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FCPA Enforcement and Compliance Developments

2013 SuperConference Compliance Panel

David H. Resnicoff Miller & Chevalier Washington, D.C.

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Corporate Plea 1

Individual Pleas 5

Corporate DPAs 7

Corporate NPAs 3

Consent to SEC Complaints (Individuals)

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Consent to SEC Complaints (Corporate)

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SEC Admin. Proc. 1

27 Dispositions

Note: These statistics count FCPA resolutions involving multiple distinct companies and/or individuals in a single settlement or case as separate enforcement actions.

2012 – The Year in Numbers Breakdown of Enforcement

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Note: Updated through December 31, 2012. These statistics count each distinct resolution involving a company and its affiliates as a separate enforcement action. They also include the resolved enforcement actions against BAE and James Giffen, although neither was technically convicted on an FCPA charge. Finally, convictions that have since been vacated have been removed as enforcement actions (e.g., Si Chan Wooh, Lindsey Mfg., the SHOT Show guilty pleas).

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14 9 10

23

14 9

6

7

8 4

8

3

2

3

15 14 8

31

11 11 5

4 4 13

9

8 5

SEC Corporate SEC Individual DOJ Corporate DOJ Individual

2007 2008 2009 2010 2011 2012 2006

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40 35

35

71

36 27

2012 – The Year in Numbers A Look at Resolved FCPA Enforcement Actions by Year

4

25

21

30

33

12

22

26

23

29

0

5

10

15

20

25

30

35

2004 2005 2006 2007 2008 2009 2010 2011 2012

Known Investigations Initiated (Resolved, Unresolved and Declined) (Affiliates Combined)

Companies Entering Dispostions (Affiliates Combined)

2012 – The Year in Numbers Known Investigations Initiated from 2004 to 2012

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2012 saw a significant uptick in declination decisions by the agencies

What exactly constitutes a declination?

What is behind the recent uptick?

Why is the DOJ declining enforcement more often than the SEC?

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6 5

6

2 3

7

4

11

0

2

4

6

8

10

12

2008 2009 2010 2011 2012

Declinations by SEC Declinations by DOJ

Note: Compiled through December 31, 2012. Includes only cases where formal declinations could be confirmed.

Known Declinations in FCPA Investigations from 2008 through 2012

2012 – The Year in Numbers A Look at FCPA Declinations by Year

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2 5

1 4

2 5

1 1 1 2 1 1

2

5

19

8 2

18

7 7 2

8 2 2

2 2 2 1 0

5

10

15

20

25

Companies Receiving Declinations Companies Entering Dispositions

Note: Tracks the approximate duration of FCPA-related investigations resolved or declined from 2006 to 2012. Estimates are upon publicly available information detailing, with varying degrees of specificity, when each investigation was initiated or disclosed. These statistics combine all related dispositions and known declinations involving each company and its subsidiaries and affiliates and use the more recent disposition/declination to measure the duration of each investigation.

2012 – The Year in Numbers Duration of FCPA-Related Investigations from 2006 to 2012

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Release of FCPA Guide

On Nov. 14, 2012, DOJ and SEC jointly issued 120-page “Resource Guide on the U.S. FCPA” (FCPA Guide); agencies’ goal was to highlight hypotheticals and “practical tips” regarding various compliance issues

FCPA Guide is "non-binding, informal, and summary” and "does not constitute rules or regulations," but agency representatives have stated that the Guide may reasonably be relied on and cited when negotiating with the agencies

Overall, FCPA Guide does not fundamentally change key enforcement positions (including those now being challenged in court), but expressly clarifies current agency practices, while confirming and consolidating public guidance and some “lore” in detail

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FCPA Guide on Gifts & Hospitality

Confirms the FCPA has no minimum threshold value for corrupt gifts or payments, but dismisses notion that modest gifts and hospitality could give rise to an enforcement action:

– Violations require corrupt intent, and “it is difficult to envision any scenario in which the provision of cups of coffee, taxi fare, or company promotional items of nominal value would ever evidence corrupt intent”

– The DOJ and SEC use discretion – small gifts are mentioned in FCPA cases only where they are part of a pattern of more egregious conduct

Hypotheticals show that more substantial items (e.g., crystal vase, business class airfare, moderate dinner, baseball game, play) may be appropriate under the right circumstances

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FCPA Guide on Gifts & Hospitality (cont’d)

Compliance program implications – Warns companies against spreading compliance resources too thin

– Notes that effective programs do not:

• Put “too much focus on low-risk…transactions”

• Devote “a disproportionate amount of time policing modest entertainment and gift-giving”

– Guide positions do not eliminate need to consider questions of line-drawing and reasonableness of gifts and entertainment

– Upcoming test of issues: World Cup tickets in Brazil

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FCPA Guide on “Instrumentality”

FCPA Guide endorses recent court rulings defining “instrumentality,” incorporating list of non-exclusive factors

State-owned or controlled entities can be instrumentalities, but no bright-line rule—fact-specific inquiry to be left to jury

FCPA Guide states that "as a practical matter” entities unlikely to qualify as instrumentalities if government does not own or control a majority of shares."

– Only a presumption. Guide cites Alcatel-Lucent as one exception where “instrumentality” status was found even though there was no majority ownership

Majority ownership/control alone not sufficient for status as “instrumentality,” but also theoretically not required

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FCPA Guide on Facilitating/Extortion Payments

FCPA Guide generally confirms existing interpretation of facilitating payments exception

Explicitly acknowledges that legality of a facilitating payment is dependent upon its purpose, not value, but notes that larger payments are “more suggestive of corrupt intent to influence” non-routine action

Confirms that true extortion or duress does not give rise to FCPA liability because payments made will lack requisite intent and purpose of violation, but must involve real threats to “health and safety”

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FCPA Guide on Vicarious Liability/ Conscious Avoidance FCPA Guide includes discussion of past dispositions plus “common

red flags” Directs companies to focus on risk-based due diligence, with

increasing scrutiny as red flags are uncovered – hypothetical provides added details on possible steps—instructive in showing how due diligence can fail

For third party vetting, highlights additional considerations (as part of an effective compliance program): – Due diligence on partners and providers – Appropriate business rationale, including written contract that specifically

describes actual services to be performed and establishes clear payment terms that provide for reasonable compensation, benchmarked by industry and country (if possible)

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FCPA Guide on Vicarious Liability/ Conscious Avoidance (cont’d) On-going monitoring of 3rd party activities:

– Documenting work performance

– Ensuring that compensation is commensurate with services being provided

– Periodic training and messaging on compliance expectations

– Obtaining annual compliance certifications

– Exercising audit rights

– Schedule for updating due diligence

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FCPA Guide on Successor Liability and M&A Due Diligence Confirms agencies’ views that successor liability can apply where pre-

merger FCPA violations are discovered post-closing States that companies that conscientiously seek to identify and quickly

remedy bribery issues—either before or soon after completing deal—will be given considerable credit – Such credit can include no action against acquiring company – Past cases also have been brought solely against predecessor entities – Many past cases have involved egregious conduct or post-closing conduct

Notably promises that a covered company that acquires a foreign entity not previously subject to FCPA will not be held retroactively liable for pre-acquisition improper payments made by acquired entity

Contains two hypotheticals on successor liability, featuring risk-based due diligence, targeted audits, and disclosure to agencies

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FCPA Guide on Accounting and Internal Controls Requirements: Basics

Requirements provide far-reaching basis for liability for parents related to actions of foreign subsidiaries – virtually strict liability (civil) for improperly recorded books and records, even when anti-bribery elements not present

Obligations automatically flow down to majority-owned or controlled subsidiaries

Good-faith obligation for non-controlled subsidiaries

SEC: Any illicit payment is “material” per se

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FCPA Guide on Accounting and Internal Controls Requirements

Notes that bribes are often concealed in records as legitimate payments, and includes long list of past mischaracterizations

Confirms that “design of a company’s operational controls must take into account the operational realities and risks attendant to the company’s business”

Summarizes different types of schemes resulting in internal controls “failures” in Siemens, Daimler cases

Emphasizes key role of “targeted audits to make certain controls on paper are working in practice”

SEC officials speaking during rollout repeatedly emphasized important role of internal audit functions in ensuring compliance program and controls integrity and effectiveness

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Hallmarks of an Effective Compliance Program: FCPA Guide’s General Overview

DOJ and SEC have “no formulaic requirements”

Make inquiries related to 3 basic questions:

Does it work?

Is the company’s

compliance program well designed?

Is it being applied

in good faith?

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Hallmarks of an Effective Compliance Program: Ten Hallmarks Summary:

1. Commitment from Senior Management and a Clearly Articulated Policy Against Corruption

2. Code of Conduct and Compliance Policies and Procedures 3. Oversight, Autonomy, and Resources 4. Risk Assessment 5. Training and Continuing Advice 6. Incentives and Disciplinary Measures 7. Third-Party Due Diligence and Payments 8. Confidential Reporting and Internal Investigation 9. Continuous Improvement: Periodic Testing and Review 10. M&A: Pre-Acquisition Due Diligence and Post-Acquisition Integration

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Hallmarks of an Effective Compliance Program: Tone at the Top

Commitment from senior management

Clearly articulated policy against corruption

Code of Conduct and compliance policies and Procedures

– “A company’s code of conduct is often the foundation upon which an effective compliance program is built.”

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Hallmarks of an Effective Compliance Program: Oversight, Autonomy, and Resources

Assign responsibility for oversight and implementation of the compliance program – One or more “specific senior executives”

– Who have appropriate authority

– Adequate autonomy from management

– Sufficient resources

To ensure that the company’s compliance program is implemented effectively.

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Hallmarks of an Effective Compliance Program: Risk Assessment

“DOJ and SEC will give meaningful credit to a company that implements in good faith a comprehensive, risk-based compliance program even if that program does not prevent an infraction in a low risk area because greater attention and resources had been devoted to a higher risk area.”

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Hallmarks of an Effective Compliance Program: Training and Continuing Advice

Training and certification for directors, officers, relevant employees and where appropriate, agents and business partners

Information presented should be appropriate for the targeted audience, including providing training and training materials in the local language

Provide different types of training to sales and accounting personnel, with hypotheticals or sample situations that are similar to the situations they might encounter

Develop measures to provide guidance when such advice is needed urgently

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Hallmarks of an Effective Compliance Program: Incentives and Disciplinary Measures

Disciplinary procedures – Should be applied reliably and promptly

– Should be commensurate with the violation

Positive incentives can take the form of – Personnel evaluations and promotions

– Rewards for improving and developing a company’s compliance program

– Rewards for ethics and compliance leadership

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Hallmarks of an Effective Compliance Program: Third Party Due Diligence and Payments

As noted earlier, in connection with 3rd party relationships, FCPA Guide calls for: – Due diligence on partners and providers – Appropriate business rationale – On-going monitoring of 3rd party activities

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Hallmarks of an Effective Compliance Program: Continuous Improvement, Periodic Testing

A good compliance program should “constantly evolve”

Take time to review and test controls

Think critically about its potential weakness and risk areas – Employee surveys

– Targeted audits

– “Proactive evaluations”

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Hallmarks of an Effective Compliance Program: Mergers and Acquisitions

As discussed in connection with successor liability earlier, FCPA Guide underscores importance of effective M&A-related due diligence on acquisition targets

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Hallmarks of an Effective Compliance Program: Other guidance Cited by the Guidance

Dep’t of Commerce: Business Ethics: A Manual for Managing a Responsible for Business Enterprise in Emerging Market Economies

Dep’t of State: Fighting Global Corruption: Business Risk Management OECD 2009 Anti-Bribery Recommendations and Annex II Asia-Pacific Economic Cooperation – Anti Corruption Code of Conduct for

Business International Chamber of Commerce – ICC Rules of Combating Corruption Transparency International – Business Principals for Countering Bribery UN Global Compact – The Ten Principles World Bank-Integrity Compliance Guidelines World Economic Forum - Partnering Against Corruption – Principles for

Countering Bribery

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FCPA Guide – Key Takeaways

Clarifies agencies’ views of Act’s provisions that lack clarity on their face

– However, some of these views are currently being litigated and may be affected by future court rulings

Confirms long-standing agency positions and practices in certain areas, such as extortion

Provides a "one-stop shop" that articulates enforcement priorities, compliance expectations, and, to some extent, the general analytical framework the agencies will use when evaluating particular factual scenarios.

Some important open issues remain, despite FCPA Guide’s overall comprehensive scope

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Questions?

For more information, please contact:

David H. Resnicoff 202.626. 5833 dresnicoff@milchev.com