DELVACCA Presents
Contracts & Commercial Law CLE Institute:
Corporate Governance Programs for Reporting Concerns —
What Companies are Doing
September 14, 2010
The Union League of Philadelphia
DELVACCA thanks Thorp Reed & Armstrong for their generous sponsorship of this event
One Commerce Square
2005 Market Street, Suite 1000
Philadelphia, PA 19103
215 640 8500
215 640 8501 Fax
www.thorpreed.com
Foreign Corrupt Practices Act
(FCPA)
15 U.S.C.A. § 78dd-1 et seq.
Lourdes Sanchez Ridge, Esq.
412 394 2462
lridge@thorpreed.com
Foreign Corrupt
Practices Act
Bribing a foreign official for the
purpose of obtaining and retaining
business and/or inaccurately
representing the bribe in the books
is PROHIBITED!
3
Today’s Focus
1. Why should Corporate Counsel be
concerned?
2. What conduct Violates the FCPA?
3. How to Avoid Liability?
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Trend in
Enforcement
1. Increase in prosecution of individuals (jail time)
2. Focus on small to midsize companies
3. Increase in hiring enforcement personnel
4. Increase in amount recovered in penalties
5. Multi-jurisdictional prosecutions
6. Increase in forfeitures/disgorgement
7. Implementation of aggressive prosecution tools
(undercover sting operations, wiretapping, confidential
informants)
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Trend in
Enforcement
(Cont’d.)
8.
Novel charging statutes (i.e. Travel Act, Money Laundering,
Conspiracy)
9.
Increase in prosecutions of foreign entities and individuals
10. Focus on particular industries (i.e., extraction industry,
pharma and medical device)
11. Increase in prosecutions of foreign individuals under a
conspiracy theory
12. Novel use of non-prosecution and deferred-prosecution
agreements by the SEC
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Consequences of
Violating the FCPA
FCPA Jurisdiction
SEC
 Public companies and individuals
DOJ
 Individuals, private and public companies
• Domestic
• Overseas – if corrupt payment touches US territory
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Consequences of
Violating the FCPA
CRIMINAL PENALTIES
• Violation of Books & Records Provision
 By a corporation – up to $25,000,000
 By an individual – up to $5,000,000
20 years in jail
• Violation of Anti-Bribery Provision
 By a corporation – up to $2,000,000
 By an individual – up to $100,000
5 years in jail
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Consequences of
Violating the FCPA
(Cont’d.)
CIVIL PENALTIES
$10,000 for individuals and corporations
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Other
Consequences
• Reputational damage
• Expensive compliance monitor
• Loss of business with federal government
• Loss of eligibility for export licenses
• Suspension or debarment from governmental agency
programs, i.e. Medicare, SEC
• Securities fraud, derivative and/or RICO actions
• Loss of research grant
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What Conduct Violates the FCPA?
FCPA Anti-Bribery
Provision
It shall be unlawful to make use of mails or other
means . . . corruptly in furtherance of an offer,
payment, promise to pay or authorization of a
payment . . . of anything of value to a foreign
official . . . for the purposes of obtaining or
retaining business or other unfair advantage
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What the FCPA
Prohibits: Payments,
Offers, Promises or
Authorizations to Pay
• Actual payment is not necessary
• Direct or indirect payment to a government
official
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Anything of Value
• Anything of benefit to the recipient
• No minimum amount
• Intangible items (e.g. enhanced reputation or prestige)
Exception:
• If item is given in good faith and directly relates to the
reasonable promotion, demonstration or explanation of
your services or products
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Examples of
Items of Value:
• Dow Chemical
– Less than $100 payments found to violate FCPA
• Monsanto Company
– Building a house for an official’s wife violates the FCPA
• Syncor de Mexico
– Granting personal loans to state employed physicians
without expectation of payment
– Paying physician’s personal expenses
– Paying for physician’s office equipment, software and
furniture
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Examples of
Items of Value:
Gifts
• For purposes of good will
• Promotional gifts – a mug with company logo
• Hospitality gifts
• Not in the form of money
• Nominal value
• Permitted under local customs or laws
• Given with transparency in the presence of others
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Foreign Official
“Foreign Official” – any officer or employee of:
• Foreign government or department, agency or
instrumentality
• Foreign “government-controlled” enterprise
• Public international organization – (Red Cross, World
Bank, United Nations, etc.)
• Foreign political party or candidate for political party
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To Affect Any Act or
Influence a Decision
• to obtain business
• to retain business
• to obtain access to decision maker
• to gain an unfair advantage
• to make ordinary business processes less onerous
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Books & Records
Provision
• Inaccurate reflection of transactions
• “Red Flags”
• Commissions
• Consulting Fee
• “Miscellaneous” and “others”
• Marketing
• Petty Cash
• Refunds or Rebates
• Travel and Entertainment
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Scienter
1. DOJ – Criminal
a) Knowing
b) Willful blindness – “high probability that an illicit
payment will be made to a third party”
2. SEC – Civil
Strict Liability
a) Foreign subsidiary
b) Officers of parent company are strictly liable for acts
committed by foreign subsidiary or third party
c) Acquiring company is liable for acts committed by the
acquired company prior to the acquisition
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How to Avoid
Liability
1. Compliance Program
2. Due Diligence
3. Opinion Letter from Department of Justice
4. Opinion Letter from counsel in foreign country
5. Reasonable Fees – must be justified
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Compliance
Program
1. “Thou shall not pay bribes”
2. Establish a culture that demands ethical conduct
3. Communicate and educate standards to all employees
4. Monitor the Compliance Program
5. Audit
6. Enforce
7. Implement Reporting Methods
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Due Diligence
Third-Party
Affiliates
Your company is responsible for illicit acts committed by:
•
•
•
•
•
•
•
•
representatives
consultants
agents
sponsors
joint ventures
partners
intermediaries
sales representatives
• law firms
• accounting firms
• lobbying firms
• public relations firms
• vendors
• distributors
• others who transact on
your behalf
• subsidiaries
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Hiring Third-Party
Affiliate
• Due diligence is required on Third-Party’s:
1. reputation
2. ownership
3. financial soundness
4. professional capabilities
5. trustworthiness
6. prior criminal record
7. prior compliance with anti-bribery laws
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Due Diligence
Steps
To investigate Third-Party Affiliate’s Reputation contact:
– Community organizations such as: Chambers of
Commerce and Better Business Bureaus
– U.S. Embassies and Consulates
– U.S. Department of Commerce International Trade
Administration http://trade.gov/cs/index.asp
– International Company Profiles –
www.export.gov/salesandmarketing/ICP.asp
– Dun & Bradstreet
– or hire specialized firms
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Hiring Third Party
Affiliates
1. Questionnaire completed by company must contain:
a) description of necessity of hiring third party
b) description of expertise of third party
c) approval of hiring third party by Compliance Officer
2. Questionnaire completed by third party should contain
detailed questions capable of revealing whether third party is:
a) legitimate
b) has any affiliations with foreign officials
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Hiring Third Party
Affiliates
(Cont’d.)
3. Investigation of third party
4. Certifications
5. Contractual provisions
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Red Flags – Third
Parties (Cont’d.)
• No office or staff (potential shell company)
• Lack of required expertise
• Insistence on unconventional contractual procedures,
i.e., payment in cash or bearer instruments, payments
sent to an unrelated country
• Insistence on receiving unusually high commission or
excessive line of credit
• Insistence on being paid in advance
• Insistence by a Government official that a particular third
party be hired
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Voluntary Disclosures of Violations of the
International Trading Rules
John P. Donohue, Esq.
215 640 8528
jdonohue@thorpreed.com
The Overriding
Question
• Do I advise the client to voluntarily disclose a violation of
criminal law?
– Factors to consider
• What is the likelihood of the offense being detected?
• What is the likelihood of short or long term incarceration of
members of management?
• What is the effect of disclosure on the organization?
• Does the application of other laws require disclosure (e.g.
SEC laws)?
• Is the corporation an alter ego of management?
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Relevant Agencies
of Government
• Bureau of Customs and Border Protection - within the
Department of Homeland Security
• Office of Foreign Assets Control – within the Department of
Treasury (trade to embargoed countries)
• Directorate of Defense Trade Controls - within the Department
of State (Munitions Control List)
• Bureau of Industry and Security - within the Department of
Commerce (Export Administration Regulations)
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When the Decision is
Made to Disclose
Violations of the
Trade Laws
• What is my maximum exposure?
– Criminal prosecution
– Denial of export privileges
– Fine
– Understanding maximum exposure
– The Pentax case
– The antidumping cases
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What Are the
Benefits of a
Voluntary
Disclosure?
• Minimize the likelihood of a criminal prosecution
• Control the destiny and outcome of the case
• Minimize the likelihood of loss of export privileges
(suspended denial of export privileges)
• Minimize the amount of any fine imposed
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What Are the
Pecuniary Benefits
of a Voluntary
Disclosure?
• Customs – Benefits of disclosure are statutory - 19 USC
§ 1592(c)(4)
• OFAC – Benefits are regulatory – See, OFAC Matrix,
Materials, page 10
• BIS and DDTC – “Great Weight” standard, but agencies
reserve the right to apply their own criteria on a case by
case basis
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Will the Agency Agree
that My Disclosure is
“Voluntary”?
• What are the tests for the timing of a voluntary
disclosure?
– Customs - Disclosure must be made “before or without
the knowledge of the commencement of an investigation”
• 19 USC § 1592(c)(4); Materials, pages 5-6
– OFAC – Disclosure must be made before any other
federal, state or local government agency or official
discovers the violation
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Will the Agency Agree
that My Disclosure is
“Voluntary”?
(Cont’d.)
• DDTC – Before the Department of State or any other
agency or bureau of the U.S. Government obtains
substantially similar knowledge AND commences an
investigation
• BIS – Before the OEE or any other agency of the U.S.
Government has learned the substantially similar facts
AND commences an investigation
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Suppose You Lack
All the Facts?
• All agencies allow for “initial notification” - See, e.g. 19
CFR Part 162.74(b)(4)
• All four agencies provide that disclosure is valid as of the
date of the “initial notification” letter
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To Whom Is the
Disclosure Made?
• For Customs matters:
– to the Commissioner of Customs through the port of entry
• For BIS matters:
– to the Director, Office of Export Compliance, with copy to
OEE Office at the port of export
• For OFAC and Directorate of Defense Trade Controls
matters:
– at Washington, D.C. Headquarters
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Agency Disclosure
in Multiple Agency
Cases
• X Corp. exports military equipment to Iran. Disclosure is made
to both OFAC (with jurisdiction over trade with Iran) and
DDTC (with jurisdiction of the trade of goods under the U.S.
Munitions list)
• Y Corp. imports medical devices mismarked with country of
origin. Disclosure is made to Customs only and Customs will
confer with FDA in assessment of penalty
• At all times negotiate the “global settlement.” Agencies will
expect one disclosure to resolve all Agency issues
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What Is Disclosed
• Customs –
– Material violations of law (but note Customs will consider
even statistical errors material omissions of information)
– Description of the merchandise involved
– Entry number, port of entry and dates of entry
– All material false statements or omissions made
– The true and correct information
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What Is Disclosed
(Cont’d.)
• Office of Foreign Assets Control
– A report in sufficient detail to afford a complete
understanding of an apparent violation, and should be
followed up by responsiveness to any follow up inquiries
• Directorate of Defense Trade Controls
– description of the violation
– statement of facts and circumstances surrounding the
violation
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What Is Disclosed (Cont’d.)
• Directorate of Defense Trade Controls (cont’d.)
– identities of all persons, domestic and foreign, involved in
the violation
– the export license numbers, if applicable
– description of the merchandise involved
– description of the corrective action taken
– names and addresses of the disclosing officials
– information and belief certification as to the truthfulness of
the information submitted
– all relevant documents, commercial, governmental and
corporate
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What Is Disclosed
(Cont’d.)
• BIS
– the results of a five year review of exports
– the violation involved
– explanation of how and when the violation occurred
– identities of all persons involved
– list of all license numbers involved
– list of the merchandise involved
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What Is
Disclosed (Cont’d.)
• BIS (cont’d.)
– statement of the value of the merchandise, in U.S. dollars
– statement of the ECCN numbers by which the exported
goods were classified
– list of mitigating circumstances
– commercial, corporate, and governmental documents
relevant
– information and belief certification of an authorized official
that the statements in the disclosure are truthful
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Mitigating Factors
in Compromising
Penalties
• Customs
– Cooperation with the Agency
– Contributory governmental error
– Remedial action
– Inexperience in importing
– Prior good record
– Inability to pay
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Factors in
Compromising
Penalties
• Export Agencies
– Was the act willful, intentional or reckless
– Inability to pay
– Is a compliance program in place
– Participation by senior management
– Was this an isolated act or part of a larger pattern of
conduct
– Was there actual or constructive notice to the offender of
possible violation
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Factors in
Compromising
Penalties (Cont’d.)
– Did the conduct harm or impair the larger objectives of the
program
– If goods were exported without a license, would a license
have been granted if applied for
– Did the parties cooperate with the government
– How long were the sanctions in place at the time of the
offense disclosed
– Have there been other enforcement proceedings by OFAC
or other agencies
– Will the imposition of a harsh penalty have a deterrent
effect
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Aggravating Factors
in the Resolution of
an Enforcement
Proceeding
– Concealment of the violation
– Disclosing party evidenced a disregard for the program
– Conduct adversely affected the program for which
licensing was established or for which specific harm was
identified (Toshiba Machinery case)
– Quantity, value and number of shipments were all high
– Complained of facts were also in violation of other Agency
laws
– Prior history of violations
– Lack of a compliance program in place
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