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FCPA
A Practitioner’s Perspective
A Journey To Compliance
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Introduction
• Objectives
– Overview of the FCPA
– Elements of an effective FCPA compliance program
– Analysis of U.S. v. Kay
– Expanding scope of the FCPA
– Practical effects of Kay
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Overview Of The FCPA
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Overview Of The FCPA
• Antibribery provisions of the Act prohibit payment or offer of payment by a
covered person or intermediary to a foreign official to improperly act or
influence an act that will obtain or retain business for the payor or any person
• Accounting provisions require issuers to:
– Maintain books and records that accurately reflect transactions and
dispositions of assets
– Devise and maintain reasonable internal accounting controls to prevent and
detect FCPA violations
• FCPA is enforced by DOJ and SEC
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Is There A Safe Harbor For
FCPA Compliance?
• No “safe harbor” but maybe a “calm inlet”
– Federal Sentencing Guidelines for Organizations 1987
• SEC has endorsed the guidelines
• DOJ has made it clear that it will use the guidelines to
– Determine recommendations for leniency
- OR – ALLOW A POTENTIAL DEFENDANT COMPANY TO AVOID
PROSECTUION ALL TOGETHER
http://www.ussc.gov/2007guid/8b2_1.html
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Is There A Safe Harbor For
FCPA Compliance?
• “To have an effective compliance and ethics program …. An organization
shall:
– Exercise due diligence to prevent and detect criminal conduct; and
– Otherwise promote an organizational culture that encourages ethical
conduct and a commitment to compliance with the law.”
http://www.ussc.gov/2007guid/8b2_1.html
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Elements Of An Effective FCPA Program
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Compliance Program Ownership
• Organization's governing authority (Board of Directors) must:
– Be aware of the content and operation of the program
– Exercise oversight of implementation and effectiveness
• High level personnel must:
– Ensure the organization has a program
– Assign specific individuals to oversee the program
– Assign specific high level individuals to have overall responsibility for the
program
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Major Elements Of An FCPA
Compliance Program
• Written standards and procedures
• Due diligence
• Training and communication
• Management
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Written Standards & Procedures
• Expectations of Ethical Conduct
– Employees
– Third parties
• How to engage
– Automated intake process (web based) cuts cycle time and provides better initial
information
– Centralized decision making for high risk agents
– Inform third parties of expectations early in the process
• How to administer
– Who has responsibility for what portions of the policy
– Periodic reports and certifications
• Red Flags
– Lay Person’s Guide to the FCPA
– List potential red flags and how to handle each (Relation to decision maker, requests
by customer, cash advances, unusual payment terms, etc.)
• Should take a risk based approach
– Reasonable action is the standard set forth in the Guidelines
– Credible
http://www.justice.gov/criminal/fraud/docs/dojdocb.html
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Due Diligence
• Conscious disregard or willful ignorance of the act is not a defense
• “The organization shall use reasonable efforts not to include within the substantial
authority personnel of the organization any individual whom the organization knew, or
should have known through the exercise of due diligence, has engaged in illegal
activities or other conduct inconsistent with an effective compliance and ethics
program.”
– On employees - HR Function
– On all “danger” partners
• Agents
• Distributors
• JV Partners/Acquisitions
• Reps
• Risk Based Approach
– Vary due diligence based on risk
• Use of third party due diligence
– Avoid conflict of interest with field sponsors
– Consistency of work product and professionalism
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Training & Communication
• Management, not compliance personnel, is ultimately responsible for
the program
• “Sell” the program
– Board of Directors
– Senior management
– Line personnel
– Third parties prior to engagement
– Periodic reinforcement
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Training & Communication
• Five-part business analysis to demystify the relationship
– Information gathering
– Due diligence
– Decision making
– Contracting
– Management
• Not a “tick in the box”
• In person if possible
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Management
• Monitoring, Auditing, Investigating, and Consequences
• We can no longer draft a policy and put it in a drawer-SOX
• Monitor and manage on a continuous basis
• Internal audit on a regular basis
– Feedback up the chain with action as needed (systemic/individual)
• Third parties for investigations (Red Flag/Violations)
– Professional
– Consistency of work product
• Reporting structure (for suspected violations)
– Open door
– Anonymous if possible
• Real and consistent consequences for non compliance
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Analysis of United States v. Kay
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United States v. Kay
• American Rice Inc through Haitian subsidiary, Rice Corp of Haiti, imported
rice to Haiti
• Between 1995 – 1999, payments to officials to lower sales tax and reduce
customs duties were an expected part of doing business
• Rice Corp of Haiti made such payments, authorized by Douglas Murphy,
President of ARI and David Kay, VP for Caribbean Sales
• During an unrelated transaction, outside counsel discovered the practice
• The company self reported and settled. Kay and Murphy were charged with
violations of the antibribery provisions. At trial, they moved that their conduct
was not a violation of the FCPA because the bribes were not for the purpose
of “obtaining or retaining business”. The trial court agreed and dismissed the
indictment. United States v. Kay, 200 F. Supp. 2d 681 (S.D. Tex. 2002)
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United States v. Kay
• Government appealed to 5th Circuit, who overturned the ruling and held that the bribes
could be a violation of the Act if they ultimately gave the payor an unfair business
advantage in the marketplace. Court concluded the statute was ambiguous as a
matter of law. Court then analyzed the SEC report that precipitated the Act as well as
the legislative history and determined not all bribes to foreign officials were covered
• Congress legislated the grease payment exception and affirmative defenses.
• Based on legislative history, the Court held that if a bribe gave an unfair advantage e.g.
lower taxes to make an unprofitable contract profitable, to stay in or improve one’s
position in the marketplace, then there was a business nexus and the bribe was within
the statute. United States v. Kay, 359 F.3d 738 (5th Cir. 2004)
• On remand to District Court. Kay and Murphy were convicted and sentenced to 37 and
63 months respectively
• Kay and Murphy appealed on other grounds. 5th Circuit denied appeal. United States
v. Kay, 513 F.3d 432 (5th Cir. 2007), reh’g en banc denied, 513 F.3d 461 (5th Cir. 2008)
• Their Petition for a Writ of Certiorari was denied by the Supreme Court. 129 S.Ct. 42
(2008), reh’g denied, 2008 WL 5046518 (December 1, 2008)
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Universe Of Bribes
All Bribes
•
•
•
•
Non FCPA Bribes to Foreign Officials
Permitted by law
Reasonable payments for business-connected travel expenses
Grease payments
Purely private
Pre-Kay FCPA Settlements
•
•
•
•
Refunds of previous tax payments
Changes to law re: land development
Reduction in general tax obligations
Clearing illegally imported goods
Forbidden By Kay
• Aid payor in gaining an unfair advantage or to
obtain or retain business
•Reduction of customs and of sales tax liability
FCPA Language
• Used to directly obtain or retain business
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Expanding Scope Of The FCPA
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What Do We Do About The Gray
Area?
• Government has taken an expansive view of scope even before Kay
• By expanding the scope of the FCPA beyond a literal reading of “obtain or
retain business” the Kay Court has given judicial support to the
government position
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SEC v. Delta & Pine Land Co.
• In July 2007, the SEC issued a Cease & Desist Order against Delta & Pine Land Co., a
US-domiciled public company and its subsidiary, Turk Deltapine, stating that, between
2001-2006, Turk Deltapine made payments valued at approximately $43,000 to
multiple officials of the Turkish Ministry of Agricultural and Rural Affairs. These
payments made is cash, kind, and reimbursement of expenses, were made in order to
obtain false governmental inspection reports and irregular quality certificates that were
necessary for Turk Deltapine to operate its business in Turkey. These payments were
made both directly and through an intermediary and continued even after being
discovered by Delta Pine & Land Co.. The books of Turk Deltapine and Delta & Pine
Land Co. did not accurately reflect these payments. The Order state that there was
time sensitivity with regard to the inspections and quality certificates but did not make a
“but for” analysis. Nevertheless, the Order stated and Delta & Pine and Turk Delta did
not object as part of the Cease & Desist Order, that Delta & Pine and Turk Delta
violated the antibribery provisions of the FCPA, as well as the books and records and
internal controls provisions. Delta & Pine and Turk Delta settled a related civil action
based on the same facts and agreed to a $300,000 civil penalty.
No. 07-cv-01352 (D.D.C. filed July 25, 2007); In the Matter of Delta & Pine Land Co., SEC Admin. Proceeding File No. 3-12712,
Cease & Desist Order at 3 (July 26, 2007): http://www.sec.gov/litigation/admin/2007/34-56138.pdf
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The Matter Of Bristow Group, Inc.
• In September 2007, the SEC issued a Cease & Desist Order against Bristow Group
Inc., a US-domiciled public company, stating that its wholly owned subsidiary, AirLog
International, Ltd., through its Nigerian affiliate, Pan African Airlines Nigeria Ltd. made
improper payments during 2003 and 2004 to Nigerian State officials in order to
influence them to improperly reduce the amount of expatriate employment taxes to the
respective Nigerian States. These amounts were not properly recorded in AirLog's
books and records and accordingly not properly recorded in Bristow’s books and
records. An annual assessment was made based upon deemed salaries of expatriates.
The affiliate then negotiated the State officials to lowered the assessed amounts. The
assessed amounts were lowered and a separate negotiated cash amount was
forwarded to the State official. Upon payment State receipts were issued only reflecting
the amount payable to the State government. A new CEO of Bristow discovered the
payments, ordered and internal investigation and self reported. Without analysis the
Order stated and Bristow did not object as part of the Cease & Desist Order, that
Barstow violated the antibribery provisions of the FCPA, as well as the books and
records and internal controls provisions.
• SEC Admin. Proceeding File No. 3-12833, Cease & Desist Order at 3 (Sept. 26, 2007), available at
http://www.sec.gov/litigation/admin/2007/34-56533.pdf; Press Release,
• SED Institutes Settled Enforcement Action Against Bristow Group for Improper Payment to Nigerian Officials and Other Violations
(Sept. 26, 2007) available at http://www.sec.gov/news/press/2007/2007-201.htm
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The Matter Of BJ Services Co.
• In March 2004, the SEC issued a Cease & Desist Order against BJ Services
Company, a US-domiciled public company, stating that BJ Services, through
its wholly owned subsidiary B.J. Services, S.A. made illegal or questionable
payments, totaling approximately 72,000 pesos to Argentinean customs
officials to improperly obtain customs clearance for equipment that had been
improperly or illegally imported into Argentina. The payment was not
accurately recorded in the books of the BJ Services group. Without analysis
the SEC stated and BJ Services did not object as part of the Cease & Desist
Order, that BJ Services violated the antibribery provisions of the FCPA, as
well as the books and records and internal controls provisions.
Proceeding File No. 3-11427, Cease & Desist Order (Mar. 10. 2004) available at http://www.sec.gov/litigation/admin/34-49390.htm
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SEC v. Monsanto Company
• On January 6, 2005, the Commission filed two settled enforcement
proceedings charging Monsanto Company, a US-domiciled public company,
with making illicit payments in violation of the FCPA. First, the Commission
filed a lawsuit in the United States District Court for the District of Columbia
charging Monsanto with violating the FCPA and seeking a civil penalty.
Second, the Commission issued an administrative order finding that
Monsanto violated the anti-bribery, books-and-records, and internal-controls
provisions of the FCPA. The facts alleged were that in 2002, an official of
Monsanto authorized an intermediary to pay a bribe to an Indonesian official
to influence him to repeal an decree requiring an environmental impact study
before Monsanto authorizing cultivation of genetically modified crops.
Although the payment was made, the unfavorable decree was not repealed.
No. 1:05CV00014 (U.S.D.C., D.D.C) (filed January 6, 2005) available at http://www.justice.gov/opa/pr/2005/January/05_crm_008.htm
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United States v. Vetco Gray
Controls, Inc.
• On February 7, 2007, Vetco Gray Controls Inc., Vetco Gray Controls Ltd., and
Vetco Gray UK Ltd., wholly owned subsidiaries of Vetco International Ltd.,
pleaded guilty to violating the anti-bribery provisions of the FCPA. The plea
included the admission that from at least September 2002 to at least April
2005, each of the defendants engaged the services of a major international
freight forwarding and customs clearing company and, collectively, authorized
that agent to make at least 378 corrupt payments totaling approximately $2.1
million to Nigerian Customs Service officials to induce those officials to
disregard their official duties with respect to goods that were either improperly
imported into Nigeria, improperly documented or otherwise not in accordance
with Nigerian customs laws. The effect was to give the defendants
preferential customs treatment.
No. 07-cr-004 (S.D. Tex. filed Jan. 5, 2007).
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Universe Of Bribes
All Bribes
•
•
•
•
Non FCPA Bribes to Foreign Officials
Permitted by law
Reasonable payments for business-connected travel expenses
Grease payments
Purely private
•
•
•
•
Pre-Kay FCPA Settlements
Refunds of previous tax payments
Changes to law re: land development
Reduction in general tax obligations
Clearing illegally imported goods
Post-Kay
• Reduction in employment taxes
• Customs clearance on illegally • Repeal of a requirement to perform
or improperly imported goods
environmental impact study
• Obtaining false government
• Preferential customs treatment
inspection reports
Forbidden By Kay
•Reduction of customs and of sales tax liability
• Aid payor in gaining an unfair advantage or to obtain or retain
business
FCPA Language
• Used to directly obtain or
retain business
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Universe Of Bribes
• Where do these fall?
– Foreign type certificates
– Zoning variations for a new office building
– Reduction in real estate taxes
All Bribes
Non FCPA Bribes to Foreign Officials
Pre-Kay Settlements
Post-Kay
Forbidden By Kay
FCPA Language
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Trap For The Unwary:
Books And Records
• SEC v. BellSouth Corp
– Encourage the repeal; or amendment of national regulations limiting foreign
investments
• In the Matter of Baker Hughes Inc.
– Reduction on general tax obligations
• United States v. Halford: No. 01-cr-00221-SOW-1 (W.D. Mo. filed Aug. 3,
2001)
• United States v. Reitz: No. 01-cr-00222-SOW-1 (W.D. Mo. filed Aug. 3, 2001)
• United States v. King: No. 01-cr-0190-DW (W.D. Mo. filed June 27, 2001)
– Beneficial changes to laws and regulations relating to land development
No. 02-cv-00113-ODE (N.D. Ga. filed Jan. 15, 2002), available at http://www.sec.gov/litigation/litreleases/lr17310.htm
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Trap For The Unwary:
Books And Records
• In the Matter of Dow Chemical Company
– Expedited government registration certifications required by law to produce,
warehouse, or market products in the country
SEC Admin. Proceeding File No. 3-12567, Cease & Desist Order (Feb. 13. 2007) available at
http://www.sec.gov/litigation/admin/2007/34-55281.pdf
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Practical Effects of Kay
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Practical Effects Of Kay
• Effect on Practitioner
– Training for new areas of the corporation
– A broader view would also include functional areas such as supply chain,
program management, real estate and corporate
– Due diligence on virtually every entity working on behalf of the corporation
that may interface with any level of foreign government
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Practical Effects Of Kay
• If type certification of a new product is required for import to a foreign market,
does a bribe to a foreign official have enough business nexus to be a
violation?
• Does a bribe for a permit or a zoning variation for a new office space come
within the business nexus rule?
• Does your entity want to be the test case for one of these questions?
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Additional Information
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Additional Resources
• The FCPA Blog
– http://fcpablog.squarespace.com
• Richard L. Cassin, and Cassin Law LLC
• FCPA Professor
– http://fcpaprofessor.blogspot.com
• Mike Koehler, Assistant Professor of Business Law, Butler University
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MICHAEL C. OSAJDA
ATTORNEY AT LAW
ETHCS CONSULTANT
BUSINESS CONSULTANT
MOBILE: 224-628-4708
MIKE@OSAJDA.COM
WWW.OSAJDA.COM
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www.world-check.com
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