Avoiding FCPA Violations in

Transcription

1 Avoiding FCPA Violations in March 14, 2012

2 Bill Pollard, Partner Deloitte Financial Advisory Services LLP Bill Pollard is a Partner in the Forensic and Investigative Services Practice in Chicago, Illinois, part of the Deloitte Financial Advisory Services group. Bill has led and conducted a broad range of FCPA, forensic accounting and financial fraud investigations for private and public companies, various levels of government, and private individuals. wpollard@deloitte.com T. Markus Funk, Litigation and White Collar Partner, Perkins Coie A former federal prosecutor in Chicago ( ) and Oxford University Law Lecturer ( ) who served in the Balkans for the State Department ( ), Markus specializes in advising clients worldwide on anti corruption compliance. Markus is the Co Chair of the ABA's Global Anti Corruption Task Force, and is the recipient of both the State Department and the US Department of Justice's highest general service awards. mfunk@perkinscoie.com

3 Opening Remarks Avoiding FCPA Violations in

4 Our Objective is that upon completion of this webinar participants will have the tools to: Understand the different cultures and regulatory environments of Brazil, Russia, India, and China and how they may lead to different FCPA and local country compliance risks Develop strategies to address corruption schemes within emerging markets Assess the effectiveness of an FCPA compliance program in addressing country specific risks

5 Agenda FCPA Enforcement Overview Brazil Russia India China Risk Mitigation Considerations Closing and Questions

6 FCPA Enforcement Overview and Trends Avoiding FCPA Violations in

7 Why Focus on Bribery? Increased enforcement efforts by U.S. Government, including Dodd Frank Whistleblower Reward New laws and increased enforcement by foreign governments Ex. U.K. Bribery Act Potentially severe consequences for company and individual employees Ex. Civil and criminal liability; immediate termination Siemens has paid $1.6 billion in penalties since 2008 Eight high ranking Siemens executives/agents indicted in year sentence imposed on Terra Telecom president in 2011

8 FCPA Enforcement Overview FCPA enforcement is stronger than it s ever been and getting stronger. We are in a new era of FCPA enforcement; and we are here to stay. Assistant Attorney General Lanny A. Breuer (Nov. 16, 2010) Source: Gibson Dunn 2010 Year End FCPA Update

9 FCPA Enforcement Overview (Cont.) Top 10 FCPA related monetary settlements (in millions) Source: Gibson Dunn 2010 Year End FCPA Update

10 Individual Prosecutions on the Rise Avoiding FCPA Violations in

11 Dodd Frank Whistleblower Reward Provision Rewards individuals who provide tips to the SEC leading to enforcement actions that exceed $1 million in sanctions Whistleblowers can earn a payout of 10% to 30% of any monetary sanctions collected Tipster must voluntarily provide original information about a possible federal securities law violation that has occurred, is ongoing, or is about to occur Anti retaliation protections for employee whistleblowers, including a cause of action in federal court; reinstatement; double back pay with interest; and litigation reimbursement

12 Brazil Avoiding FCPA Violations in

13 Statistics, Trends and Risk Areas Statistics & Trends: Corruption Perception Index (2010): Score 3.7 Rank 69 (out of 178) Bribe Payers Index (2008): Score 7.4 Rank 17 (out of 22) Brazil has signed the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of the Organization for Economic Cooperation and Development (OECD) Brazil is a signatory of the Inter American Anti Corruption Convention and also signed and ratified the United Nations Anti Corruption Convention

14 Statistics, Trends and Risk Areas Risk Areas: Size of public sector Brazil's government plays a large role in the economy. Total taxes correspond to approximately 33% of GDP Direct participation in the economy Government control of many sectors considered strategic, including power generation, oil extraction, mining of natural resources, water supply, infrastructure (ports, airports, roads, railroads), and hospitals Indirect participation in the economy Influence over State Owned Companies Pension Funds, State Commercial Banks, State Development Banks, State Owned Saving Accounts Regulatory bodies and agencies Tax, Labor, Regulated Sectors

15 Bribery/Corruption Schemes Specific Examples: Public procurement processes in which a company wins a contract resulting from bribes paid to public officials involved in the decision making process at various phases during the tender process Public official manipulates definition of who may participate in the bidding process to direct a tender to a particular company Achieved through changing specific technical or financial requirements which may exclude certain competitors The final decision over which company wins the tender is determined through a judgmental process influenced by a public official Other Common Schemes and Practices: Public procurement process Deliberate use of vague definitions in the contract Lack of formal rules to monitor performance of contracts Lack of formal mechanisms to control and audit contracts Other areas subject to heightened bribery risks include customs, tax collection, licenses and permits

16 Russia Avoiding FCPA Violations in

17 Statements and Views on Corruption President Medvedev: Poverty and corruption are the biggest internal threats to Russia s security 25 Jun 2008 first interview with Western media It is obvious that no one is satisfied with our progress in clamping down on corruption 14 July 2010 Russia's Council of Legislators Today, common citizens, business and civil society representatives, and reasonable officials believe that it was the right step to start that work [on fighting corruption] 14 July 2010 Russia's Council of Legislators Prime Minister Putin: "What should be done to eradicate corruption? Probably [execution by] hanging, but this is not our method 6 July 2010 Putin attending a session of the regional branch of Russia's ruling United Russia party in the North Caucasus

18 Statistics, Trends and Risk Areas Statistics and Trends: Corruption Perception Index (2010): Score 2.1 Rank 154 (out of 178) Bribe Payers Index (2008): Score 5.9 Rank 22 (out of 22) 2011 New law criminalizes foreign bribery combining once scattered proscriptions No concept of "corporate" criminal liability but Russia always in DOJ crosshairs Disclosures & Cooperation = immunity ("effective regret") Russian Prosecutor General's Office weak on enforcement (for now) No deferred or non prosecution agreements "Effective regret" an easy way to avoid liability Small team of prosecutors Motivation to prosecute Anti corruption campaigns popular election tool Russian Federation Economic Security Department of the Ministry of the Interior

19 Statistics, Trends and Risk Areas (Cont'd) Risk Areas: Strong state, large bureaucracy and high level of regulation Presence of state controlled entities, particularly in strategic industries Culture of using intermediaries, agents and entities with opaque ownership for dealing with third parties Culture of corruption being perceived as "the way we do business"

20 India Avoiding FCPA Violations in

21 Statements and Views on Corruption Corruption dents our international image and demeans us before our own people... [Corruption must be] tackled boldly, quickly. Prime Minister Manmohan Singh (February 2011) India has gone down in the ranking as well as integrity score and this is a matter of concern and regret. It appears that the level of governance has not improved despite India having a skilled set of administrators Transparency International India Chairman P S Bawa (October 2010)

22 Statistics, Trends and Risk Areas Statistics and Trends: Corruption Perception Index (2010): Score 3.3 Rank 87 (out of 178) Bribe Payers Index (2008): Score 6.8 Rank 19 (out of 22) Fortified Corruption Law Doesn't Clear Parliament, but remains on horizon Creates independend anti corruption agency Covers senior politicians and officials Introduces Corruption Ombudsman Broad public support 2G Spectrum Scam Fraud led by former Telecom minister involving the process of allocating unified access service licenses (approximately US $40 billion) Commonwealth Games Scam Alleged corruption in various tenders related to the games including payment to non existent parties, equipment purchases at inflated prices, and misappropriation of funds (approximately US $15.6 billion)

23 Statistics, Trends and Risk Areas (Cont.) Risk Areas: India is characterized as having a large public sector undertaking wherein the government owns a majority share. There are currently 277 Central PSUs in India Public Sector involves considerable bureaucratic hassles due to lack of transparency, cumbersome procedures, and delay in granting licenses and permits all of is a recipe for corruption as a way to help "cut the red tape" Existence Parallel Economy in India which accounts for some 40% of India s GDP Strong push towards whistleblower reporting (ex. "Ipaidabribe.com")

24 Bribery/Corruption Schemes Specific Examples: Corruption in the public tendering process Payment of commissions or success based fees to third parties and consultants, especially for license procurement and approvals Other Common Schemes and Practices: Payments to government officials by employees and the directors of the organizations either in cash or in kind Payments to subcontractors without value Payments made to Non Existent Vendors Intermediary price inflations Sponsorship of foreign travel Slush funds created by false expense reports by employees used for cash payments Making charitable contributions to organizations recommended by government officials (and sometimes run by them or their relatives)

25 China Avoiding FCPA Violations in

26 Statements and Views on Corruption President Hu Jintao: China would take more forceful steps to root out government corruption, which he said remains a "grave problem. More efforts should be made to investigate graft in key industries and key posts. 10 Jan 2011 Speaking at a three day plenary session of the CPC Central Commission for CCDI Prime Minister Wen Jiabao: A primary task in 2011 will be investigating and punishing principal officials accused of and found guilty of abuses of authority, dereliction of duty and corruption. Feb 2011 Speaking to the public in an on line chat after a State Council meeting Officials, along with their families and aides, are not allowed to interfere in or manipulate tenders and bid activities. They are required to report their assets and the employment of their family members. Officials will also be held accountable if they accept bribes, either in cash, securities, or payment cards. Further, leaders from state owned enterprises are not allowed to seek illicit gains through operating relevant businesses or trade. 25 Mar 2011 Speaking at the State Council

27 Statistics, Trends and Risk Areas Statistics and Trends: Corruption Perception Index (2010): Score 3.5 Rank 78 (out of 178) Bribe Payers Index (2008): Score 6.5 Rank 21 (out of 22) China FCPA enforcement Since 2002 to mid 2010, DOJ and the SEC have brought twenty eight anti corruption enforcement actions relating to business activities in China Increased domestic enforcement Before 2005, officials were arrested for accepting bribes but businessmen were rarely punished for giving them. Between 1988 and 2002, only about 6,000 cases of bribe giving were investigated by mainland officials compared with more than 200,000 cases of accepting them. * *Sources: Parry, S. (2010, October 17). The inside story. South China Morning Post. Retrieved from SCMP Archives.

28 Statistics, Trends and Risk Areas (Cont.) Local anti corruption laws and regulations Criminal offense to provide PRC public officials with money, property, fees or kickbacks in order to obtain an improper advantage Criminal offense for private commercial parties to provide or receive money or property of relatively high value to secure an improper advantage China criminalizes foreign bribery (introduced 25 Feb 2011, effective 1 May 2011) The Standing Committee of the Eleventh National People s Congress issued Amendments to the Criminal Law of the People s Republic of China New clause to the commercial bribery provision of Article 164 which expands the law by criminalizing the offering and giving of bribes to "foreign officials" and "officials in international public organization Extraterritorial reach similar to FCPA and the soon to come into force UK Bribery Act, applies to bribes paid to foreign officials in China and abroad

29 Statistics, Trends and Risk Areas (Cont.) Risk Areas: Gift giving culture (Travel & Entertainment) State owned enterprises ( SOEs ) employees deemed government officials Longer supply chains Unfamiliar trade practices Wages of government staff bribes can supplement wages Decentralization of power Inconsistent enforcement of laws Immature legal remedies and dispute resolution mechanisms Scarcity of qualified and experienced middle management Prevailing culture of loyalty to family, friends and colleagues

30 Bribery/Corruption Schemes Specific Examples: Related party transactions in the supply chain Other Common Schemes and Practices: Entertainment & Gifts Wine, liquor and cigarettes (consumable) Clothes and jewelry for the recipient or spouse Lavish entertainment (meals and karaoke) Paid vacations Free transportation on corporate vehicles Free use of resort facilities Gifts of the briber's inventories or services Illicit Cash Payments Kickbacks, cash payments, checks or other financial instruments or even in the form of a loan Hidden Interests Joint Ventures Suppliers (Purchase Schemes) Sales Schemes

31 Risk Mitigation Avoiding FCPA Violations in

32 What are some Red Flags? Countries with a reputation for corruption Transparency International s Corruption Perceptions Index Industries with a reputation for corruption Ex. Telecommunications, pharmaceuticals, real estate Close personal connections with government officials Requests for payments to unrelated third parties Requests for payments in cash Proof of performance lacking in detail or documentation Ex. Contract; invoice Payments requested to be made outside of the usual process or accounting structure

33 What are some Red Flags? (cont.) Incorrect/incomplete information relative to payment request The contracting party does not have offices or a staff The contracting party lacks significant experience Unusually high fees or commissions Requests for unusual bonuses, advance payments, or special payments Agents or consultants hired at the strong recommendations of a government official Agents or consultants who are former government officials dealing with their former agencies Confidential: Attorney Client Privileged February

34 FCPA Risk Mitigation Measures Views on FCPA compliance Strategies: Traditional Approach Risk Based Approach Likelihood of FCPA Violations Low Medium High Likelihood of FCPA Violations Low Medium High Employees Employees FCPA violations follow a standard distribution where the majority of employees are responsible for a majority of the violations Characterized by the use of broad, relatively shallow preventative measures FCPA violations follow a hockey stick distribution where a select few employees are responsible for a majority of the violations Characterized by the use of preventative measures focused on certain employees who have the opportunity and inclination to commit FCPA violations

35 FCPA Risk Mitigation Measures (Cont.) Link fraud to corruption Identify government touch points (customs, tax, regulatory, patent, trademark officials, customers, suppliers, etc.) Identify payments made via third party intermediaries (agents, distributors, etc.) Identify employees who have the opportunity to commit FCPA violations Educate relevant employees on ways to prevent and detect corruption (live training session/targeted meeting) Perform due diligence procedures on potential acquisition targets and third parties Review vendor s financial records and past ethical behavior before entering into a contract Focus compliance efforts and resources on the areas of greatest risk Develop procedures for effectively addressing whistleblower allegations Focus on "petty cash" and similar "slush funds" they are high risk

36 Transparency International Corruption Perceptions Index Scale of 1 (poor reputation) to 10 (good reputation) Avoiding FCPA Violations in

37 QUESTIONS? Avoiding FCPA Violations in

38 Contact: Bill Pollard T. Markus Funk