the fcpa year in review

1© 2009 Shearman & Sterling LLP

The FCPA Year in Review

Recent InvestigationsCompliance Programs

July 22, 2009 2© 2009 Shearman & Sterling LLP

Anti-Corruption History


Common Anti-Corruption Provisions

Anti-Bribery ProhibitionsBooks & Records RequirementsProceeds of Corruption Provisions


US Books & Records Provisions - “Issuers” only

Two requirements: Maintain books and records which, in reasonable detail, accurately and fairly reflect

the transactions and dispositions of the assets Devise & maintain internal controls that reasonably assure

the books and records are accurate and transactions are pursuant to specific or general management direction

Civil and Criminal Penalties Criminal fine of up to $5,000,000 for natural persons and $25,000,000 for legal

persons Imprisonment for not more than 20 years Disgorgement Bar on employment, professional disqualifications


Elements of US Anti-Bribery Offense

(i) Issuer, domestic concern, or “any person”

(ii) Use of mails or interstate commerce

(iii) Corruptly

(iv) In furtherance of payment, offer, or promise, or authorization of payment, offer, or promise

(v) Of money or anything of value

(vi) To a public official, political party, party official, candidate for public office, or intermediary

(vii) To cause the official to do something, to refrain from doing something, or to use his or her influence

(viii) To assist in obtaining or retaining business for any person


Defenses and Exceptions

Facilitating or expediting payments “routine governmental action”

Reasonable and bona fide expenditures Promotion, demonstration, or explanation of products or services Execution or performance of a contract with a government

Lawful payments to government officials Lawful under the written law of the official’s country


U.S. Cases Brought

3 1 36 7

17

955

7 6

21

16

8

4 3

0

5

10

15

20

25

30

35

40

2002 2003 2004 2005 2006 2007 2008 2009ytd

Total SEC/DOJ Matters Initiated: 2002-present

DOJ

SEC

Total SEC/DOJ Matters Initiated: 2002-present

DOJ

SEC

3 3

75

5

2

5

10

6

11

15

3

3

02468

1012141618

2002 2003 2004 2005 2006 2007 2008 2009ytd

Individuals Charged:2002-Present

DOJ

SEC

DOJ

SEC

11

2 2 1

7107

188

4431

3

0

5

10

15

20

25

30

2002 2003 2004 2005 2006 2007 2008 2009ytd

Total Corporate Matters Initiated: 2002-present

U.S. Corporations

Foreign Corporations

U.S. Corporations

Foreign Corporations

2


Rise in Corporate Prosecutions Post-Enron Corporate Fraud Task Force Voluntary Disclosures resulting from Sarbanes Oxley

Focus by auditors on internal controls and “fraud” reporting Management certifications Whistleblower provisions

Increased availability of foreign evidence Rise in Prosecution of Foreign Corporations

Increased cooperation and coordination with foreign law enforcement Impatience with pace of foreign enforcement of OECD laws Expansive interpretation of territorial jurisdiction over foreign companies

Growth in “Consolidated” or “Industry” Investigations U.N. Oil for Food (17 corporations report open investigations; 9 corporations settled with DOJ & SEC) Freight Forwarders & Customs Brokers (12 corporations report open investigations) Medical Devices (11 corporations report open investigations)

Trends in U.S. Cases


Potential Sanctions in FCPA Matters

Civil Penalties Fine of $325,000 (Tier II) or $650,000 (Tier III) per

violation

Disgorgement of ill-gotten profits (SEC only)Criminal Penalties Organizations

$ 2 million per violation; or Twice the “Gross Gain”

Individuals 5 years in prison $100,000 per violation

Collateral Consequences Debarment Shareholder & other actions Foreign Prosecutions

Corporate Deferred Prosecution Agreement / Non Prosecution Agreements Penalties & Restitution Reporting Compliance measures Monitors Cooperation, including waiver of attorney-client

privilege


Trends in Sanctions

Company: Fines, Civil Penalties, Disgorgement & Interest

$ 800 million Siemens (+ € 596 in Germany) 579 million KBR/ Haliburton 44 million Baker Hughes 32 million Wilbros 28 million Titan 26 million Vetco II 22 million Lockheed II 19 million Volvo 17 million Fiat 16 million ABB

Individual: 84 months Steindler & Stanley 63 months Murphy 46 months Williams

155.1

36.328.22.7

87.20

0.0

581

893.4

0100200300400500600700800900

2002 2003 2004 2005 2006 2007 2008 2009ytd

Total Criminal and Civil Fines Imposed on Corporations: 2002-present

Am

ou

nt

in M

illio

ns (

$) Amounts Pertaining to

Siemens 2008 and KBR 2009


Number of FCPA Proceedings by Country

Africa Asia Europe Middle East North America South America

Nigeria 25 China 17 Turkey 4 Iraq 19 Canada 6 Costa Rica 6

Rwanda 6 Indonesia 14 Germany 3 Egypt 6 Mexico 2 Brazil 5

Senegal 4 India 8 France 2 Saudi Arabia

4 Panama 4

Benin 3 Azerbaijan 7 UK 2 UAE 4 Argentina 3

Angola 2 Kazakhstan 6 Belgium 1 Bahrain 2 Colombia 3

Kenya 2 South Korea 6 Greece 1 Iran 2 Ecuador 3

Liberia 1 Thailand 5 Italy 1 Israel 2 Jamaica 3

Taiwan 3 Luxemburg 1 Dom. Rep. 2

Bangladesh 2 Poland 1 Venezuela 2

Philippines 2 Spain 1 Bolivia 1

Russia 2 Nicaragua 1

Mongolia 1

Turkmenistan 1

Uzbekistan 1

43 75 17 39 8 33


U.S. Criminal Dispositions

,,

Compliance Monitor16% (16)

Deferred/Non-Prosecution Agreements

21% (23)

Pleas44% (48)

Withdrawals1% (1)

Convictions4% (5)

Dismissals3% (3)

Fugitives5% (6)

Acquittals6% (7)


Siemens Settlement - Facts

According to U.S. pleadings, $ 805,500,000 intended in whole or in part as corrupt payments to foreign officials

Corrupt conduct included: Off-books accounts Consultant agreements with no legitimate business purpose Conduit payments False invoices Misaccounting for corrupt payments Limited audits of consultant payments Accumulating profit reserves as liabilities in internal balance sheet accounts Removable Post-It notes as approval forms Failure to follow four-eyes principle Backdating agreements Use of “agency agreements” to avoid prohibitions on consultants Kickbacks in connection with the UN’s Oil for Food Program Contracts


Siemens Settlement – U.S. Sanctions

DOJ Fine reduced to $ 450 million

U.S. Sentencing Guidelines range of $ 1.35 – 2.75 billion Express recognition of Siemens’ “extraordinary cooperation,” its new Compliance program and remediation

efforts, and penalties imposed in German enforcement actions Imposition of a Monitor

SEC Requires disgorgement of $ 350 million of profits Imposition of a Compliance Monitor

Both DOJ and the SEC required Siemens to retain a monitor Dr. Theo Waigel appointed compliance monitor for four-year term Regularly scheduled reporting to SEC Report improper activities to Siemens’ Audit Committee Report to US government any improper activity that may constitute significant violation of law


Siemens Settlement - German Proceedings

October 2007 proceedings relating to Siemens Com € 201 million fine € 179 million tax penalty relating to € 450 million in “non-deductible

expenses” December 2008 proceedings relating to failure of former Managing

Board to fulfill its supervisory duties € 395 million fine

Continuing investigations of former Managing Board, employees and others


KBR / Halliburton

Facts: Halliburton acquired M.W. Kellogg Company in 1996 and merged it with Brown & Root to form KBR Kellogg and then KBR was part of a consortium to build LNG “trains” in Nigeria Between 1994 and 2002, KBR and the other partners paid $182 million to two agents to pay bribes to

senior and mid-level Nigerian officials

Sanctions: DOJ Criminal Fine - $ 402 million SEC disgorgement – $ 177 million Monitor for KBR Compliance consultant for Halliburton

Individuals: Former KBR senior officer pleaded guilty and will serve up to 84 months in prison Former agent (a U.K. solicitor) and former KBR officer, both UK citizens, charged. UK authorities

have arrested the agent and are seeking the officer. U.S. has stated it will seek extradition.


Other 2008 Developments

Two DOJ Review Releases on M&A Due Diligence Fourth Revision of “Principles of Federal Prosecution of Business

Organizations” ( Holder, Thompson, McNulty, Filip Memo) Written DOJ Policy on the Selection & Duties of a Monitor


An Investigation: Steps

Trial AnalysisStatutory

ElementsSubpoena

Smell Test

Random Event


An Investigation: How It Starts & What It Typically Means

Typical triggers for investigations Typical initial issues

Government actionE.g. prompted by complaint, whistleblower, legal assistance request, international institutions, press reports (see Siemens, Daimler, Oil for Food cases, Statoil)

Initial fatal mistakes (e.g. lack of proper dawn raid policy) Lack of control over procedure Business disruption / distraction Public relations issues

M&A transactionsE.g. bidder due diligence or vendor due diligence (see StatoilHydro, Titan, ABB)

Timing constraints Diverging interests of seller and bidder(s) Impact on transactions (show stopper? no

action letter? timing of closing? reps & warranties? escrow?)

Self-reportingFollowing internal findings, e.g. whistleblower, internal audit

Control over procedure & evidence Control over timing Control over public relations Persuasion of internal constituencies Selective disclosure?


Dawn Raids & Search Warrants

Have a policy that provides explicit instructions and contact information Call counsel immediately. Until counsel arrives senior employee acts as leader

Do not agree to interviews or informal chats with employees unless counsel so advises All requests for information other than the location of materials cover by the warrant /order should be referred to counsel.

Do NOT resist or interfere with police activity – offer assistance to minimize disruption to the company’s records, equipment, and employees Ask to assist in electronic data gathering so as to not damage data or media Offer a conference room for the officers to use where you will deliver requested materials

Make a record of your cooperation and the government’s actions: Note the time the officers arrive. Ask to see each officer’s credentials, write down names agency & contact information Review warrant / order for apparent validity, addressee & limitations & make a copy Get a detailed receipt specifically listing anything removed from premises and if possible copies


Anti Corruption Compliance Programs

Seven elements of an effective program:1) Establish compliance and ethics standards and procedures to be followed by employees

and other agents2) Board of directors must exercise reasonable oversight and assignment of overall

responsibility 3) Due diligence in delegation of substantial authority 4) Implement training programs and information dissemination5) Implement monitoring and auditing systems, including use of a reporting system 6) Implement and consistently enforce appropriate disciplinary mechanisms 7) Respond appropriately to misconduct and take all reasonable steps to prevent similar

offenses


Mergers & Acquisitions: Due Diligence

Inadequate due diligence can result in liability Successor liability for pre-acquisition conduct Direct liability for continuing post-acquisition conduct

FCPA due diligence before mergers and acquisitions is increasingly expected by the U.S. government. Recent guidance suggests that due diligence coupled with disclosure and cooperation may result in a

post-acquisition “grace period” to impose new controls and clean house Due diligence includes:

Due diligence questionnaire Interviews with key executive and operational personnel Thorough review of target's books and records Identify and review third parties retained by target - level of review based on business volume and

geographic risk profile Interviews with critical third party personnel Review of books and records by agreement or by audit rights

Appropriate response to “red flags” Retention of external counsel Forensic accounting review


Third Parties (Agents, Suppliers, Wholesalers, Customers):Due Diligence & On-Going Risk Assessment

Existing contract due diligence Internal controls Look for conduit payments Ensure proper finance structure Check for red flags

Examples on next slides

Compliance Program Ensure proper due diligence Oversee compliance training

and maintain certifications Anti-corruption SOPs Maintain help lines Ensure prompt enforcement

and discipline Periodic compliance auditing

Partner/agent due diligence Partner/agent contract terms Check for red flags

Sales&

Marketing

Finance&

Controls

Legal&

Compliance

Red flags: May signal a compliance issue that requires further/heightened due

diligence Periodic re-review may be necessary


RED FLAGS: Agent/Vendor I

Agent/Vendor

Relatedto customer or

government officialQuestionable

past

Incorporated in high risk country

Primary strengthis influence

Lacks experience

Lacks references

Government official referred

Was referredby customer

Commercialcapability

Establishedfacilities

Experiencein the region

Favorable businessreferences

No government contracts

Based in lowrisk country

Commercial directory listings

Past relationship with company


RED FLAGS: Agent/Vendor II

Agent/Vendor

AnonymityRefuses corruption contract provisions

Misleading payment structure

False documents Subcontracting to third party

Excessive compensation

Success fee

Transparent payment process

Accuratedocumentation

Detailed scopeof work

Concretedeliverables

Effort-based compensation

On-budget, on-time performance

Interface withqualified staff


RED FLAGS: Payments

Payment

Third countriesor parties

Shell companies

Post office boxes

Unexpected bonuses or loans

Requests negotiable currency

Larger payments during bid process

Third country banks

Invoices paidtoo quickly

Established banks

Matches commercial capability

Regular channelsCommercially

reasonable terms

Reasonable compensation

Payment incountry


RED FLAGS: Operations

Operations

Requests backdatingor fraudulent

documentation

Connection with government or

customer emerges

Suspicious documentation

Becomes subject to investigation

Suspicious expenses or travel

Refuses to certify compliance

Well-trainedemployees

Anti-corruptionprogram

Accurate documentation

Performanceconsistent with

proposals


Discussion Questions

1.) In a normal international M&A transaction, should the anti-corruption due diligence match the standard set out in recent DOJ Review Releases on that topic?

2. In an offering by a foreign issuer does a US underwriter risk FCPA liability if the issuer makes a corrupt payment traceable to the offering proceeds?

3.) How much economic stimulus aid can a foreign corporation receive before it becomes a governmental “instrumentality” so that its employees are “foreign officials” under the FCPA?

the fcpa year in review

Documents

red flags

siemens settlement

managing board

kbr

government

anti

siemens