Foreign Corrupt Practices Act Enforcement:

2014 Year-in Review January 29, 2015

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Mark Srere Stanley Marcuss Andrew Mohraz

Presenters

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•  2014 Enforcement Overview •  FCPA Primer •  2014 Enforcement Update

–  Huge Settlements –  Increased Focus on Individuals –  Increased Focus on China –  Increased International Cooperation –  Benefits & Risks of Self-Disclosures –  Significant DOJ Interpretations –  Interesting SEC Enforcement Initiatives

•  Compliance Tips

Agenda

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2014 ENFORCEMENT OVERVIEW

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•  DOJ/SEC Settlements –  2014: $1.56 billion –  2013: $731 million –  2012: $259 million –  2011: $509 million –  2010: $1.8 billion –  2009: $644 million

•  Corporate Settlements –  2014: 10 settlements –  2013: 12 settlements –  2012: 12 settlements –  2011: 15 settlements –  2010: 23 settlements –  2009: 11 settlements

•  Individuals Charged –  2014: 10 individuals –  2013: 12 individuals –  2012: 2 individuals –  2011: 10 individuals –  2010: 33 individuals –  2009: 18 individuals

FCPA Statistics

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•  The Enforcers: –  DOJ

•  Established FCPA unit works with FBI, Homeland Security, Commerce, SEC, and IRS

•  Investigative tools: subpoenas, search warrants, body wires, wiretaps

–  SEC •  FCPA unit has staff of about three dozen attorneys and other

professionals –  FBI

•  Will triple its overseas bribery unit to more than 30 agents

•  The Targets: –  107 companies reporting ongoing and unresolved FCPA-related

investigations

Continued Aggressive Enforcement Efforts

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FCPA PRIMER

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Antibribery Provisions

•  Prohibits bribery of foreign government or political officials for the purpose of obtaining or retaining business or securing any improper advantage

•  Mainly enforced as criminal violations by the Department of Justice

Books and Records Provisions

•  Requires SEC-registered or reporting issuers to make and maintain accurate books and records and to implement adequate internal accounting controls

•  Mainly enforced as civil violations by the Securities and Exchange Commission

Structure of the FCPA

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•  Any “issuer” that files reports to the SEC or trades equity or debt on a U.S. exchange –  Includes any foreign company that trades, for example, American

Depository Receipts (ADRs) on a U.S. exchange

•  Any “domestic concern” –  Includes U.S. citizens, nationals, and residents as well as any entity

(corporation, partnership, etc.) that is organized under the laws of the U.S. or a U.S. territory or that has its principal place of business in the United States

•  Any “person,” including an organization, wherever located, that, while in a U.S. territory, does any act in furtherance of the prohibited conduct –  Government argues minimum contacts include emails, telephone calls,

transfers through correspondent bank accounts in U.S. intermediary banks

To Whom Do the Antibribery Provisions Apply?

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•  It is unlawful for –  an “issuer,” “domestic concern,” or “any person acting within the

territory of the United States” –  with “corrupt intent” –  directly or indirectly –  to offer, pay, promise to pay, or authorize payment –  of “anything of value” –  to a “foreign official” –  for the purpose of obtaining or retaining business

Antibribery Prohibited Acts

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•  Applies ONLY to expedite or secure performance of “routine governmental” action by a government official

–  Must be non-discretionary and not a misuse of discretion –  Size is not determinative, but can suggest discretion or corruption – look to purpose rather

than its value

•  Examples –  Obtaining permits, licenses, or other official documents –  Processing governmental papers, such as visas and work orders –  Providing police protection –  Mail pick-up and delivery –  Providing phone service, power, and water supply –  Loading and unloading cargo –  Protective perishable products –  Scheduling inspections associated with contract performance in transit of goods across

country

•  BUT some companies no longer allow these types of payments

•  AND facilitation payments are not always permitted under local foreign law

Facilitation Payments

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•  “Lawful” under local law –  The fact that bribes may not be prosecuted under local law does

not suffice for this defense –  U.S. v. Kozeny (S.D.N.Y. 2008): court ruled that an exception

under Azeri law that relieved bribe payors who voluntarily disclosed bribe payments to the authorities of criminal liability did not make the bribes legal under this affirmative defense

•  Promotional payments –  “Reasonable and bona fide” expenses

•  Promotion, demonstration, explanation of products/services •  Execution of performance of contract

–  Proper documentation of expenditures

“Affirmative Defenses” Under the FCPA

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•  Books, records, and accounts must be kept “in reasonable detail” –  Level of detail that would satisfy prudent officials in the conduct of their own

affairs –  No materiality threshold –  Bribes are often concealed as legitimate payments, such as consulting fees,

marketing expenses, travel and entertainment, or discounts

•  System of internal accounting controls –  The processes in place to ensure accurate financial reporting –  Includes the organization’s “tone,” risk assessments, and control activities such

as approvals, authorizations, segregation of duties, etc. –  An effective compliance program is a critical component of internal controls

•  SEC will look to see if there are potential reporting and anti-fraud violations that accompany the FCPA violation

•  There can be criminal liability for accounting violations

Books and Records

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2014 ENFORCEMENT UPDATE

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Huge Settlements

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•  Settlement in January 2014

•  Combined $684 million settlement with DOJ and SEC –  Sixth largest FCPA settlement

•  Alcoa and U.S. subsidiary supplied aluminum raw materials to Bahrain-owned company

•  Use of international middleman, Victor Dahdaleh, and shell entities owned by Dahdaleh

•  Price markups of $188 million over 20 years allowed tens of millions of dollars in bribes to Bahraini Royal Family

Alcoa Inc.

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•  Settlement in December 2014

•  $772 million settlement with DOJ –  Second largest FCPA settlement –  Third French company on top 10 list (Total S.A., Technip S.A.) –  Two U.S. subsidiaries reached DPAs

•  Alleged more than $75 million in bribes to secure $4 billion in projects in Indonesia, Saudi Arabia, Egypt, Bahamas, and Taiwan –  Focus on use of third party consultants to pay bribes to foreign

officials to influence contract awards

•  Followed $88 million settlement in March 2014 with Marubeni Corp., a consortium partner in Indonesia

Alstom S.A.

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Increased Focus on Individuals

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“Since 2009, we have convicted more than 50 individuals in FCPA and

FCPA-related cases, and resolved criminal cases against more than 50

companies with penalties and forfeiture of approximately $3 billion.

Twenty-five of the cases involving individuals have come since

2013 alone. And those are just the cases that are now public. These

individuals run the gamut of actors involved in bribery schemes:

corporate executives, middlemen, and corrupt officials.”

Assistant Attorney General Leslie R. Caldwell

November 2014

DOJ’s “Robust Enforcement Record”

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•  Five individuals charged in connection with investigation

•  Asem Elgawhary –  Former Bechtel executive pleaded guilty to accepting $5.2

million in bribes in connection with government contract awards –  73-year old agreed to serve 42 months in prison

•  Lawrence Hoskins –  Former Alstom Holdings SA executive –  District Court denied motion to dismiss indictment; set for June

trial

•  William Pomponi, Frederic Pierucci, David Rothschild –  Former Alstom executives all have pleaded guilty

Alstom S.A. / Bechtel Corp.

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•  Three individuals charged in connection with investigation –  $330,000 in cash payments to official of Colombian state-owned

petroleum company (Ecopetrol S.A.) in exchange for approval of $40 million oil services contract

•  Knut Hammarskjold (co-CEO) and Gregory Weisman (General Counsel) entered guilty pleas

•  Joseph Sigelman (co-CEO) entered not guilty plea –  District Judge denied Sigelman’s motion to dismiss and his

challenge that Ecopetrol was not an “instrumentality” of the Colombian government

–  District Judge will allow evidence of secret video recording made by GC Weisman of conversation with Sigelman

–  Trial set for April 2015

PetroTiger Ltd.

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•  Two individuals charged in connection with investigation –  Stephen Timms and Yasser Ramahi headed sales (thermal

binoculars, security cameras) in company’s Dubai office –  Penalties: combined $70,000

•  Provided to Saudi government officials: –  Luxury watches totaling $7,000 –  20-night world travel tour before 8-10 hour visit to FLIR’s Boston

facilities for equipment inspection, including: Casablanca, Paris, Dubai, Beirut, and New York City

•  Attempted Cover-up –  Fabricated invoice for watches –  Claimed travel payment was a billing mistake by travel agent

FLIR Systems Inc.

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•  Five individuals have been charged, all of whom have now pleaded guilty to criminal charges

•  Allegations –  Paying $5 million in bribes over three-year period to a public

Venezuelan bank in exchange for receiving the bank’s bond-trading business

–  Scheme made $74 million in revenues for company

•  DAP did not self-report; DOJ developed the investigation from a broker-dealer examination

Direct Access Partners LLC

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•  Six foreign nationals indicted for international conspiracy seeking to secure mining licenses –  $18.5 million in bribes to government officials in India

•  Dimitry Firtash, Ukranian national and enterprise leader, arrested in Austria and posted € 125 million in bail

•  Other defendants remain at large: –  Andras Knopp (Hungary) –  Suren Gevorgyan (Ukraine) –  Gajendra Lal (Indian national, U.S. resident) –  Periyasamy Sunderalingam (Sri Lanka) –  K.V.P. Ramachandra Rao (India, member of Parliament)

Group DF

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Increased Focus on China

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•  Settlement in December 2014

•  Combined $135 million with SEC and DOJ

•  Between 2004 and 2008, Avon’s Chinese subsidiary provided $8 million in cash, gifts, and improper travel and entertainment to Chinese government officials

•  Costs to Avon: Settlement took six years and cost over $300 million in professional fees –  Avon’s internal audit and legal departments raised FCPA

concerns in 2005 –  Avon disclosed in 2008 after receiving whistleblower letter

Avon Products, Inc.

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•  Settlement in December 2014

•  $2.4 million settlement following self-disclosure and cooperation with SEC

•  Several of Bruker’s Chinese subsidiaries paid: –  $120,000 in travel and entertainment to employees of Chinese

state-owned companies –  $110,000 to “collaboration agreements” with Chinese

government officials

•  SEC focused on Bruker’s failure to translate compliance policies and training into Mandarin and local languages

•  Bruker reported it spent over $26 million on investigation and settlement expenses

Bruker Corp.

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•  Of 107 companies reported to have ongoing or pending FCPA-related investigations, countries most often mentioned in public filings:

Corporate Investigations

China: 40 investigations

Brazil: 10 investigations

Russia: 9 investigations

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•  SEC subpoena regarding potential bribery related to release of “Resident Evil: Afterlife” movie

–  Subpoena issued in probe “In the Matter of Lions Gate Entertainment Corp.”

•  Subpoena indicates escalation of 2012 inquiry into major studio movie-distribution practices in China

–  Hollywood studios must work with state-owned China Film Group to secure 1 of 34 spots for imported movies

–  Third-party firms help studios navigate bureaucracy

•  Sony attorneys have reviewed 570,000 documents and interviewed 39 employees

Sony Corp.

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Increased International Cooperation

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“This level of collaboration is the product of hard work and strategic

coordination, which has allowed us to forge the international

partnerships that are essential to fight global corruption … Together,

these coordinated global actions sent a powerful message –

countries all over the world are now engaged in the fight against foreign

bribery and together, we can and will hold to account individuals and

companies who engage in corruption, regardless of where they operate

or reside.”

Assistant Attorney General Leslie R. Caldwell November 2014

An “International Solution” to Global Bribery

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•  Deputy Attorney General James M. Cole, December 2014: –  “wide consortium of law enforcement officials throughout the

country and across the globe” involved in investigation –  “remarkable cross-border collaboration” involving U.S.,

Indonesia, Switzerland, UK, Germany, Italy, Singapore, Saudi Arabia, Cyprus, Taiwan

•  April 2014: Indonesian KPK successfully prosecuted former Indonesian Parliament official for bribes, sentenced to 3 years in prison

•  September 2014: UK’s SFO charged Alstom’s UK subsidiary for bribes in India, Poland, and Tunisia

Alstom S.A. / Marubeni Corp.

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•  UK’s SFO closed its investigation into 2011 sale of Autonomy to HP

•  Investigation commenced in early 2013

•  SFO cited that it had ceded jurisdiction over investigation to U.S. authorities based on parallel DOJ/SEC investigation

Hewlett-Packard Co.

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•  International conspiracy involving individuals associated with India, Ukraine, Hungary, U.S., and Sri Lanka

•  DOJ worked closely with and received assistance from: –  Austrian law enforcement –  Hungarian National Police

Group DF

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Benefits & Risks of Self-Disclosures

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•  SEC: $5 million settlement; DOJ: declination

•  Immediate Disclosure –  September 2010: company learns of possible illegal payments while updating its

FCPA policy –  December 2010: company has self-disclosed and publicly announced its own

investigation

•  “Extensive Remediation Effort” –  Terminated four employees, including division president and CFO –  Forensic accounting, companywide risk assessment, enhanced training and

internal controls, review of third party relationships, improved process for retaining new third parties

•  Cooperation –  Provided real-time reports of investigative findings, –  Produced English-language translations –  Made foreign witnesses available in U.S.

Layne Christensen Co.

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•  Combined $55 million SEC/DOJ settlement –  NPA with DOJ for company’s self-disclosure and full cooperation

•  Allegations –  $7.5 million in bribes paid over five-year period –  $35 million in profits through bribes –  Third party agents: high commissions, no expertise/capabilities

•  Remediation –  Enhanced anti-corruption policies globally, improved internal controls

and compliance functions, instituted additional due diligence contracting procedures for agents, and conducted extensive anti-corruption training

•  Cooperation –  Made U.S. and foreign employees available for interviews –  Produced documents from overseas –  Summarized findings of internal investigation

Bio-Rad Laboratories, Inc.

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“If you want full cooperation credit, make your extensive efforts to

secure evidence of individual culpability the first thing you talk about

when you walk in the door to make your presentation. Make those

efforts the last thing you talk about before you walk out. And most

importantly, make securing evidence of individual culpability the focus

of your investigative efforts so that you have a strong record on

which to rely.”

Principal Deputy Assistant Attorney General for DOJ’s Criminal Division Marshall L. Miller

September 2014

Self-Disclosure Requires Report of Individuals

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Significant DOJ Interpretations

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•  United States v. Esquenazi (11th Cir. 2014): Court affirmed DOJ’s broad interpretation of who qualifies as foreign official under FCPA

•  Facts: –  Owners of Terra Communications (U.S. company) – Joel

Esquenazi (President/CEO) and Carlos Rodriguez (EVP Operations)

–  Alleged bribery scheme involving Telecommunications D’Haiti (“Teleco”), a company owned/controlled by Republic of Haiti

–  Terra officials paid more than $890,000 in bribes to Teleco company officials to reduce Terra’s debt to Teleco

•  Trial court imposed prison (Esquenazi: 15 years, Rodriguez: 7 years) and forfeiture of $3.09 million

“Instrumentality”: The Esquenazi Opinion

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•  Defendants appealed to Eleventh Circuit –  Argued that Teleco did not fall under FCPA’s definition of

“instrumentality” of foreign government and, therefore, no payments to foreign officials

–  Eleventh Circuit: Teleco qualifies as Haitian instrumentality

•  Test: Instrumentality is an entity that –  Is controlled by the government of a foreign country

•  Factors: designation, majority interest, hire/fire authority, management of profits/losses, length of time of indicia of control

–  Performs a function the controlling government treats as a governmental function

•  Factors: monopoly, government subsidy, services to greater public, perception

“Instrumentality”: The Esquenazi Opinion

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•  “Issuer” (Alstom Settlement) –  Pleaded guilty to criminal violations of FCPA’s books and

records and internal controls provisions –  Only “issuers” are subject to these provisions –  Alstom was last an “issuer” in 2004 when the company de-listed

securities from U.S. exchanges

•  “Domestic Concern” (Group DF Investigation) –  Demonstrates DOJ’s use of conspiracy allegations to charge

foreign individuals –  One of six individuals charged was U.S. resident (a “domestic

concern” under FCPA) –  Additional allegations: funds transmitted through U.S., two of

defendants traveled to U.S.

Jurisdiction

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•  United States v. Kay (5th Cir. 2007) –  Bribes paid to foreign officials in exchange for unlawful evasion

of customs duties and sales taxes could constitute an FCPA violation but does not automatically violate the FCPA

–  Prosecution must allege facts that savings were to assist in “obtaining or retaining business”

•  Layne Christensen (SEC settlement, October 2014) –  SEC alleged company paid over $1 million in bribes to obtain

favorable tax treatment, customs clearance for equipment, and reduction in customs duties

–  No allegation of what business the company obtained/retained as a result of the bribes

“Obtain or Retain Business”

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•  DOJ Opinion Procedure Release No. 14-02 (November 2014)

•  No FCPA liability for pre-acquisition potential FCPA violations by foreign target company if target company not already subject to FCPA –  Acquisition does not transform target company to “create liability where

none existed before”

•  Facts –  U.S. company sought to acquire foreign consumer products company

and subsidiary (both incorporated abroad) –  No evidence that target was subject to U.S. jurisdiction –  Discovery of: $100,000 in payments to government officials, accounting

failures, lack of compliance culture

Successor Liability

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Interesting SEC Enforcement Tactics

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•  In its 2014 fiscal year, the SEC received more than 3,600 whistleblower tips –  FCPA-related allegations accounted for 4.4% of whistleblower

tips

•  FCPA-related tips continue to increase –  2014: 159 allegations –  2013: 149 allegations –  2012: 115 allegations

•  No whistleblower award in connection with FCPA enforcement action to date

Dodd-Frank Whistleblower Provisions

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•  In 2014, 7 of the 8 SEC settlements were resolved by administrative proceedings, not in federal court

•  Dodd-Frank Amendment (2010) empowered SEC to collect civil penalties through administrative proceedings

•  SEC administrative proceedings do not require judicial approval –  In recent years, District Courts have sought changes to negotiated

settlements or dismissed / narrowed SEC’s claims

•  Administrative proceedings afford no right to jury trial and Administrative Law Judges are full-time SEC employees

Administrative Proceedings

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•  In February 2012, SEC alleged former Noble Corp. executives violated FCPA books and records provision –  Followed Noble’s 2010 settlement of $8.1 million to DOJ/SEC –  One executive settled for $35,000 in March 2012

•  In July 2014, SEC settled with Mark Jackson and James Ruehlen –  One week before trial was set to start in what was believed to be

the agency’s first trial in an FCPA matter –  No agreement/order to pay civil fines –  No admission of liability

•  SEC’s claims had narrowed throughout the case

Still No SEC FCPA Trial

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COMPLIANCE TIPS

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•  One size does not fit all

•  Requires a careful analysis of your business and an intentional identification of your risks

•  Counsel or head of compliance should be sure to stay on top of best practices and consider whether they are appropriate for the company

Compliance Programs

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•  Tone at the top – commitment from senior management and clearly articulated policy against corruption

•  Code of conduct, compliance policies & procedures

•  Oversight, autonomy, and resources

•  Risk assessment

•  Training and continuing advice

•  Incentives and disciplinary measures

•  Third-party due diligence

•  Confidential reporting and internal investigation

Essential Elements to Compliance Program

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•  DOJ continues to emphasize importance of effective anti-corruption due diligence in deal context

•  DOJ/SEC urge the following: –  Pre-Acquisition Due Diligence –  Post-Acquisition Compliance Integration –  Anti-Corruption Training –  FCPA Audit –  Disclosure to Government

Mergers & Acquisitions

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•  FCPA contains an exception for facilitation payments

•  But: –  UK Bribery Act – facilitation payments violate statute –  Canada’s Corruption of Foreign Public Officials Act –

amendment in 2013 to phase out facilitation payments exception

•  As a practical matter, multinational companies must determine whether to: –  Prohibit facilitation payments in all instances –  Implement strong internal controls to ensure that facilitation

payments are vetted and approved in advance of payment

Facilitation Payments

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CONCLUSION

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You see…

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Prosecutors see…

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QUESTIONS & ANSWERS

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•  Mark Srere Partner, Washington mark.srere@bryancave.com, 202.508.6050

•  Stanley Marcuss Partner, Washington sjmarcuss@bryancave.com, 202.508.6074

•  Andrew Mohraz Partner, Denver andrew.mohraz@bryancave.com, 303.866.0254

Contact Information

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