Title: Foreign Corrupt Practices Act (FCPA) 15 U.S.C.A. § 78dd-1 et seq.
1DELVACCA 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
2Foreign Corrupt Practices Act(FCPA)15 U.S.C.A.
78dd-1 et seq.
Lourdes Sanchez Ridge, Esq. 412 394
2462 lridge_at_thorpreed.com
3Foreign 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!
4Todays Focus
- Why should Corporate Counsel be concerned?
- What conduct Violates the FCPA?
- How to Avoid Liability?
5Trend in Enforcement
- Increase in prosecution of individuals (jail
time) - Focus on small to midsize companies
- Increase in hiring enforcement personnel
- Increase in amount recovered in penalties
- Multi-jurisdictional prosecutions
- Increase in forfeitures/disgorgement
- Implementation of aggressive prosecution tools
(undercover sting operations, wiretapping,
confidential informants)
6Trend in Enforcement(Contd.)
- Novel charging statutes (i.e. Travel Act, Money
Laundering, Conspiracy) - Increase in prosecutions of foreign entities and
individuals - Focus on particular industries (i.e., extraction
industry, pharma and medical device) - Increase in prosecutions of foreign individuals
under a conspiracy theory - Novel use of non-prosecution and
deferred-prosecution agreements by the SEC
7Consequences ofViolating the FCPA
8FCPA - Jurisdiction
- SEC
- Public companies and individuals
- DOJ
- Individuals, private and public companies
- Domestic
- Overseas if corrupt payment touches US
territory
9Consequences 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
10Consequences of Violating the FCPA (Contd.)
- CIVIL PENALTIES
- 10,000 for individuals and corporations
11Other 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
12What Conduct Violates the FCPA?
13FCPA 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
14What the FCPA Prohibits Payments, Offers,
Promises or Authorizations to Pay
- Actual payment is not necessary
- Direct or indirect payment to a government
official
15Anything 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
16Examples of Items of Value
- Dow Chemical
- Less than 100 payments found to violate FCPA
- Monsanto Company
- Building a house for an officials wife violates
the FCPA - Syncor de Mexico
- Granting personal loans to state employed
physicians without expectation of payment - Paying physicians personal expenses
- Paying for physicians office equipment, software
and furniture
17Examples 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
18Foreign 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
19To 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
20Books Records Provision
- Inaccurate reflection of transactions
- Red Flags
- Commissions
- Consulting Fee
- Miscellaneous and others
- Marketing
- Petty Cash
- Refunds or Rebates
- Travel and Entertainment
21Scienter
- DOJ Criminal
- Knowing
- Willful blindness high probability that an
illicit payment will be made to a third party - SEC Civil
- Strict Liability
- Foreign subsidiary
- Officers of parent company are strictly liable
for acts committed by foreign subsidiary or third
party - Acquiring company is liable for acts committed by
the acquired company prior to the acquisition
22How to Avoid Liability
- Compliance Program
- Due Diligence
- Opinion Letter from Department of Justice
- Opinion Letter from counsel in foreign country
- Reasonable Fees must be justified
23Compliance Program
- Thou shall not pay bribes
- Establish a culture that demands ethical conduct
- Communicate and educate standards to all
employees - Monitor the Compliance Program
- Audit
- Enforce
- Implement Reporting Methods
24Due Diligence
25Third-Party Affiliates
Your company is responsible for illicit acts
committed by
- law firms
- accounting firms
- lobbying firms
- public relations firms
- vendors
- distributors
- others who transact on your behalf
- subsidiaries
- representatives
- consultants
- agents
- sponsors
- joint ventures
- partners
- intermediaries
- sales representatives
26Hiring Third-Party Affiliate
- Due diligence is required on Third-Partys
- reputation
- ownership
- financial soundness
- professional capabilities
- trustworthiness
- prior criminal record
- prior compliance with anti-bribery laws
27Due Diligence Steps
- To investigate Third-Party Affiliates 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/sa
lesandmarketing/ICP.asp - Dun Bradstreet
- or hire specialized firms
28Hiring Third Party Affiliates
- Questionnaire completed by company must contain
- description of necessity of hiring third party
- description of expertise of third party
- approval of hiring third party by Compliance
Officer - Questionnaire completed by third party should
containdetailed questions capable of revealing
whether third party is - legitimate
- has any affiliations with foreign officials
29Hiring Third Party Affiliates(Contd.)
- Investigation of third party
- Certifications
- Contractual provisions
30Red Flags Third Parties (Contd.)
- 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
31Voluntary Disclosures of Violations of the
International Trading Rules
John P. Donohue, Esq. 215 640 8528 jdonohue_at_thorpr
eed.com
32The 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?
33Relevant 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)
34When 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
35What 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
36What 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
37Will 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
38Will the Agency Agree that My Disclosure is
Voluntary?(Contd.)
- 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
39Suppose 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
40To 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
41Agency 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
42What 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
43What Is Disclosed (Contd.)
- 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
44What Is Disclosed (Contd.)
- Directorate of Defense Trade Controls (contd.)
- 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
45What Is Disclosed (Contd.)
- 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
46What Is Disclosed (Contd.)
- BIS (contd.)
- 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
47Mitigating Factors in Compromising Penalties
- Customs
- Cooperation with the Agency
- Contributory governmental error
- Remedial action
- Inexperience in importing
- Prior good record
- Inability to pay
48Factors 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
49Factors in Compromising Penalties (Contd.)
- 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
50Aggravating 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