11/18/2009 Meeting - FCPA

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November 18, 2009

Mountain View, CA

ACFE San Jose Chapter Meeting

The Foreign Corrupt Practices Act: What You Don’t Know Could Hurt You

1© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.6

Introduction

Susan S. Muck, Partner in the Litigation Group of Fenwick & West LLP.

Guido Van Drunen, Managing Director at KPMG LLP.


Agenda

FCPA Background

Elements of the FCPA

Case Examples

Red Flags

Investigations

Compliance

Conclusions


Background: The Birth of the FCPA

•Revelations in the 1970s that many U.S. companies had bribed foreign government officials

− 450 public companies

− Questionable foreign payments exceeding $400 million

− 117 Fortune 500 companies

− Gulf Oil, General Tire & Rubber, Exxon, Occidental Petroleum, Lockheed, Bell Helicopter

•Facilitated by improper accounting practices− Records that failed to record transactions

− Records that concealed relevant information

•Falsified records− FCPA passed and signed on December 19, 1977


Background: Ethical Standards

•Gate-keepers must be committed to enforcing and promoting high standards of ethical business conduct and compliance with all applicable laws, rules and regulations

•Bribery and other improper business practices are unethical, may result in materially false financials, may misrepresent a company’s financial performance, and violate the laws in the U.S. and internationally

•US companies doing business outside of the US –including employees and agents wherever located – are required to comply with U.S. and other nations’ anti-corruption laws


Background: Liability

•Corporation may be criminally liable for actions of its employees and agents

•Corporation may be liable for the collective actions and intent of its employees

•Corporate policies prohibiting criminal conduct do not insulate the corporation from prosecution

•Corporations may be sued by shareholders or others for engaging in corruption and securities fraud

•Defendants in bribery cases are often not entitled to indemnity or insurance


Background: Costs of Corruption

•Penalties include imprisonment, potential limitations on business such as suspension or debarment, disgorgement, civil penalties, shareholder litigation, corporate governance reforms, monitors, and loss of strategic opportunities and business partners

•Penalties can be severe:− Individuals: Five years imprisonment/$100,000 per count of

bribery− Corporate fines: $2,000,000 per count of bribery − Or, double the benefit obtained from the corrupt payment− Or, can be a predicate offense for RICO prosecution which

provides for forfeiture •The cost of investigating potential violations may exceed the penalties themselves


Background: Regulatory Enforcement

•Recent increase in the number of cases

•Increase in US regulatory resources

•Increase in international statutes and requirements

•Limited number of international prosecutions, but growing

•Potential for duplicative US and foreign enforcement and penalties


Agenda

FCPA Background


Case Examples

Red Flags

Investigations

Compliance

Conclusions



The FCPA has three key provisions:

1. The “anti-bribery” provision

2. The “internal controls” provision

3. The “books and records” provision


Elements of the FCPA:The Anti-Bribery Provisions

• Who: any officer, director, employee or agent, including third-party consultants or distributors

• What: authorizing, offering, promising or paying “anything of value” directly or through an intermediary

• Recipient: an official or employee of a government-owned entity or a political party or candidate

• Purpose: to influence any official act or decision, or to secure an improper advantage such as reduced taxes, with corrupt intent


Anti-Bribery: Who is covered?

•Domestic businesses and individuals

•US securities issuers and their officers, directors, employees, agents or stockholders

•US businesses and their officers, directors, employees, agents and stockholders

− Incorporated in the US, or with their principal place of business in the US

− Individuals who are citizens, nationals or residents of the US

− Foreign businesses and individuals


Anti-Bribery: Who is covered?

•Parents and subsidiaries

− Foreign subsidiaries can be liable if it causes an act in furtherance of the violation in the US

− Domestic parent can be liable if it directs, authorizes or controls the entity

•Intermediaries or Third Parties

− Most recent FCPA prosecutions involve violations by an intermediary, not by the company itself. Prior to engaging an intermediary, the company should conduct adequate diligence to assess the intermediary’s background and identify potential red flags


Anti-Bribery: What is covered?

Broad application

•Anything of value: money, goods, services, political contributions, discounts, business opportunities

•An improper offer is enough, even if payment is not actually made and even if no benefit is actually received

•A violation occurs the moment any act is taken “in furtherance of” an improper offer or payment

•The offer does not need to be communicated to the foreign official, and the official does not need to accept it

For example: having a meeting and authorizing others to proceed with a bribery scheme would be regarded as an FCPA violation by U.S. enforcement officials even if the scheme came to light before the official was even contacted


Anti-Bribery: What is covered?

Gifts, Travel, Meals & Entertainment

•Gifts should be routine, customary, and of modest value

•Travel and entertainment should be modest, reasonable, bona fide and directly related to business

•In all cases, gifts, travel, meals and entertainment must:

Not be extravagant or lavish

Conform to local laws and customs

Have no improper purpose

Be accurately reflected in books and records


What is Covered: Gifts

Usually Permitted:

Gifts with logo (but not a Mercedes with the logo on the bumper)

Tote bags, T-shirts, coffee mugs

On customary gift giving occasions

Nominal value

Usually Not Permitted:

Money, poker chips, travelers’ checks, gift cards

Expensive or luxury items

Frequent


What is Covered: Travel

Usually Permitted:

Directly related to the promotion, demonstration or explanation of products or services - e.g., visit to facility

Paid directly to service provider

Length limited to business purpose

Officials only


Side trips unrelated to business purpose – e.g., trip to California with stop in Orlando, FL

Paying for extra days for vacation or sightseeing

Paying for family or other guests

Stipends or spending money

Expenses paid to official (as opposed to service provider)

*Local sightseeing and reasonable per diem?


What is Covered: Meals & Entertainment

Usually Permitted:

In presence of company

Paid directly to provider

Appropriate setting


No member of company present

Paying for extra “troops”(other individuals including family members)

Improper purpose


Anti-Bribery: To Whom (Recipient)?

•To any foreign official at any level

− Officers, employees and others acting in an official capacity

o Includes departments, agencies and "instrumentalities"

o Includes a public international organization

•To any political party or candidate for public office

•FCPA also covers

− Employees of SOE’s

− Many physicians that are on the payroll of the state

− Many University employees and professors


Anti-Bribery: For What Purpose?

•With a corrupt intent

− FCPA does not define what this is

− Intent to influence an official to misuse his official position; it need not succeed

− Influence an act or decision of a foreign official, or to induce a foreign official to influence a decision or to do or omit to do an act contrary to lawful duty

•To obtain or retain business or to direct business to any person

− Really means to gain any kind of business advantage

− Need not be consummated; the question is what was the purpose

− It need not be business with the government


Anti-Bribery: For What Purpose?

•FCPA will cover many things, examples are:

− Payments to obtain a contract

− Payments to obtain non-public information about a competitor or its products

− Payments to tax officials to reduce taxes


Anti-Bribery: Three Exceptions

•"Grease payments”− To expedite or secure a routine governmental service− Phone service, processing visas, obtaining police

protection, "actions of a similar nature"− Narrowly construed− When in doubt get a ruling, this is a gray area

•Acts legal under the written laws of the foreign country•Reasonable and bona fide expenditures directly related to:

− The promotion, demonstration or explanation of goods and services

− The execution or performance of a contract


Anti-Bribery: Key Take-Aways

•Consider whether a company’s customers are employees or officials of government-owned entities, and when in doubt, assume they are

•Payments or gifts made without a valid business purpose to someone who can influence the award of government business is presumptively “corrupt”

•Lavish entertainment or travel, gift cards, loans, jewelry, electronics and cash gifts are almost always improper

•Any payment or offer to pay, regardless of the dollar amount, can be a violation if done for improper purposes

•A violation can occur even if the company does not receive the business or other benefit for which the bribe was offered


Anti-Bribery: Key Take-Aways

•Third parties present a high risk area for FCPA compliance -most recent FCPA prosecutions were based on improper conduct by third parties

•Companies may be liable for improper offers or payments by consultants, distributors or other third parties

•Companies must use diligence and care in hiring and monitoring third parties

•Companies can be liable for the conduct of third parties if management knows or has reason to know that the intermediary is using funds, such as commissions, for an improper purpose


Elements of the FCPA: Internal Controls

•The FCPA requires that internal controls are adequate to provide reasonable assurances that:

− The company books and records accurately reflect expenditures, commissions, gifts, travel, meals and entertainment paid to foreign government officials and employees;

− All payments for commissions, consulting fees, gifts, travel, meals, entertainment and other transactions are accurately recorded; and

− Employees and consultants, distributors and other intermediaries understand and comply with the FCPA


Elements of the FCPA: Books and Records

•The FCPA requires that all expenditures, commissions, gifts, travel, meals and entertainment are accurately recorded in the Company’s financial books and records

•The FCPA’s books & records provisions may be violated by falsifying any aspect of a transaction to conceal its real purpose; including:

− Recording a payment as a “commission” to a consultant when part of that payment is passed on to a government official

− Recording a payment as “travel” when the payment was used for entertainment

− Inaccurately reporting the number or identity of individuals who participated in a meal, entertainment or who received a gift


Internal Controls, Books & Records: Key Take Aways

•The failure to implement internal controls may itself be a violation of the FCPA

•The failure to follow up on “red flags” – circumstances suggesting a “high probability” of an improper payment or corruption – may itself be a violation

•Any error or omission – no matter how small – in a company’s books and records with respect to such payments may provide a basis for enforcement action

•Under the FCPA, a bribe must be recorded as a bribe

•Expenses for meals, travel and entertainment must be accurate, complete and transparent such that the purpose, recipients and amounts are obvious


Agenda

FCPA Background


Case Examples

Red Flags

Investigations

Compliance

Conclusions


Case Example:The Titan Corporation, San Diego

•Paid $3.5 million to Titan's agent in Benin, Africa

− $2 million funneled to president for campaign

− To assist in development project and improved payment terms

− False invoices from agent to disguise purpose of payments

•Government cited Titan's lack of controls

− No due diligence

− No FCPA policy, no FCPA compliance program and no meaningful oversight over foreign agents

− Other FCPA violations


Case Example:The Titan Corporation, San Diego (cont)

•Settlement announced in March 2005

− Three count criminal conviction

− Civil enforcement judgment

•Penalties

− $15.479 million in disgorgement

− $13 million in fines and penalties

•Corporate governance reforms

− Independent consultant

− Structural reforms

•Major merger/acquisition by GE fell through


Case Example:Schnitzer Steel Incorporated

What Occurred•Cash payments to officers of government-owned and private steel producers to purchase from Schnitzer

− “Officer A” in Tacoma, WA received requests from SSI and forwarded requests to SSI Headquarters in Portland

− “Officer B”—a “senior executive”—approved at least 40 payments

•Payments Totaled $1.8 Million made as:− Commissions

− Refunds

− Gratuities

− Gift and entertainment

•Produced $55 Million in Profits− $6 Million from government-owned customers


Case Example:Schnitzer Steel Incorporated (cont)

•SSI pled guilty− Paid $7.5 Million Criminal Fine

− $7.25 Million to SECo Costs of investigation

o FCPA violations and wire fraud

•Schnitzer entered a Deferred Prosecution Agreement, which includes a Compliance Program

− Voluntarily disclosed conduct

− Disclosed internal investigation

− Cooperated with investigation

− Disciplinary action imposed

− Replaced senior management

− Significant remedial steps taken


Case Example:Baker Hughes

•Baker Hughes was charged with foreign bribery and violating a 2001 cease and desist order by the SEC

•Baker Hughes also pled guilty to three Felony Charges in a criminal action filed by the DOJ

•The company paid $44 million in criminal fines, civil penalties and disgorgement of illicit profits

− $23 million in Disgorgement

− $10 million in civil penalties

− $11 million in criminal penalties


Case Example:Baker Hughes (cont)

•A Baker Hughes subsidiary paid $5.2 million to two consultants whilst knowing that some or all of these funds were to be used to pay officials of the Kazakhstan government

•The company was recognized for co-operating with the investigations

•As a result, the company now has a monitor appointed for a period of three years


Case Example:Dow Chemical Company

•Dow violated the books, records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA)

•An estimated $200,000 in improper payments were made

•The payments were made by a fifth-tier foreign subsidiary of Dow to Indian government officials from 1996 through 2001

• Dow consented to pay a $325,000 civil penalty without admitting wrong doing

•These were not large payments compared to the entities mentioned previously


Case Example:Dow Chemical Company (cont)

•The complaint alleges that the Dow subsidiary, DE-Nocil Crop Protection Ltd. (DE-Nocil) made the following improper payments

− $39,700 in payments to an official in India's Central Insecticides Board to expedite the registration of three DE-Nocil products

− $87,400 in improper payments to state officials in order to distribute and sell its products

− payments to Indian government officials consisting of an estimated $37,600 for gifts, travel, entertainment and other items

− $19,000 to government business officials

− $11,800 to sales tax officials; $3,700 to excise tax officials; and $1,500 to customs officials over a six-year period

•Without admitting or denying the Commission's findings, Dow consented to the entry of the order that requires Dow to cease and desist from violating the relevant FCPA provisions


Agenda

FCPA Background


Case Examples

Red Flags

Investigations

Compliance

Conclusions


Red Flags

Red flags are situations or circumstances requiring extra scrutiny before proceeding:

Requests for unusually high commissions, “extra” profit or unusual payment structures - especially before an award decision

Requests for payments to compensate unidentified partners, “big men,” or “cultural consultants”

Lack of visibility into use of funds or partners

Assurances that person “has the right connections” to influence standards-setting or an RFP award

Lack of knowledge or experience in the industry

Government customers who suggest a bid be made through a specific representative


Red Flags: Today’s environment, where do you do business?

•The areas that business leaders speak about from a growth and profit perspective are the nations known as the BRIC nations.

•These nations and the regions they are in also rank very high on the risk scale with respect to bribery and corruption as identified by Transparency International.

•The question is often, who are you really doing business with?

•Simply because a country is not operating in a high risk area does not mean you do not have an FCPA risk/exposure.

•The fines and penalties for violations of the FCPA are significant and can have a significant impact on a company.


Red Flags: Currently Economic Growth and Risk are Correlated


Red Flags: What is an “improper payment?”-----Original Message-----

From: AllenTo: BobSubject: $100K InvoiceBob:RE: Settlement Payment for Krakozia Project.Several weeks ago we agreed to pay an additional $100K to KTS to satisfy them regarding the delay in implementing a new upgrade to our software (and the extra efforts KTS had to make to satisfy the Krakozia Broadcast Authority). Attached is their invoice. Recall this is a negotiated amount down from over $200K. If there is a way to push through for quick payment, I’d appreciate it.Thanks much,Bob-----Original Message-----From: VictorTo: AllenSubject: KTS $100K InvoiceHi Allen If you any questions for this Invoice, please let me know ASAP.Victor


Red Flags: How might it be documented?


Red Flags: Potential Follow up

•Issue: A request for extra funds to avoid a penalty for late delivery to a government customer is a red flag and requires investigation.

•Company should not ignore the red flag or proceed with the transaction or payment unless review satisfies management/reviewer that the transaction or payment is appropriate and has adequate and accurate documentary support.

•Cautionary Tale: In InVision, a Senior Vice President was copied on an email referring to additional compensation. The SVP did not respond to or acknowledge the email, but authorized payment to the distributor based on the invoice. The SVP paid $65,000 in penalties and InVision paid $1.9 million in disgorgement and penalties.


Red Flags: What is an “improper offer?”From: GeorgeTo: AllenSubject: Pricing for KTDI - Krakozia ProjectAllen,You might have to seriously consider increasing the consulting fee for Krakozia Consulting Associates (KCA) since they anticipate greater marketing expenses. KCA used several of its influential friends to guide the RFP toward software specs that put us in a better position in bidding for this project. KTDI needs sufficient profit to share with them.The RFP will be issued very soon, possibly in the next couple ofweeks. The success of Krakozia will definitely affect the progress of Transylvania, Carpathia, Crimea and many other projects.Best regards.George


Agenda

FCPA Background


Case Examples

Red Flags

Investigations

Compliance

Conclusions


Investigations: Quality Standards

The investigation should:•Be overseen by the audit committee and monitored by independent directors

•Be led by a reputable law firm with forensic accounting support and no ties to management

•Be allowed sufficient latitude and not restrained

•Be disclosed to outside auditors at the outset and they should be updated throughout the investigation

•Consider the need for voluntary disclosure

•Result in timely and appropriate remedial action


Investigations: What triggers enforcement actions?

•Whistleblowers

•Private suits by disgruntled agents

•Press reports

•SEC Filings

•M & A transactions

•U.S. and foreign enforcement, other regulatory requirements

•World Bank referrals

•Self-reporting

•Competitors


Investigations: Enforcement & Trends

•Corporate liability is very broad

•DOJ is working toward consistent anti-bribery provisions globally

•Self-reporting and cooperation are crucial

•Advance opinions can be sought

•Investigations are increasingly initiated by the DOJ and the SEC as a result of voluntary disclosures

•The company that discloses voluntarily and cooperates often benefits from the settlement through deferred prosecution agreements, etc.

•Full disclosure is required as part of the “cooperation”


FCPA Investigations: DOJ & SEC Questions

•Who is the client (company, management, audit committee)?

•How “independent” is the investigation?

•Is the investigating entity known to the SEC and DOJ?− Are investigators competent and knowledgeable, with

necessary skills and tools?

− Do investigators have sufficient resources and authority?

•Does the investigation have the proper scope?

•Is there effective preservation of documents?− Paper

− Electronic

•What remediation efforts have been made?


Investigations: DOJ & SEC Questions (cont)

•What is the company’s business (how, where, risks)?

•What is the existing controls environment?

•What is the compliance culture?

•How far into the process is the investigation?

•What is the plan going forward?

− Implementation

− Timetable

− keeping regulators apprised

•Is the investigation focused on issues of interest to the

DOJ and SEC?

•Are the DOJ and SEC able to examine key documents?

•How and why did the violation occur?


Investigations: Summary

The world has changed•Self investigation, reporting and disclosure is becoming the order of the day

•When making a disclosure to the authorities a full and complete independent investigation will need to have been conducted

•The DOJ will let you know if they believe what you have done is adequate

•The DOJ has taken the position that a voluntary disclosure will benefit the company

•SEC enforcement of FCPA violations is on the rise and will likely increase


Agenda

FCPA Background


Case Examples

Red Flags

Investigations

Compliance

Conclusions


What must I do to comply?

“It's getting much harder for me to distinguish good from evil. All I'm certain about is what upsets the government in an investigation.”


Compliance Programs

An ounce of prevention is worth a pound of cure

•There is a legitimate business case for having a sound compliance program

− In addition to the civil and criminal penalties along with disgorgement there is the cost of the investigation

•Both the DOJ and the SEC will generally require an independent investigation

− This will need to be conducted under the auspices of independent counsel with assistance from a forensic accounting firm

− The costs of these investigations can be substantial


Compliance Programs: Framework

•Tone at the Top/Management and Board support

•Strong Code of Conduct

•Importance of comprehensive FCPA provisions in compliance programs and policies

•Certifications by employees on an annual basis

•Exception reporting mechanisms

•Continuous training

•The ability to establish that the training took place


Compliance Programs: Reviews

Periodic Compliance Reviews should:

•Test compliance with Code of Conduct

•Be part of Internal Audit’s Annual Audit Plan

•Incorporate high risk countries and business lines

− Sub-certification review

− Training review

•Review the Company’s disclosure procedures and follow up procedures

•Confirm appropriate tone at the top


M & A Transactions

Due diligence takes on a new meaning•FCPA risk is one which needs to be specifically considered in acquisitions

•Successor liability is a significant risk; some deals have failed as a result of thorough due diligence

− Do you know where to look?

− What do you do about do about off book transactions?

− Which intermediaries has the target retained?

− What types of compliance programs and sub certification programs does the target company have in place?

•A failure in the due diligence arena can turn a perceived profitable acquisition into a potential drain on earnings


Mark MendelsohnDeputy Chief, Fraud Section, USDOJ

“If you have an effective, robust compliance program, you ought to be

finding violations if you are doing business globally.”


Agenda

FCPA Background


Case Examples

Red Flags

Investigations

Compliance

Conclusions


Conclusions on FCPA

• A real business risk to be considered in the context of overallenterprise risk management.

• Expansion into the high growth economies which score lower on bribe payers and corruption indices increases risk

• Limit exposure to FCPA risks through:− Strong internal controls

− High quality accounting systems

− Proactive recurring and continuous training programs

− Detailed due diligence

− Annual certification by employees

• The Department of Justice and SEC are much more active in pursuing these cases

− Fines, prosecutions and disgorgement have increased

− Costs of investigations are substantial


Conclusions on FCPA (cont)

•Self-disclosure and cooperation have become part and parcel of mitigating damages and managing risk

•An incident response plan needs to be in place to ensure potential violations are properly and thoroughly investigated

•The ultimate outcome of detected incidents is dependent on the systems in place, the cooperation received, and the specifics of the case


Resources

DOJ’s Layperson’s Guide to the FCPAhttp://www.usdoj.gov/criminal/fraud/fcpa/dojdocb.htm

Transparency International Corruption Perceptions Index

http://www.transparency.org/policy_research/surveys_indices

World Bank’s Doing Business Index (includes assessments of ease of obtaining business and risks of corruption)

http://www.doingbusiness.org/EconomyRankings


Questions?


Contact Information

Guido van Drunen

KPMG

[email protected]

206-913-4208

Susan Muck

Fenwick & West LLP

[email protected]

415-875-2325


Disclaimer

Information discussed is of a general nature. This document does not constitute a binding written agreement of our engagement. Our engagement is subject to successful completion of our normal engagement acceptance procedures and the mutual execution of an engagement letter. KPMG LLP does not provide legal services.

11/18/2009 Meeting - FCPA

Business

Transcript of 11/18/2009 Meeting - FCPA