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FCPA Update: Trends in Global Anti-Corruption Enforcement

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Highly Corrupt

INSIDE THIS PUBLICATION:

> Where Bribery and Corruption Still Reign

> FCPA Enforcement Shifts into High Gear

> The FCPA and China’s Anti-Corruption Drive

> As FCPA Cases Mount, Justice Department Offers a Path to a Reprieve

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CONTENTS

Where Bribery and Corruption Still Reign ..................................................................... 3

FCPA Enforcement Shifts into High Gear ...................................................................... 6

The FCPA and China’s Anti-Corruption Drive ............................................................... 9

As FCPA Cases Mount, Justice Department Offers a Path to a Reprieve ..........13

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Where Bribery and Corruption Still Reign Despite vigorous efforts by regulators in the United States and Europe to punish bribery, it still plagues many parts of the world

By Joseph McCafferty

T he U.S. Department of Justice and the Securities and Exchange Commission are on something of a roll lately in bringing corruption cases to fruition

under the Foreign Corrupt Practices Act.

Together, the agen-cies concluded 26 enforcement actions against companies and individuals—includ-ing three cases where regulators declined to prosecute, but en-forced strict reforms—through the first half of 2016, according to the FCPA Blog which tracks such cases. That’s more than the 20 enforcement ac-tions the DoJ and SEC jointly concluded in all of 2015, including nine declinations. And most experts expect

the second half to be just as active in terms of corruption enforcement.

The list of offenders in recent months includes such high-profile companies as Las Vegas Sands, Goodyear, BHP Billiton, Novartis, SAP, Qualcomm, and so many others. Potential cases against Walmart and international soccer’s governing body, FIFA, are still playing out. A series of corruption scandals even ousted Brazil’s first female president, Dilma Rousseff, who was impeached in August.

While the United States is at the center of the push to prosecute bribery and corruption around the world, it is, of course, not the only country taking action. An anti-corruption campaign that began in China in 2013 has reportedly resulted in the arrest of thousands of government officials so far and has been severe enough that it has resulted in the declining performance of premium products, such as Swiss watches,

jewelry, and premium wines and spirits that are typically given as gifts to grease the wheels of business transactions. In the United Kingdom, enforcement of the 2010 U.K. Bribery Act is starting to pick up after a slow start. Last year, Britain opened the International Corruption Unit to assist the Serious Fraud Office in bringing Bribery Act cases.

Despite the emphasis on enforcement by a growing group of nations, there doesn’t appear to be a material decline in the level of bribery and corruption around the world, and in many countries a culture of corruption still persists at government entities and private companies alike. In fact, compliance officers and risk managers are preparing for the increased threat of corruption problems this year. According to the 2016 annual Kroll Anti-Bribery and Corruption Report, 40 percent of those surveyed say their bribery and corruption risks will increase this year and 52 percent expect them to stay the same. Only 8 percent are preparing for a decline.

In the following sections, we’ll look at the bribery and corruption risks and developments in a few regions of the world where it is the highest.

AFRICA

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If you want to know how the fight against corruption is going in Africa, consider this: Kenya’s Ethics and Anti-Corruption Commission chairman, Philip Kinisu, resigned in August after allegations surfaced that his family business was involved in improper dealings with a government ministry and he

became the subject of an investigation into his role in the potential graft. A poll conducted last year found that 58 percent of the 43,143 respondents in 28 African countries say corruption has increased in the prior 12 months.

According to the latest iteration of the Corruption Perceptions Index, a country-by-country ranking of the perceived level of corruption conducted by global corruption watchdog Transparency International, Africa was home to six of the

Despite the emphasis

on enforcement by

a growing group

of nations, there

doesn’t appear to be

a material decline in

the level of bribery

and corruption around

the world.


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bottom 10 performers. Those countries include Guinea-Bissau (158 of 168), Libya (161 of 168), Angola and South Sudan (tied at 163 of 168), Sudan (165 of 168), and Somalia, which ranks dead last at 168. “Corruption creates and increases poverty and exclusion. While corrupt individuals with political power enjoy a lavish life, millions of Africans are deprived of their basic needs like food, health, education, housing, access to clean water, and sanitation,” said Transparency International chairman, José Ugaz.

That’s not to say that there are not those who are working to fight corruption in Africa. During the Audit, Risk, and Governance Africa conference held by MISTI in August in Ghana, auditors and risk managers voiced frustration over the level of corruption that plagues the continent and shared strategies to combat it. “I have seen a number of instances in

many countries where oversight institutions are created and then immediately under-mined,” said Ludovick Utouh, former control-ler and auditor general at WAJIBU – Institute of Public Accountabil-ity in Tanzania. “They are a showcase only.” According to Utouh, auditors at public en-tities need to do more to bring audit find-ings, especially those that detail instances of corruption and wrong-

doing, directly to the people to put more pressure on gov-ernments to reform. “We need to transform the way audit findings are reported,” he said. “They end up being stuffed in boxes and nothing is done.”

That transformation has been slow in coming. “From Ebola to terrorism, we’ve seen corruption exacerbate crises during 2015 in Sub-Saharan Africa,” says Chantal Uwimana, Director for Sub-Saharan Africa at Transparency International. “Forty out of the region’s forty-six countries show a serious corruption problem and there’s no improvement for continent powerhouses Nigeria and South Africa. If corruption and impunity are to ‘be a thing of the past’ as the African Union stated, governments need to take bold steps to ensure rule of law is the reality for everyone.”

RUSSIA

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Among large, industrialized nations, none have a poorer record on c o r r u p t i o n than Russia. It has lan-guished to-ward the back of Transpar-

ency International’s ranking since the corruption index was devised in 1995. Earlier this year, a New York Times headline declared, “Why Putin Tolerates Corruption.” The article went on to explain that the Russian president has little interest in reforming a culture of corruption in the world’s 14th largest economy.

Transparency International ranked Russia 119 of 168 countries in 2015 with a score of 29 on a scale of 100, up slightly from its score of 27 in 2014. A survey of Russian citizens completed in 2014 by the Levada Center in Moscow, a non-governmental research agency, noted reasons for its history of corruption: it found that over a third of Russians believe it would be impossible to eradicate corruption. “More than a third (38 percent) think that the Russian authorities will continue their crackdown on corruption but will have little success because ‘corruption is indestructible,’ ” the report reads.

Part of the problem of fighting corruption in Russia is that it has become ingrained in the fabric of society there, say observers. “Corruption in Russia has become institutionalized and is invisible to most, but it weighs on the price of almost everything, from apples to subway tickets to medical care,” wrote Associated Press reporter, Nataliya Vasilyeva, earlier this year.

CHINA AND EAST ASIA

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A coordinated crackdown on corruption of government officials initi-ated by Presi-dent Xi Jin-ping in 2013 has so far not shown much p r o g r e s s .

Transparency International rated China 83 out of 168 coun-tries last year, nearly unchanged from its 2012 ranking of 80 out of 174. The effort has, however, done much to change the

“More than a third

(38 percent) think

that the Russian

authorities will

continue their

crackdown on

corruption but will

have little success.”


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perception of the world’s second largest economy from that of not enforcing the corruption laws on its books to that of a country that is joining with other economic powers to fight corruption. As the Transparency International rankings show,

reform will not come quickly to China, but it appears to be heading in the right direction. (For more on the cor-ruption environment in China, see “The FCPA and China’s An-ti-Corruption Drive,” page 9.)

Among other large countries in East Asia, there is a mixed record on corruption. Japan, for example, has a good record, ranking 18th on TI’s index. Meanwhile, the region is home to several laggards in anti-corruption efforts,

including Cambodia (150 of 167), Myanmar (147 of 168), and the regions worst performer, North Korea, which checks in at 168 of 168, tying Somalia for last. While not a lot is known about the mostly shuttered nation, its reputation as a cauldron for bribery and corruption is well established. “Gift politics have greased the wheels of industry since the country’s foundation,” wrote Jonathan Corrado in The Diplomat, a publication that specializes in Asia-Pacific politics and government. “On face value, corruption might be considered a purely negative force. And it’s true that corruption remains pervasive in North Korea. Indeed, it seems to be growing in scale, frequency, and distribution.”

SOUTH AMERICA

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Very Clean

Highly Corrupt

Another region with a spotty record on reining in bribery and corruption is South America. Like the Far East, there are leaders and poor performers across the continent. Chile, for example, does well, ranking 23 out of 168, tied with France. Meanwhile, its neighbor to the east, Argentina, ranks 107.

Brazil, which has centered itself on the world stage with its hosting of the Olympics this summer and the World Cup

international soccer tournament in 2014, has garnered the most attention on the corruption front. Including the scandal that ousted its president in August, mentioned earlier, corruption and bribery have been constant sources of pain and public attention in the continent’s biggest economic power.

“We’ve witnessed two remarkable trends in the Americas in 2015: the uncovering of grand corruption networks and the mass mobilization of citizens against corruption,” says Alejandro Salas, Transparency International Director for the Americas. “The Petrobras and La Línea scandals are testament to these trends in the two biggest regional decliners: Brazil and Guatemala. The challenge now is to tackle the underlying causes and reduce impunity for corruption.”

ANTI-CORRUPTION PROGRESS?

Don’t expect much progress in these regions anytime soon. But as Western econo-mies continue to pur-sue companies listed on their exchanges for bribery and corrup-tion in any part of the world, we may see some progress down the line. Global companies like Siemens and Hallibur-ton have found out the hard way that they have too much at stake not to crack down more on bribery and increase their anti-corruption and compliance prac-tices.

“The most recent Cor-ruption Perceptions Index clearly shows that corruption re-mains a blight around the world,” says TI chairman Ugaz. “But 2015 was also a year when people again took to the streets to protest corruption. People across the globe sent a strong signal to those in power: it is time to tackle grand corruption.”

“We’ve witnessed two

remarkable trends in

the Americas in 2015:

the uncovering of

grand corruption

networks and the mass

mobilization of citizens

against corruption.”

ALEJANDRO SALAS, TRANSPARENCY INTERNATIONAL

“Gift politics have

greased the wheels

of industry since the

country’s foundation.

On face value,

corruption might be

considered a purely

negative force. And it’s

true that corruption

remains pervasive in

North Korea. Indeed, it

seems to be growing in

scale, frequency, and

distribution.”

JONATHAN CORRADO THE DIPLOMAT


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FCPA Enforcement Shifts into High Gear Regulators come down hard on corruption, unless companies cooperate completely

By Karen Kroll

A s it nears its fortieth birthday, the Foreign Corrupt Practices Act (FCPA) remains a focus of both the Securities and Exchange Commission and

the Department of Justice. At the same time, the agencies regularly modify their approach to enforcement. While no radical departures from historical practice appear imminent, experts have identified several shifts.

In 2015, the DoJ and SEC together brought eleven core corporate FCPA enforcement actions, says Mike Koehler, associate professor of law at Southern Illinois University, and the individual behind FCPA Institute, which provides training on anti-corruption programs. Core actions are based on the same set of corporate transgressions. For instance, actions against a corporate parent and its subsidiary for actions by the subsidiary typically would count as one action.

So far in 2016, the DoJ reports that it has brought six FCPA-related actions, and the SEC, fourteen. In April of this year, the DoJ launched a one-year pilot program intended to motivate companies to self-report FCPA-related misconduct. To be sure, regulators have always emphasized the strength of companies’ internal control programs and their willingness to self-report criminal wrongdoing by employees or agents. The pilot program shows “more effort to demonstrate the benefits of voluntary disclosure,” says Kimberly Parker, partner with WilmerHale.

Chief among these is a company’s eligibility for “the full range of potential mitigation credit, including a declination of prosecution.” So far, the DoJ has issued at least four declination letters: to Akamai Technologies, Johnson Controls, Nortek, and Key Energy.

LETTER OF THE LAW

The decision to make the letters of declination public is a significant change from past practice, says James Koukios, partner at law firm Morrison Foerster and formerly, senior

deputy chief of the DoJ’s fraud section.

The long-term success of the program remains a question mark. Parker notes that even if the DoJ decides not to move forward against a company, the SEC still can. While companies would escape criminal prosecution from the DoJ—admittedly, an enormous benefit—they could face the negative repercussions of an SEC civil case, including hefty fines and damaging publicity.

Koehler sounds skeptical about the motives behind the letters. “They’re marketing a government program,” he says. The conduct at issue generally took place by a few employees in foreign subsidiaries who concealed their actions from the corporate parent. Their actions may have been sufficient to bring a civil action against the company, but based on the only information currently available in the public domain, don’t appear to rise to level of criminal case, he says. “What criminal charges did the DoJ decline? Based on the information in the public domain, it appears to be none.”

Koukios also raises some concerns about the DoJ’s decisions to decline prosecution only when a company disgorges profits stemming from the wrongdoing, which has been the case with each of the four declinations so far. “I understand the gut reaction, that companies shouldn’t keep

tainted money,” he says. But requiring companies to disgorge profits when they’ve acted quickly and thoroughly to stop the activity and prevent future problems may prompt companies to question whether self-reporting and cooperating with the

In September 2015,

Sally Yates, a deputy

attorney general with

the Department of

Justice (DoJ), issued

a memorandum

titled, “Individual

Accountability for

Corporate Wrongdoing.”

It states “one of the

most effective ways

to combat corporate

misconduct is by

seeking accountability

from the individuals

who perpetrated the

wrongdoing.”


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enforcement agencies actually will pay off. “There’s no perfect solution,” he adds.

INDIVIDUAL CULPABILITY

In September 2015, Sally Yates, a deputy attorney general with the Department of Justice, issued a memorandum titled, “Individual Accountability for Corporate Wrongdoing.” It states “one of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.”

To be sure, prosecutors have long focused on individual culpability, says Michael Diamant, partner with Gibson, Dunn & Crutcher. “This was largely a codification of what was already happening in most cases.”

Of the fourteen FCPA enforcement actions by the SEC so far this year, five name individuals. “It’s a notable percentage,” Koukios says.

“The enforcement authorities don’t want monetary penalties on companies to be seen as an acceptable cost of doing

business,” says Jeremy Zucker, co-chair of the international trade and government regulation practice with Dechert LLP. News photos of executives being hauled to prison can be a more compelling deterrent to criminal action.

A focus on the individuals involved also lessens the risk that an entire company suffers for the actions of a few, says Ed Williams, senior manager, audit and risk advisory services at Experis.

DIVERGING PATHS OF SEC, DOJ

Until recently, the SEC and DoJ brought most FCPA cases almost in parallel with each other, Koukios says. This year to date, four of the resolutions have been parallel, and ten have been only from the SEC. “The DoJ has become more circumspect in the cases it will bring,” Koukios. It then can shift resources to other cases, including those in which the SEC doesn’t have jurisdiction.

In addition, by limiting the number of parallel cases to those in which the companies under investigation decide not to work with the government and fail to take remediating action, the DoJ emphasizes the importance of mitigation and

“The enforcement

authorities don’t want

monetary penalties on

companies to be seen

as an acceptable cost of

doing business.”

JEREMY ZUCKER DECHERT LLP


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cooperation, Koukios says.

Of the fourteen SEC resolutions this year, all but one has been for less than $30 million, Koukios notes. Several are for relatively modest amounts, such as Akamai Technologies’ agreement to disgorge $650,000 in profits connected to bribes paid to Chinese officials. The numbers reflect the SEC’s focus on accounting violations, rather than grand corruptions schemes involving suitcases of cash changing hands, he adds.

EMPLOYEES AND THIRD PARTIES

Two actions in the past twelve months centered on companies that offered jobs or internships to the offspring of foreign officials. In August 2015, BNY Mellon agreed to pay $14.8 million to settle FCPA charges when it provided internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund. In March of 2016, Qualcomm agreed to pay $7.5 million to settle similar charges, after it hired relatives of Chinese officials deciding whether to purchase the company’s products. The cases are a new application of the FCPA, and one companies should be aware of.

At the same time, Koehler notes that the cases ended with no judicial scrutiny, and the companies neither admitting nor denying the SEC’s findings. If the DoJ or SEC was forced to action in such a case, it’s “very much an open question” if the charges would satisfy the burden of proof, Koehler says.

Koehler also points to a double standard. “How

many kids in Washington D.C., New York, or other centers of power get jobs because of their parents?”

Another shift in enforcement actions concerns third parties, the focus of most cases. Early on, most actions centered on commissioned sales agents, Parker says. Now, along with agents, the actions target distributors, resellers, customs brokers, and others. The broader focus means this high-risk area has expanded.

ACROSS THE GLOBE

Anti-corruption and anti-bribery enforcement efforts around

the globe are intensifying. While many countries have had regulations in place for years, more are actually enforcing them, Parker says.

In addition, most regulatory authorities are working more closely with their peers in other countries, Zucker says. The U.S. government also has taken a “more demanding attitude” regarding claims that certain information needs to remain in a foreign country due to privacy concerns, he adds. These trends boost the chance an issue originating outside the United States will find its way to the attention of U.S. authorities.

China, for instance, has ramped up anti-corruption efforts under the current premier, Diamant says. The cases so far have focused almost entirely on domestic companies, yet the efforts have “lasted longer and been more aggressive than many anticipated,” he says.

At the same time, China remains a hotspot for FCPA enforcement, accounting for eight of the fourteen SEC actions so far this year. “It’s easy to slip up in China,” Koukios says. Many of the cases focus on travel and gift-giving, highlighting the risk inherent in operating in cultures in which gift-giving often is seen as a cost of doing business. On top of that, the sheer physical distance between China and the United States hinders efforts to monitor employee behavior.

Yet, companies need to make a sincere, intel-ligent effort. “Corrup-tion and bribery con-tinue to be recognized as important prob-lems by policy mak-ers around the world,” Diamant says. Both can undermine gov-ernment institutions, consume money need-ed for education, in-frastructure, and other government works, and obstruct efforts to help people pull them-selves from poverty, all of which can aid terrorists in attracting new adherents.

“You can have an interesting debate about how vigorously the law is enforced and if the government is too puritanical,” Diamant says. “But the concept that bribery is bad is widely acknowledged.”

“How many kids in

Washington D.C., New

York, or other centers of

power get jobs because

of their parents?”

MIKE KOEHLER, FCPA INSTITUTE

“It’s easy to slip up

in China.” The sheer

physical distance

between China and the

U.S. hinders efforts

to monitor employee

behavior.

JAMES KOUKLOS, MORRISON FOERSTER


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The FCPA and China’s Anti-Corruption Drive A well-designed and effective global anti-corruption program has never been more important

By Steven Parker and Ed Williams

T he Foreign Corrupt Practice Act (FCPA) is here to stay. So, too, is the expanding backdrop of global anti-corruption regulations and both stepped-up enforcement and increasing media scrutiny

around the world. Companies operating domestically and internationally need to understand their corruption risks and have effective programs in place to mitigate those risks. Internal auditors and compliance professionals should be

facilitating practical discussion within their organizations about what must be done to help provide assurance to senior leadership, governing Boards, investors, customers, regulators, and other stakeholders that the company is operating ethically and corruption-free around the globe.

Companies need to widen the aperture of their risk radar beyond just the United States’ FCPA. Solely focusing on the requirements and prohibitions of the law exposes organizations to corruption risks beyond the bribing of “foreign officials” and not maintaining “accurate books and records.” Money laundering, bribes not involving government officials, kickbacks, bid rigging, nepotism, extortion, embezzlement, and sham companies are just a few examples of corruption that may not be explicitly addressed by the FCPA but may be a violation of other U.S. and international laws.

U.S. companies should work to develop, maintain, and publicize an effective global anti-corruption program

consisting of the six elements pictured in the graphic below.

But will all this effort be worth it?

Yes, without question. Recent actions by U.S. and international regulators confirm the value and importance of a well-designed and operationally effective global anti-corruption program. Many cases have now unfolded where the SEC and Department of Justice have decided not to bring enforcement actions against companies that have demonstrated a commitment to robust anti-corruption and compliance efforts.

CHINA’S ANTI-CORRUPTION DRIVE

The emerging method of tackling corruption in China is known as “striking tigers and flies at the same time.” This theory has been promulgated and supported by Xi Jinping, who serves as the General Secretary of the Communist Party of China. The reference to tigers and flies alludes

The emerging

method of

tackling

corruption

in China is known as

“striking tigers and flies

at the same time.”


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to both high-ranking corrupt officials as well as those at local and grassroots levels and is a clear indication that rampant corruption at all levels of government will no longer be tolerated. In one of Xi Jinping’s first speeches on the subject of corruption as General Secretary, he warned the Central Politburo of the Communist Party that continued and even rising instances of corruption could doom both the party and state.

The approach is essentially a strategy of encirclement that initially focuses its efforts on rooting out corruption of high ranking politicians by first focusing on the “flies”–their political allies and associated business partners, followed by family members, and ultimately the high-ranking senior officials who are under suspicion or implicated by the encirclement strategy. Tackling the “flies” first is a key component of the encirclement strategy because it paves the way for graft and corruption investigators to then close in on and encircle the “tigers.”

This strategy has numerous implications for both corruption and the political environment in China. Not only does it provide a mechanism to root out, tackle, and reduce corruption, but also could serve as a possible maneuver capable of taking down political rivals who might be seen as potential threats. That possibility hanging over their heads at the same time helps ensure that provincial party leaders comply with the strategy and toe the party line. In fact, of late, lower-level government officials and subordinates have been competing to uncover corruption in hopes of not only performing their duties, but also in hopes of currying favor within the party.

CHINA’S ANTI-CORRUPTION LAWS

China’s main anti-corruption provisions and guidelines are contained predominantly within two major pieces of legislation: the 1993 Anti-Unfair Competition Law (AUCL) of the People’s Republic of China originally with significant revisions proposed in 2016, and the Criminal Law of the People’s Republic of China.

The AUCL was among the first important laws of China’s “opening up” period. Its major premise was to target unfair and anti-competitive practices and to establish offenses for trademark and patent infringement, commercial bribery, false and deceptive advertising, misappropriation of trade secrets, trade libel, misuse of sales incentives, and various anti-competitive practices. In February 2016, the State Council released draft revisions to the AUCL

that would materially change Chinese law in two areas of concern for multinational and joint-venture companies in China: commercial bribery and antitrust. If enacted, the revisions would introduce broad and comprehensive rules against the “abuse of a relative advantageous position.”

The Anti-Unfair Competition Law specifically prohibits commercial bribery and makes it punishable with both economic and administrative sanctions. AUCL also prohibits acts of commercial bribery, such as giving bribes for the purpose of selling or purchasing goods and receiving bribes in the course of selling or purchasing. Fines for criminal acts of bribery range from RMB 100,000 to twice the amount of the fine plus any illicit income stemming from the acts of bribery.

Additionally, the Criminal Law of the PRC contains various articles specific to bribery such as pro-hibiting the giving and receiving of money or property to obtain any unique benefit. This includes cash, cash equivalents, items, and proprietary inter-ests to obtain and undue benefit.

FCPA IN CHINA: CHALLENGES AND DIFFICULTIES

Among the more difficult challenges facing U.S. multinationals in China is the need to understand the relationship, interest, and involvement of government entities there. After 1949, all business entities in the PRC were created and owned by the state (state-owned enterprises or SOE). In the late 1980s, the government began to reform state-owned enterprises, and during the 1990s and 2000s, many mid- and small-sized state-owned enterprises were privatized and went public. However, it is possible that there may be a continued and significant interest by the government in these organizations which often makes it difficult to clearly determine the ownership interest of Chinese organizations, whether joint-ventures, vendors, suppliers, or customers.


Among the

more difficult

challenges

facing U.S.

multinationals in China is

the need to understand

the relationship, interest,

and involvement of

government entities there.


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Obviously, this makes it imperative for multinational organizations to understand the ownership of companies with whom they have working relationships. This extends to vendors, partners, supplier, customers, and SOE’s and government agencies.

On September 18, 2015, Chinese Premier Li Keqiang convened a meeting on reforms of SOEs. One of the most important recommendations was the promotion of mixed ownership. SOEs were encouraged to attract various types of capital, whether state or owned private, domestic or international. Private and non-SOEs were encouraged to join the process by investing in SOEs via different channels, such as stocks, bonds, and share right swaps. As such, mixed ownership has become a common occurrence in China with a combination of state and private ownership. Even after SOEs are privatized, their CEOs can and are likely to still be politicians. According to the guidelines, politicians in SOEs have the choice of whether to stay in the entities as party officials or become professional managers.

Another challenge is the need to understand the impact of Chinese culture on business practices. China has deep rooted cultural mores and norms that drive day-to-day in-teractions. One such norm deeply rooted in the country’s culture is the ancient Chinese teaching that “not to recip-rocate is against etiquette” (來而不往, 非礼也). China is a gift-giving culture, and it is accepted in Chinese soci-ety that courtesy demands reciprocity (礼尚往来) which certainly can have far-reaching business impacts. An im-portant aspect of this gift-giving philosophy is evidenced during important cultural holidays, such as giving red packets on Chinese New Year and providing moon cakes to friends, colleagues, business associates, and business partners during the Mid-Autumn Festival. While this is certainly an acceptable and common practice, the risk exists that it might be viewed as a means to perpetrate bribery.

Therefore, it is imperative for multinational organizations to be culturally sensitive but at the same time ensure



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policies, procedures, and controls are in place to provide clear direction on how gift-giving should be managed. Ensuring these activities are well controlled, un-derstood and man-aged can be done by communicating gift value limits and what type of gifts are al-lowed, and ensuring appropriate approv-al processes are in place.

FCPA IN CHINA: UNCOVERING CORRUPTION

Uncovering corruption in China is not unlike other countries; however, the means by which corruption is carried out and achieved there is definitely a reflection of the country’s culture and unique business practices.

Third-Party Intermediates

Regulators in China expect organizations to take the necessary measures to establish the propriety of the third-party intermediaries it engages. An organization cannot avoid liability under anti-bribery legislation by “turning a blind eye” to activities undertaken for and on its behalf by third parties, whether or not those activities are explicitly or implicitly sanctioned. The utilization and engagement of third-party intermediates typically relate to the following areas:

• Customs declaration and clearance • Import duties and taxes • Legal activities • Licenses and permits • Construction projects • Contract negotiations • Travel arrangements

Travel & Entertainment Claims

Travel & entertainment claims have been a commonly used method for concealing corruption and fraud; however, some claims that may increase the exposure to FCPA violations in China are specific to the cultural context of China. Chinese

New Year, Mid-Autumn Festival, and holidays in China can and have been used to facilitate bribery. It becomes imperative for organizations to understand what these types of claims are, ensure controls around how these types of claims are managed are in place, and ensure that policies and processes to govern these types of expenses are well communicated to all involved.

Common travel and entertainment red flags: • Cash coupons / department store and grocery shop gift

cards • Concert / theme park tickets with monetary value • Chinese New Year red packets (红包) and gift boxes • Computers and electronic products • Expensive meals / drinks • Liquor, cigarettes and tea leaves • Mooncake vouchers • Night clubs, karaoke, body / foot massages • Overseas / international field trips with family members • Public transportation cards • Arts and antiques (Art has become an “invisible cloak”

that helps business navigate corruption with shops that specialize in buying back expensive painting and antiques)

Discretionary Expense Claims

There are other expense types that are discretionary in nature and can be used to conduct fraudulent activities. Specifically, these are expenses which are of larger value than those normally claimed as T&E expenses, and may be listed as one-off payments. These claims include or might be stated as:

• Professional fees • Licensing costs/fees • “Miscellaneous” expenses • “Other” expenses • Petty cash

China presents some distinctive challenges relating to FCPA due to its unique political environment and deep-rooted cultural norms. Our objective in developing this whitepaper was to provide insights that will enable you to challenge the specific elements of your FCPA and internal audit activities. For those interested in additional information on uncovering corruption, please contact us at [email protected].

Regulators in

China expect

organizations

to take the

necessary measures to

establish the propriety

of the third-party

intermediaries it engages.



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As FCPA Cases Mount, Justice Department Offers a Path to a Reprieve The Department of Justice’s Pilot Program awards credit and even a pass to companies that go the extra mile after finding evidence of corruption

By Thomas Fox

T his year is sure to be one for the books for Foreign Corrupt Practices Act (FCPA) enforcement. By the end of June, there were more FCPA enforcement

actions in 2016 than in all of 2015, and it doesn’t appear that things will be slowing down anytime soon. The Fed’s aggressive campaign against bribery and corruption rolls on.

Yet this surge in FCPA cases isn’t even the most significant development in corruption enforcement so far this year. The single most important development is the announcement of the Justice Department’s Pilot Program for FCPA enforcement, which provides some relief for companies that meet high standards for cooperating with regulators during investigations.

The Pilot Program, announced the first week of April, laid out how companies can receive significant credit in FCPA

enforcement actions. The Justice Department provided four general requirements for a company to receive up to 50 percent discount from the lowest end of the penalty range under the U.S. Sentencing Guidelines. To receive this discount, companies must (1) self-disclose potential FCPA violations, (2) fully cooperate during the investigation, (3) extensively remediate its compliance program, and (4) disgorge any profits the company may have received for conduct that is considered in violation of the FCPA.

In practice, the Pilot Program has actually proved beneficial to companies, as the Justice Department has issued four declinations to prosecute under it, even in cases where evidence supported enforcement actions. All of these companies—Key Energy, Akamai Technologies, Nortek, and Johnson Controls—settled with the Securities and Exchange Commission (SEC) on a civil basis.


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THE DECLINATION LETTERS

Gleaning insights for the details of the four cases, however, isn’t easy. Key Energy didn’t disclose the terms of its declination and the Justice Department did not issue a letter providing any detail as to why it granted it. The only information can be found on an SEC press release noting the settlement of the case. For the other three companies, the letters issued by the DoJ didn’t provide much detail.

The Akamai and Nortek declination letters were identical with the exception of the different corporate names. In relevant part they stated, “we have reached this conclusion ... based on a number of factors, including but not limited to the fact that Nortek’s internal audit function identified the misconduct, Nortek’s prompt voluntary self-disclosure, the thorough investigation

undertaken by the company, its fulsome cooperation in this matter (including by identifying all individuals involved in or responsible for the misconduct and by providing all facts relating to that misconduct to the Department), and its agreement to continue to cooperate in any ongoing investigations of individuals, the steps that the company has taken to enhance its compliance program, and its internal accounting controls, the company’s full remediation.” It went on to add that the company had agreed to disgorge profits earned from the questionable behavior.

The JCI letter announcing the declination was no more detailed. “We have reached this decision based on a number of factors, including but not limited to: the voluntary self-disclosure of the matter by JCI; the thorough investigation undertaken by the company; the company’s full cooperation in this matter (including its provision of all known relevant facts about the individuals involved in or responsible for the misconduct), and its agreement to continue to cooperate in any ongoing investigations of individuals; the steps that the company has taken and continues to take to enhance its compliance program and its internal accounting controls; and the company’s full remediation.” As with the Nortek and Akamai, the JCI letter also noted the company had agreed to disgorge its profits.

About the only difference that can be ascertained in the letters is that Nortek and Akamai provide “fulsome” cooperation, and JCI provided “full” cooperation. Yet, the overall point of these declinations seems to be the cooperation was very substantial.

Contrast the triple declination language with the NPA, which Analogic received, specifically noting the company’s lack of full cooperation. It stated, “the company did not receive full cooperation credit because, in the view of the Offices, the company’s cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts that it learned during the course of its internal investigation; specifically, the company did not disclose information that was known to the company and Analogic about the identities of a number of the state-owned entity end-users of the company’s products, and about certain statements given by employees in the course of the internal investigation;”

All parties admitted to facts, which could have formed the basis of a criminal FCPA enforcement action brought by the DoJ, yet they all received declinations. While it would certainly have been more helpful to have a full release of information by the DoJ, to assist the compliance practitioner in understanding the totality of the facts considered, these three declinations may well mark a new starting point in criminal FCPA enforcement going forward.

OFFICIAL POLICY

Since at least 2014, with the Parker Drilling and Hewlett-Packard FCPA enforcement actions, the DoJ has provided significant credit to companies that thoroughly cooperated and provided extensive remediation during the pendency of their enforcement actions. With the Pilot Program implementation, these shifts are now official DoJ policy.

One other point unrelated to the Pilot Program discussion is the length of time that the Akamai and Nortek matters were concluded. It was less than 18 months for both. This short time frame for a resolution is certainly a welcome development and shows that if a company comes forward quickly, is efficient in its investigation, and is proactive in its remediation, it can benefit with lower overall investigation and remediation costs as well.

2016 may well turn out to be a seminal year in FCPA enforcement. The DoJ Pilot Program has come out of the box with some solid wins for the companies involved, the DoJ, and the greater compliance community. If this pattern continues, it will allow the DoJ to focus its resources in driving home the message that it is doing compliance that will not only work to keep a company out of trouble, but will also get a company out of trouble after the fact.

The DoJ Pilot Program

has come out of

the box with some

solid wins for the

companies involved,

the DoJ, and the

greater compliance

community.


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Thomas Fox has practiced law in Houston for 30 years. He is now an independent consultant, assisting companies with FCPA and compliance issues. He is also editor of the award winning FCPA compliance and ethics blog and podcast, “The FCPA Compliance and Ethics Report.”

COMPANYSELF-

DISCLOSURE?COOPERATION FACTORS REMEDIATION DIRECTIVES

PROFIT DISGORGEMENT?

☑ Yes: Before completing internal

investigation

Shared investigation details; Identified and presented

relevant documents; Provided timely updates;

Translated documents; and Made witnesses available

Termination of culpable employees; Revision of internal

audit testing and protocol; Strengthening of policies;

Creation of compliance committee; Institution of mandatory

compliance training; and Adoption of risk based audit approach

☑ Yes

☑ Yes Same as Akamia, plus conducted risk assessment

Due diligence program for 3rd parties; Strengthening of

compliance policies; Enhanced compliance function and named CCO; Institution of mandatory compliance training;

and Enhanced travel and expense controls in China

☑ Yes

☑ Yes: One month after it received a

second anonymous complaint

Provided real time updates, interview summaries, and all requested documents; Provided Yates binders

including hot docs, interview summaries, chronologies and

emails; Preserved evidence

Termination of culpable employees; Suspension of culpable

3rd parties; Enhanced integrity testing and auditing, including random audits; and Random

testing of transactions

☑ Yes

No

Provided real-time updates during investigation; Preserved evidence;

Translated documents; Cooperated with staff

Hiring of new CCO and comptrollers; Review of payments

to 3rd parties and enhanced internal controls; New business

opportunity protocol; In-person compliance training; and Updated Code of Conduct; FCPA policies and procedures,

hiring procedures and screening

☑ Yes

BOX SCORE SUMMARY OF DECLINATIONS


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