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FORENSIC Foreign Corrupt Practices Act (FCPA) A Presentation by KPMG Forensic September 29, 2008 ADVISORY. Media Spotlight. FCPA Background . Enacted in 1977 in response to scandals More than 400 U.S. Companies admitted to paying over $300 million in bribes
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FORENSICForeign Corrupt Practices Act (FCPA)A Presentation by KPMG Forensic September 29, 2008ADVISORY
FCPA Background • Enacted in 1977 in response to scandals • More than 400 U.S. Companies admitted to paying over $300 million in bribes • Two objectives: (1) greater transparency in financial reporting; (2) prohibit illicit payments by U.S. companies to foreign officials • In addition to anti-bribery, addresses books and records and internal controls • For 20 years, U.S. was only country that criminalized bribery of foreign government officials • FCPA is now receiving more attention from U.S. and foreign regulators, in part due to the PATRIOT Act, Sarbanes-Oxley and a series of international anti-corruption conventions
Aggressive FCPA Enforcement by DOJ and SEC • Substantial increase in FCPA enforcement proceedings against U.S. and foreign issuers, subsidiaries, individuals, third-party agents and intermediaries • 38 Cases Brought in 2007; Over 80 Open Investigations in 2008 • Larger Penalties Imposed – $44 Million Baker Hughes • Deferred Prosecution and Non-Prosecution Agreements • Appointment of Independent Monitors • Increase in Parallel Proceedings among U.S. and foreign law enforcement officials FCPA Enforcement continues to be “top priority” for DOJ and SEC
Other FCPA Remedies • Criminal fraud charges, censure • Civil injunctive action • Administrative cease and desist proceedings (C&Ds) • Disgorgement of ill-gotten gains, pre-judgment interest • Other Remedial Measures • Debarment • Implementation of FCPA compliance program • Independent Monitor • Continuing reporting obligation • Deferred Prosecution (or Non-Prosecution) Agreements
Lucent Technologies Ingersoll Rand * Azko Nobel York International * Chevron Paradigm BV * Textron Omega Advisors Baker Hughes * Aibel Group Schnitzer Steel * Statoil * Monsanto Invision * Micrus Corporation * * Independent Monitor appointed Deferred and Non-Prosecution Agreements
Foreign Corrupt Practices Act (FCPA) • The Anti-Bribery Provisions Section 30A, Securities Exchange Act of 1934 • The Financial Reporting Provisions Section 13, Securities Exchange Act of 1934
FCPA – Anti-Bribery Provisions • Prohibited Payments: It is unlawful to pay or offer to pay “anything of value” to a “foreign official” to influence official action or to secure any improper business advantage in order to obtain or retain business. • 5 elements: • Who: Applies to any issuer, officer, director, employee or agent of such issuer • Payment: Cannot offer, pay or promise to give “anything of value” • Corrupt Intent: The payer must have a corrupt intent and the payment must be intended to induce misuse of an official position • Recipient: To any foreign official or political party • Business Purpose Test: To influence official action or to secure any improper advantage in order to “obtain or retain business”
FCPA Anti-Bribery Provisions - Who? • Jurisdiction: Any “issuer,” or any officer, director, employee or agent of an issuer • Issuer includes U.S. listed companies • Also includes foreign companies or foreign affiliates that are themselves listed on U.S. exchanges • Alternative Jurisdiction: Any United States person anywhere in the world • United States person’’ means a national of the United States or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship organized under the laws of the United States or any State, territory, possession, or commonwealth of the United States, or any political subdivision thereof.
FCPA Anti-Bribery Provisions: Payment • Prohibited Payments: Cannot offer, pay or promise to give “anything of value” • Cash • Services • Payment of Travel Expenses • Excessive Entertainment Expenses • Lavish Gifts • Favorable Loans • Charitable Contributions
FCPA: Anti-Bribery Provisions – Recipient • Definition of “Foreign official” • Foreign government, including officers and employees • Political parties, officials or candidates • Public international organizations (e.g. Red Cross, the World Bank) • Also includes other persons who intend to pass on the payments or a portion of the payments to foreign officials or political parties
FCPA Anti-Bribery Provisions: Business Test • Business Purpose Test / Prohibited Activities: • Influencing any act or decision of a foreign official in his official capacity, inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or securing any improper advantage; or • Inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person.
Financial Reporting Provisions • Applicable to SEC-registered “Issuers” • U.S. public companies • Foreign companies listed on U.S. stock exchanges • Books and Records • Issuers must maintain books, records and accounts, which in reasonable detail, accurately reflect the transactions and dispositions of its assets • Internal Controls • Issuers must devise and maintain a system of internal accounting controls to provide reasonable assurance that transactions are authorized by management and financial statements are in conformity with GAAP
Exceptions and Affirmative Defenses • Exception for Facilitating Payments in order to secure Routine Governmental Action • Affirmative Defenses (1) Payment lawful under foreign law (2) “Reasonable expenditure” for promotional activities
FCPA – Exception • “Facilitation Payments” for Routine Governmental Action • Obtaining licenses or permits to do business • Processing government papers (visas, work orders) • Providing police protection, mail or cargo service • Providing telephone service • “Actions of a similar nature” • Caveats • Must be ministerial – no discretionary authority • Cannot affect decision to award new business or to continue existing business
FCPA – Affirmative Defenses • Payment Lawful Under Foreign Law • There must be something in the written law or regulations of the foreign country • Traditional, customary, not enforced does notqualify • Reasonable Business Expenditure • To promote a business or product • Includes trip expenses, tours of company facilities, product demonstrations and training • Must be reasonable and bona fide
FCPA - Materiality Irrelevant • There is no materiality threshold for FCPA • Any prohibited payment is actionable • Impact of FCPA non-compliance can have material negative impact on financial statements, operations and reputation • Criminal and civil penalties may be substantial, and may include disgorgement, restrictions on business with the federal government, adverse publicity, impact on stock price, and potential private securities litigation
FCPA “Red Flags” • Companies with significant overseas operations • Operations in countries with high risk for bribery (i.e. Southeast Asia, Middle East) • Operations in high risk industries (i.e. defense, aircraft, oil, engineering, construction) • Acquisitions of foreign subsidiaries • Joint ventures with foreign government entities • Foreign consulting/agency relationships • Large payments to foreign agents relative to local prevailing rates for services provided
FCPA “Red Flags” (cont.) • Agent refuses to provide FCPA representations • Unusual bonuses paid to foreign operational managers • Unusual payment arrangements to vendors • Commissions inconsistent with the going rate • “Public red flags” such as political contributions, payoffs, bribes, kickbacks or excessive rebates
Global Corruption Indices:CPI and BPI • 2007 Transparency International – Corruption Perceptions Index (CPI) • Reflects perceived levels of corruption on the “demand” side by government officials • Ranks countries on scale of 10 (squeaky clean) to 1 (highly corrupt) • TI deems 5.0 the borderline figure distinguishing companies that have a serious corruption problem • 2006 Bribe Payers Index (BPI) • Reflects perceived levels of corruption on the “supply” side • Includes 30 top exporting countries
U.S. Enforcement Trends • Scrutiny of foreign issuers and subsidiaries • Actions against individuals and third parties agents • Compliance monitors • Transactional due diligence
Scrutiny of foreign issuers and subsidiaries • There has been increased scrutiny of foreign issuers by US regulatory authorities as well as increased enforcement activity by foreign regulatory authorities • Statoil • U.S. v. Statoil ASA, Case No. 06-CR-00960-RJH-1 (S.D.N.Y. October 2006) • Dow Chemical Company • SEC v. Dow Chemical Company, Lit. Rel No. 20000 (February 13, 2007) • Siemens AG
Actions against 3rd parties and individuals • There have been a number of recent cases against not only corporate entities, but also against individuals and third-party agents • eg. U.S. v. Sapsizian, Case No. 06-CR-20797 (S.D. Fla. 2006) • DOJ Guidance regarding Payments to Third-Parties • The FCPA prohibits corrupt payments through intermediaries. It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official. The term "knowing" includes conscious disregard and deliberate ignorance.
Compliance monitors • There has been a trend toward appointing compliance monitors to review FCPA policies, procedures and internal controls • Baker Hughes Inc. • SEC v. Baker Hughes Incorporated and Roy Fearnley, Civil Action No. H-071408 • United States District Court for the Southern District of Texas, LR-20094; AAE Rel 2602 • Vetco Gray Controls, Inc. • U.S. v. Vetco Gray Controls Inc., Vetco Gray Controls Ltd., Vetco Gray UK Ltd., and Aibel Group Ltd., Case No.07-CR-004 (S.D. Tex. 2007)
Transactional due diligence • FCPA due diligence is expected in joint ventures, mergers and acquisitions involving foreign counterparts • GE merger with InVision • In Vision Technologies, Inc. Lit. Release No. 19078 (February 14, 2005) • DOJ Settlement; GE avoided successor liability for InVision’s conduct • Titan Corporation • SEC v. The Titan Corporation, Civil Action No. 05-0411 (D.DC), Lit. Rel. No. 19107 (March 1, 2005) • US v. Titan Corporation, Case No. 05cr0314-BEN (S.D. Cal.)
Prevention • Audit / Compliance Committee Oversight on FCPA Compliance • Executive and Line Management Responsibilities • Communication and Training • Written FCPA Policies and Procedures • Specific reference in Code of Conduct • Employee and Third Party Due Diligence • Transactional Due Diligence • Political and Charitable Contributions • Gifts and Entertainment of Foreign Officials • Facilitating Payments • Internal Audit, Compliance and Monitoring Functions
Detection • Hotlines and Whistleblower Mechanisms • Substantive Testing • Ongoing Monitoring
Response • Internal Investigations Protocols • Remediation Protocols • Enforcement and Accountability Protocols • Disclosure Protocols
Global Investigations Bribery Investigations Forensic Accounting Computer Forensics FCPA Due Diligence M&A Transactions Third-Party Agents Compliance Services Global Risk Assessment Development of FCPA Policies and Procedures Internal Controls Review and Testing Communication and Training FCPA Compliance Monitoring FCPA Services
Presenters Details Pamela J. Parizek, Partner 202-533-5362 pparizek@kpmg.com Tim Hedley, Partner 212-872-3496 thedley@kpmg.com