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U.S. Anti-Corruption Compliance

Danforth Newcombdnewcomb@shearman.com

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U.S. Anti-Corruption Topics

• Elements of a Violation• Enforcement Trends• Evaluating Compliance • Discussion

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Global Anti-Corruption History

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U.S. Anti-Corruption Topics

Elements of a Violation

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U.S. Jurisdiction

– Extraterritorial for U.S. companies and nationals• Includes U.S. subsidiaries of non-U.S. companies• Includes U.S. nationals working overseas for non-U.S.

companies– Territorial jurisdiction for non-U.S. companies and non-

U.S. nationals• Includes non-U.S. companies and individuals who do any act

within the United States• Includes non-U.S. subsidiaries of U.S. companies• Includes non-U.S. nationals working in the U.S. for either U.S.

or non-U.S. companies

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Who is Covered?

Agents & Stockholders Acting for Above

Organizations under U.S. Law

Employees of Above

SEC Registered

U.S. Citizens

U.S. Residents

U.S. Nationals Anywhere

Any Person in the U.S.

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U.S. Territorial Jurisdiction

Traditional Expansive Aggressive

Physical presence in the U.S.

Transmitting or transiting into or through the U.S. (fax, email, travel, bank transfers,

etc.)

Foreign U.S.$ denominated transactions

(via correspondent accounts)

U.S.-based email servers

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FCPA Penalties

Corporations IndividualsCriminalDOJ & FBI

Fines - $2 mil./ Twice GainNo Gov. Contacts

Monitor

PrisonFines - same

Probation

CivilSEC

Fines $25 milDisgourgement

InjunctionsMonitor

Fines $5 milInjunctions

Employment Bar

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U.S. Books & Records Provisions

Applies to “Issuers”– U.S. public companies– Non-U.S. companies whose securities are traded over U.S. exchanges or who are

otherwise registered with the U.S. Securities & Exchange Commission

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

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U.S. Anti-Bribery Provisions

– Corrupt act in furtherance– Of payment, offer, promise, or authorization of

“anything of value” to– “Foreign official”, political party, party official,

candidate, or “any person”– To induce action (quid pro quo) or obtain

improper advantage– To obtain or retain business

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Affirmative Defenses

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

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Anything of Value

Money

Charitable Contributions

Gifts

Assumption of DebtStock

Entertainment

Services Employment

Travel

Monetary equivalents

Family Benefits

Political Contributions

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Foreign Official

EmployeesOf

Any

Official Capacity

Department

Political Party

Government Agency

Gov.- Owned Company

Public International Organization

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Any Person

Customers

Suppliers

Subcontractors

Advisors (Lawyers, Accountants, etc.)

Subsidiaries

Agents

Consultants

Partners

Family Members

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Knowing

Willful Blindness Circumstantial Evidence

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Recent U.S. Case Analysis

Most of the top FCPA penalties have involved the use of agents

Top Criminal and Civil Penalties

Matter Description Fine and Civil Penalties

Siemens Payments through business consultant, payment intermediary, and other third parties

$800 million (+ € 596 in Germany)

Halliburton/KBR

Payments through business consultant $579 million

Magyar Telekom Payment through business consultants and intermediaries

$95.8 million

Baker Hughes Payments through business consultant $44 million

Willbros Payments through business consultant $32 million

Chevron Payments through sales intermediary $30 million

Titan Payments through business consultant $28 million

Vetco Grey II Payments through customs broker $26 million

Biomet, Inc. Payments through distributor $22.9 million

Lockheed II Payment to official’s spouse $22 million

Volvo Payments through distributor $19 million

CCI Travel and entertainment and education expenses paid directly to government officials, other direct payments

$18.2 million

Lucent Travel and entertainment expenses paid directly to government officials

$2.5 million

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U.S. Anti-Corruption Topics

Enforcement Trends

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Why More U.S. Enforcement Actions?• OECD Convention

– Availability of evidence– Cooperation & coordination amongst enforcement authorities– Peer review pressure

• Additional U.S. enforcement resources– FCPA unit at DOJ– FCPA FBI squad– FCPA unit at SEC HQ and field offices (32 attorneys)

• U.S. foreign policy– Link corrupt regimes to terrorism and drug trafficking

• Whistleblower incentives– Dodd-Frank– False Claims Act

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OECD Enforcement Actions1999 – 2011

0

20

40

60

80

100

120

140

Criminal

Civil/Adm

Japan Korea Italy Germany All Others

U.S.

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U.S. Defendants by Country of Official Africa Asia Europe Middle East North America South America

Nigeria 69 China 43 Greece 10 Iraq 50 Mexico 19 Costa Rica 11

Rwanda 6 Indonesia 27 Russia 9 Egypt 11 Canada 6 Brazil 13

Senegal 6 South Korea 16 Turkey 7 Saudi Arabia 8 Haiti 13

Angola 5 Thailand 16 Croatia 5 UAE 7 Venezuela 12

Cote D’Ivoire 4 India 13 Italy 5 Bahrain 2 Argentina 10

Benin 3 Kazakhstan 12 Germany 5 Iran 2 Ecuador 9

Kenya 3 Azerbaijan 10 Hungary 4 Israel 4 Honduras 9

Liberia 1 Vietnam 10 Latvia 3 Oman 2 Panama 6

Malawi 1 Kyrgyzstan 6 Poland 3 Libya 1 Colombia 4

Mozambique 1 Malaysia 6 Romania 3 Yemen 1 Bolivia 3

Uganda 1 Taiwan 6 Serbia 3 Dom. Rep. 3

Bangladesh 6 UK 3 Jamaica 3

Turkmenistan 5 France 2 Nicaragua 2

Philippines 4 Luxemburg 1 Guatemala 1

Uzbekistan 4 Czech Republic 1 Peru 1

Mali 1 Belgium 1

Mongolia 1 Georgia 1

Japan 1 Montenegro 1

Netherlands 1

Spain 1

100 187 69 88 25 100

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Trends in U. S. Sanctions

Company: Fines, Civil Penalties, Disgorgement & Interest

– $800 million Siemens (+ € 596 M in Germany and $100 M to World Bank) (2008)

– $579 million KBR/ Halliburton (2009)

– $400 million BAE (2010) (+£30 M in UK)

– $365 million Snamprogetti (2010)– $338 million Technip (2010)– $218 million JGC Corp (2011)– $185 million Daimler (2010)

– $137 million Alcatel (2010)

Individual: Jail – 15 Years Terra Telecom (2011)– 156 months Jefferson (2007)– 87 months Jumet (2009)– 84 months Stanley (2008)– 63 months Murphy (2002) – 57 months Diaz (2009)

Total Criminal and Civil Fines Imposedon Corporations: 2002 – 2012 YTD

Am

ount

in M

illio

ns (

$)

Amounts Pertaining to Siemens 2008 and KBR 2009

111.48

508.80

1782

155.1

36.328.22.787.20

0.0

579

803

0200400600800

1000120014001600

2002

2004

2006

2008

2010

2012

ytd

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U.S. Prosecution of Individuals

Clear Shift in DOJ & SEC Policy

Aggressive Legal Theories– Control Person Liability

Aggressive Investigative Tactics– International Cooperation– Wiretaps, Search Warrants– Extradition– Interdiction– Revoking Passports

“To really achieve the kind of deterrent effect we’re shooting for, you have to prosecute individuals. . . . If the only sanctions out there are monetary, penalties against companies could be interpreted as the cost of doing business. But when people’s liberty is at stake, it resonates in new ways.” Mark Mendelsohn, DOJ

“Prosecution of Individuals is a cornerstone of our enforcement strategy.” Lanny Breuer, DOJ

Individuals Charged: 2002-2012 YTD

3 37 7

12

42

6 5

10

5

25

33

38

1111

12

05

1015202530354045

2002

2004

2006

2008

2010

2012

ytd

4

DOJ

SEC

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U.S. Prosecution of Corporations

Voluntary Disclosures– Sarbanes-Oxley– Auditors– Principles of Federal Prosecution of Business

Organizations– U.S. Sentencing Guidelines

Industry Sector Initiatives– Customs Agents / Freight Forwarders (Oil & Gas)– Pharmaceutical / Medical Device Industry

Collateral Investigations– Antitrust– EPA– National Security– Medicare / Medicaid / Insurance Fraud

Mergers & Acquisitions– Due Diligence Discoveries

“The prosecution of corporate crime is a high priority for the Department of Justice. . . . Indicting corporations for wrongdoing enables the government to be a force for positive change of corporate culture, and a force to prevent, discover, and punish serious crimes.” Principles of Federal Prosecution of Business Organizations

U.S.

foreign

3 4

19

9

18

710

15 17

3

3

1221

9

4

19 3

2

5

9

05

10152025303540

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

ytd

Total Corporate Matters Initiated: 2002-2012 YTD

U.S. Corporate Enforcement Actions are Negotiated

Data Source; 1999 – 2011 OECD

Pleas DPA/NPATrials Settlements

Civil Criminal

Data 2004 -2009

U.S. Criminal Negotiations CriminalCharge

Conviction Monitor FineCooperationRequired

EnhancedCompliance

Press

PleaYes Yes

5/771%

Yes Yes Yes Yes

DPA Yes No7/1258%

Yes Yes Yes Yes

NPANo No

4/1136%

Yes Yes Yes Maybe

Declination No No No No No No No

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U.S. Criminal Disposition by Bribe AmountData 2004 - 2009

Mean Bribe Median Bribe

Plea $142 mil $4.1 mil

DPA $2.8 mil $1.2 mil

NPA $2.8 mil $ .28 mil

Declination* $.16 mil $.08 mill

Plea DPA NPADecl

$3.2 mil - $805 mil $.28 mil - $1.9 mil $.02 mil - $.2 mil

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U.S. Anti-Corruption Trends

Evaluating Compliance

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U.S. Incentives for Corporate Compliance

• Criminal – DOJ Decision Whether to Prosecute

• Voluntary Disclosure• Cooperation in Investigation• Effective Compliance

Program

– Penalty Mitigation• Voluntary Disclosure• Cooperation in Investigation• Acceptance of Responsibility• Remediation

• Civil – SEC Decision Whether to Charge &

Penalty Mitigation• Voluntary Disclosure• Cooperation in Investigation• Effective Compliance

Program• Remediation

– Avoid Shareholder Claims– Avoid Debarment Proceedings

Prevent & Detect Corruption and Related Reputation Risks and Investigations

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Evaluating Compliance Programs

Seven elements of an effective anti-corruption compliance 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

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Evaluating Policy & Procedures

FAQs and Summaries

Implementing Protocols

High level statement of principle only•e.g. “We only do business through third parties who we know and can trust to follow our anti-corruption policy”

Establishes risk categories, procedures, and approval levels and identifies red flags

Concise, easy-to-read guidance without jargon•Translated into multiple languages

More technical and comprehensive•Reference for sponsors and others directly involved in process•May vary by region

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Evaluating Responsibilities

Sales&

Marketing

Finance&

Controls

Legal&

Compliance

• Identify need for partner• Conduct due diligence• Make initial decision as to

whether to use partner• Provide periodic certification of

continued compliance

• Secondary approval for higher risk partners

• Review and analyze commissions and other partner payments

• Maintain “authorized agent” and “do not use” lists

• Develop third party policy• Oversee training program• Ensure proper enforcement• Provide legal advice• Supplemental approval for higher

risk partners• Periodic compliance audits

• Everyone Checks for Red Flags

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Evaluating Third Party Diligence

– Recognize and Assess Risk Involving All Third Parties – whenever money or value leaves the company

• Agents, Consultants, and Sales Representatives• Wholesalers and Distributors• Vendors, Suppliers, and Service Providers• Partners and Joint Venture Parties

– Positive and Negative Due Diligence– Document and Retain Findings– Independent Review and Approval– Periodically Update Due Diligence for Long-term Relationships

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Project Red Flags

Project

High-risk country

Government Sales

Customer suggests charitable or political

contributionLarge and

infrequent sales

Customer desires certain third party

Low-risk country Low government involvement

Proposal matches vendor

capability

Long relationship between UVV

and projectTransparent

bidding process

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Operations Red Flags

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

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Payments Red Flags

Payments

Shell companies

Third countries or

parties

Post office boxes

Unexpected bonuses or

loans

Third-country banks

Requests negotiable currency

Larger payments during bid process

Commercially reasonable

terms

Regular channels

Reasonable compensation

Payment in country

Established banks

Matches commercial capability

Invoices paid too quickly

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U.S. Anti-Corruption Compliance

• Long History• Broad Application• Active Enforcement • Substantial Penalties• Incentives for Compliance• A Public – Private Partnership

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Discussion