Partner, BakerHostetler
Kathryn Zunno, Partner, BakerHostetler
Mark Gerber, Partner, Forensic Services,
Pricewaterhouse Coopers
John E. Frank, Vice President, Deputy General
Counsel and Chief of Staff, Office of the General
Counsel, Microsoft Corporation
Monica Reinmiller, J.D., M.B.A., C.R.I.S.C., C.C.E.P.,
Senior Legal Risk Management and Compliance
Professional
Neil Moir, Director, Business Ethics and Compliance,
Legal and Corporate Affairs, Starbucks Corporation
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What is the FCPA?
Commercial anti-corruption statute enforced by
U.S. criminal and civil authorities with three
components:
– Anti-bribery provisions.
– Accurate accounting books and records
requirements.
– Effective internal controls requirements.
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Anti-Bribery Provisions
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Anti-Bribery Provisions
Prohibits corruptly giving, paying, promising, offering, or authorizing payment of
anything of value
Directly or Indirectly
Through third parties
To foreign officials, political parties, or candidates
For the purpose of influencing an official in his or her official capacity or to
secure and improper advantage in order to obtain or retain business
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Who is a “Foreign Official?”
• Any officer or employee of a foreign (non-U.S.)
government or any department, agency or
instrumentality thereof, or any person acting in an
official capacity on behalf of any such government or
department, agency, or instrumentality.
• Any official or employee of a public international
organization or person acting on its behalf.
• Includes employees of state-owned entities.
• FCPA also prohibits corrupt payments to any foreign
political party, official thereof, or candidate for foreign
political office.
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Foreign Officials
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Foreign Ministers.
Heads of Agencies and
Departments.
Procurement Officials.
Every Government Employee:
– Elected.
– Appointed.
– Career Officials.
– Executive Branch Officials.
– Legislators.
– Judges.
– Part Time.
– Unpaid.
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Political Parties, Party Officials,
and Candidates for Political Office.
Officials of Public International
Organizations:
– International Monetary Fund.
– International Finance
Corporation.
– United Nations.
– Organization of American
States.
– International Red Cross.
Doctors and Employees of StateOwned Hospitals or Medical
Clinics.
Scientists and Employees at StateOwned Research Facilities or
Institutions.
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“Anything of Value”
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Cash.
Car.
Seat on Company
Aircraft.
Surplus Equipment.
Art.
Contract Rights.
Personal Gifts.
Purchasing Goods
and Services at
Above Market Rates.
Job for Relative.
Donation to Charity.
Lavish Gifts.
• Travel Expenses.
• Accommodations, Meals,
Entertainment.
• Per Diems.
• Services.
• Carried Interests.
• Loans.
• Excessive Discounts.
• Preferential Options.
• Selling at Less than Fair
Market Value.
• Scholarship for Family
Member.
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U.S. Regulators Broadly Interpret
Words “to obtain or retain business”
• The FCPA prohibits more than just bribes to
obtain or retain a government contract.
• The FCPA prohibits any bribe to secure any
advantage, such as obtaining a permit, license
or tax break.
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The Foreign Corrupt Practice Act:
Criminal & Civil Enforcement Penalties
FCPA Provision
Individual/Entity
Corporate Liability
Anti-Bribery
Criminal Penalties
Civil Penalties
• The higher of $2,000,000 or 2x the
• $16,000 per violation
benefit from the corrupt conduct
• Up to five years in prison
Individuals
AND
• $16,000 per violation
• The higher of $250,000 or 2x the
benefit from the corrupt conduct
• Disgorgement
Corporate Liability
Books &
Records
Individuals
• The higher of $25,000,000 or 2x
the benefit from the corrupt
conduct
AND
• Up to twenty years in prison
• Disgorgement
AND
AND
• The higher of $5,000,000 or 2x the
benefit from the corrupt conduct
• The higher of the total gains from
the corrupt conduct or $150,000
• The higher of the total gains from
the corrupt conduct or $725,000
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Defense to Anti-Bribery Provisions
1. Local Law Defense (payment was lawful
under the written laws of the foreign country).
2. Reasonable and Bona Fide Business
Expenditure Defense (money was spent as
part of demonstrating a product or performing
a contractual obligation).
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Subsidiary Liability under
Anti-Bribery Provisions
Companies are directly liable for the actions of their
agents, employees, and subsidiaries:
“…a company is liable when its directors,
officers, employees, or agents, acting within the
scope of their employment, commit FCPA
violations intended, at least in part, to benefit the
company…”
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Potential Liability for Actions of Foreign
Agents, Consultants, and Intermediaries
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Company and individuals may be liable for payments made
by a third party – such as a consultant, agent, or joint venture
participant if the third party gives money or something of
value to a foreign official and:
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the money or thing of value had been paid by the company or the
third party received reimbursement from the company, and
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the company knew or authorized the payment, or understood there
was a high probability that such a payment would be made.
FCPA imputes knowledge of the violation where factual
information possessed by the person/company indicates a
“high probability” that prohibited conduct will result.
Therefore, it is critical to exercise due diligence to search for,
and react appropriately to “red flags.”
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Books & Records
and
Internal Controls Provisions
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Books & Records Provisions
• The FCPA requires SEC-registered “issuers”
to maintain books, records, and accounts
which in reasonable detail accurately reflect
transactions and the disposition of its assets.
• No materiality requirement for a violation.
• Requires reasonable level of detail that would
satisfy prudent officials in the conduct of their
affairs.
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Accurate Books and Records Provisions
• FCPA books and records
violations typically involve:
– Unrecorded transactions.
– Falsified or mislabeled
transactions.

Bribery transaction is described
as something innocuous.
– Mischaracterization of
payments.
– Improper general ledger
characterization for payment.
• Note:“facilitating payments”
must be accurately
described.
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FCPA Internal Controls Provisions
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Section 13(b)(2)(B) of the
Exchange Act requires
“Issuers” to devise and
maintain a system of internal
accounting controls to
provide reasonable assurance
that transactions are
authorized by management,
that assets are accounted for,
and that financial statements
are in conformity with GAAP.
No materiality requirement
for a violation.
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Adequate Internal Controls
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Should ensure:
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Appropriate management
authorization for transactions.
Accountability for company’s
assets.
Systems to identify possible
FCPA violations and assure
compliance.
Should prevent:
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The failure to record illegal
transactions.
The falsification of records to
conceal illegal transactions.
The creation of records that
are quantitatively accurate but
may mislead by failing to
specify qualitative aspects of
transactions.
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Current Enforcement Trends
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Current Trends
• Focus on the Life Sciences and Healthcare
Industry
• U.S. vs. Esquenazi – Definition of
Instrumentality
• Alstom Settlement – Guilty Pleas and Record
Fines
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Increased Penalties and
Settlement Amounts
Total FCPA Criminal and Civil Fines
Imposed on Corporations
2000
1782
Amounts in Milliions ($)
1800
1600
1400
1200
1000
803
720.6
800
511.2
600
508.8
400
260.57
155.1
200
2.7
0
28.2
36.3
2003
2004
2005
87.2
13.4
67.8
2008
2009
0
2002
2006
2007
Non-Siemens/KBR
Siemens
2010
2011
2012
2013
KBR
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Prosecutions of Individuals
FCPA Proceedings Brought Against
Individuals by Year 2002-2013
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Number of Proceedings Commenced
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35
30
25
20
15
10
5
0
2002
2003
2004
2005
2006
2007
DOJ
SEC
2008
2009
2010
2011
2012
2013
Total
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Risks & Red Flags
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General Red Flags
 Country has a reputation for a high risk of corruption
(CPI Map).
 Foreign official has a reputation for corruption.
 Use of mandated third party agents or distributors.
 Third party is suggested or recommended by
government official.
 Party objects to FCPA representations and warranties
in agreement.
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Red Flags (continued…)
 Party is too important, busy or insulted to engage in due
diligence.
 Close personal or family relationship with government
official.
 Requests for unusual compensation arrangements such as
cash payments or payments to offshore accounts.
 Unusually high commissions or fees in relation to the
services provided.
 Unusual bonuses paid to foreign operational managers.
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Red Flags (continued…)
 Lack of objective qualification in intermediaries hired to
facilitate a transaction.
 Unusual invoicing, payment patterns, or financing—
absolutely no “accommodation” billing.
 Success fees.
 Lack of transparency in expense records and accounting.
 Suggestion that a particular payment, gift or form of
hospitality or entertainment would help or assist in
attaining a particular goal.
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Transparency International
Corruption Perceptions Index (CPI)
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Recent FCPA Settlements
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Avon (2014)
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Avon is a major international beauty and cosmetics company.
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Between 2004 and 2008, Avon’s subsidiary in China improperly gave or
provided “$8 million worth of payments in cash, gifts, travel, and entertainment
to Chinese officials.”
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The payments were intended to gain access to officials with oversight of new
“direct selling regulations.” In turn, Avon was the first company to receive a
direct selling business license in China.
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As a result of the misconduct, the company settled with the SEC whereby it
agreed to disgorgement in the amount of $52,850,000, in addition to
prejudgment interest of $14,515,013.
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On December 17, 2014, the DOJ filed criminal informations against Avon and
Avon China, its subsidiary; Avon China thereafter entered a guilty plea. As a
result of its plea, the Avon entities will be required to pay $67,648,000 in
criminal penalties.
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In total, the violations resulted in prejudgment interest, penalties, and
disgorgement in the amount of $135,013,013.
Alcoa (2014)
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Alcoa World Alumina is a mineral and chemical company, a
subsidiary of Alcoa Inc., which deals in the production and
acquisition of Alumina.
On January 9, 2014, Alcoa World Alumina pleaded guilty to
resolve charges connected to its bribery, through a third-party
agent, to foreign officials in Bahrain.
In conjunction with its guilty plea, the company agreed to $223
million in criminal fines and forfeiture.
In addition to the resolution of its criminal charges, Alcoa World
Alumina also settled with the SEC. The company agreed to pay
$175 million in disgorgement (of which $14 million would be
counted towards the criminal forfeiture).
As a result of its misconduct, Alcoa World Alumina will pay
penalties and disgorgement in the amount of $384 million.
Cooperation – Is it worth it?
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Goodyear Tire & Rubber Co. (2015)
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Goodyear’s subsidiaries in Kenya and Angola paid bribes of over $3.2
million to, among others, employees of the Kenya Ports Authority, Armed
Forces Canteen Organization.
As a result of the misconduct, the SEC and Goodyear entered into a
settlement whereby Goodyear is required to pay disgorgement in the
amount of $14,122,525, and prejudgment interest in the amount of
$2,105,540—for a total of $16.2 million.
SEC highlighted Goodyear’s cooperation and significant remedial
measures, which presumably led to the decision not to impose a civil
penalty, including:
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Promptly halting the improper payments and self-reporting to the SEC;
Voluntary production to the staff, including materials from the company’s internal
investigation;
Significant enhancements to its Global Compliance program; and
Divested itself of the subsidiaries that made the improper payments.
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Ralph Lauren Corp. (2013)
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As a result of bribes paid by its Argentine subsidiary, Ralph Lauren entered into a
Non-Prosecution Agreement (“NPA”) with, and agreed to pay substantial
financial penalties to, the SEC ($593,000 in disgorgement and $141,845 in
prejudgment interest).
The SEC indicated that its willingness to enter the NPA was in large part a product
of the company’s cooperation and disclosure of the wrongdoing:
– Reporting preliminary findings of its internal investigation to the staff within
two weeks of discovering the illegal payments and gifts.
– Voluntarily and expeditiously producing documents.
– Providing English language translations of documents to the staff.
– Summarizing witness interviews that the company's investigators conducted
overseas.
– Making overseas witnesses available for staff interviews and bringing
witnesses to the U.S.
The company also agreed to pay $882,000 in penalties to the DOJ.
In total, the FCPA violation resulted in over $1.58 million in penalties,
disgorgement, and prejudgment interest for the company.
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Alstom S.A. (2014) – The Price of Not
Cooperating
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Alstom S.A. is a French power and transportation company.
On Monday, December 22, 2014, the company pleaded guilty to a two count
information to resolve criminal charges relating to its bribery of foreign officials in,
among other countries, Indonesia, Saudi Arabia, Egypt, and the Bahamas.
In addition to the actual bribery, the company also retained consultants to act as
intermediaries and to conceal the bribes.
As a result of its illicit conduct, Alstom S.A. agreed to a fine in the amount of
$772,290,000.
In addition to the charges against the company, at least five individuals have already
been charged in connection with the misconduct, with 4 guilty pleas to date.
The plea agreement highlighted the reasons for the record-breaking fine, including:
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Failure to voluntarily disclose the conduct once the company was aware of it;
Failure to cooperate with the government’s investigation until the government charged several former
Alstom employees;
Lack of an effective compliance and ethics program; and
Alstom’s prior criminal misconduct.
Best Practices
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Examples of Leading Compliance
Practices
Examples of leading compliance practices:
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Adequate due diligence of agents.
Annual FCPA risk assessment, training, and due diligence review of agents;
Use of consistent agent and distributor contracts:
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Anti-corruption clauses.
Representation and warranties for corruption clauses and FCPA compliance.
Right to inspect books and audit payments.
Required annual written attestation of compliance with the FCPA and anti-corruption clauses.
No success fee based contracts.
Document provision of FCPA training and compliance materials to agents.
Monitor charitable and political contributions.
Commissions and bonuses should be in expected and reasonable ranges.
Identify and track government contracts.
Regular procedures to identify unusual payments, such as offshore holding companies, and
appropriately review.
Closely evaluate favorable or abnormal credit terms.
Adequate whistleblower procedures.
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Foreign Considerations
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Foreign countries, including Canada, the U.K, Russia,
Brazil, and China, have all implemented local anti-bribery
and/or anti-corruption laws.
– The enforcement of foreign anti-bribery/anticorruption laws is on the rise.
– Use of carbon-copy or parallel prosecutions
increases potential costs of FCPA non-compliance.
– Industry “sweeps” by the DOJ and SEC are also on
the rise.
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Protecting the Privilege
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Maximizing Privilege Protections During
Internal Investigations: The Basics
Attorney-Client Privilege
• A communication;
• Made between privileged persons;
• In confidence;
• For the purpose of seeking, obtaining, or providing legal assistance to the
client.
Work Product Protection [tracking FRCP 26(b)(3)]
• Documents or tangible things otherwise discoverable;
• Prepared in anticipation of litigation or trial;
• Sought by another party in the litigation;
• With greatest protections given to attorney thoughts and impressions, but;
• Consideration of undue hardship if the material is not otherwise
discoverable.
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Maximizing Privilege Protections During
Internal Investigations: Key Considerations
• The purpose of the investigation.
• At whose direction is the investigation undertaken
and conducted.
• The privilege laws in any non-U.S. jurisdictions that
touch the investigation.
• Whether an internal audit or risk assessment by
outside counsel or consultants would be protected by
the privilege.
• How to ensure the work of experts or consultants
engaged during the investigation is protected.
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Maximizing Privilege Protections During
Internal Investigations: Recent Case
Wultz v. Bank of China, 2014 WL 362667 (S.D.N.Y. Jan. 21, 2015)
Relevant Facts: NY branch of Bank of China (“BOC”) received a demand letter
threatening to file a suit against BOC for knowingly providing material assistance to a
terrorist group that had caused terrorists attacks by executing wire transfers to the group’s
senior member. In response, BOC’s head office in China conducted an internal
investigation primarily by employees in China.
• Plaintiffs eventually filed suit in federal district court and, in discovery, sought documents
created during BOC’s internal investigation.
• BOC argued the documents were privileged because the investigation was conducted in
response to the demand letter “with the expectation” that U.S. counsel would ultimately use
the documents to provide legal advice.
Holding: BOC was ordered to produce the documents created during the investigation.
• The attorney-client privilege did not attach merely because BOC planned later to turn the
documents over to a U.S.-based attorney; BOC could not establish the documents were created
at the direction of counsel for the purpose of providing legal advice.
• The work product protection did not apply because BOC could not show that the materials
were prepared “because of” its anticipation of litigation. For protection to apply, party
asserting it must show that material at issue would not have been created in essentially similar
form had no possibility of litigation existed.
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Maximizing Privilege Protections During
Internal Investigations: Tips
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Establish protocols and procedures as early as possible – ideally, before the investigation
begins – to ensure privilege is preserved and work product protection is triggered.
The Basics:
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Mark written materials confidential, attorney-client privileged, and prepared at the direction
of counsel.
Limit the circulation of attorney-client or work product material.
Ensure those who will be conducting investigation understand how to give proper Upjohn
warnings.
Document and communicate the legal purpose of the investigation as often as possible.
Put protocols in place to ensure any potential wrongful conduct is escalated to the legal
department as early as possible.
Involve U.S. counsel in internal investigations that may have consequences in the U.S.
As a best practice, engage U.S. outside counsel.
Ensure attorney direction and oversight at all stages of the investigation.
Differentiate the investigation from standard procedures per company policy.
Understand and solicit advice regarding the privilege laws in any non-U.S. jurisdiction
relevant to the investigation.
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Privilege Considerations When Dealing
With The Government: The Dilemma
To disclose or not to disclose privileged information
or work product?
Important Considerations
• Disclosure of facts vs. privileged material.
• Likelihood that selective waiver doctrine will apply.
• Potential benefits:
• Prevent prosecution entirely.
• Maximize cooperation credit.
• Potential pitfalls:
• Government pursues case anyway and disclosed material helps
agency build its case.
• Impact of waiver on subsequent litigations concerning same
subject matter.
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Privilege Considerations When Dealing
With The Government: Tips
• Assume any disclosure of privileged material to the government
is effectively full disclosure to any subsequent litigant.
• Clearly identify and segregate purely factual matter from
attorney-client and work product material.
• Consider presenting factual findings in an oral attorney proffer.
• Even though the trend is to disfavor selective waiver, you can
still increase your chances of its application by:
– Establishing a record showing the purpose of conducting the
internal investigation is to receive legal advice.
– Negotiating an express confidentiality and non-waiver agreement
with the government agency requesting the documents.
• If you do end up in ancillary litigation, be generous with
producing non-privileged documents.
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These materials have been prepared by Baker & Hostetler LLP for informational purposes only and are not legal advice. The information is not intended to create, and receipt of it does not constitute,
a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. You should consult a lawyer for individual advice regarding your own situation.