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Paul R. Berger Partner Debevoise & Plimpton LLP Alice Eldridge VP, Ethics and Business Conduct Lockheed Martin Corporati - PowerPoint PPT Presentation

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Paul R. Berger Partner Debevoise & Plimpton LLP Alice Eldridge VP, Ethics and Business Conduct Lockheed Martin Corporation. Complying with the Foreign Corrupt Practices Act. February 13, 2009. What is the FCPA?. Federal statute passed by post-Watergate Congress in 1977

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Paul R. Berger


Debevoise & Plimpton LLP

Alice Eldridge

VP, Ethics and Business Conduct

Lockheed Martin Corporation

Complying with the Foreign Corrupt Practices Act

February 13, 2009


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What is the FCPA?

  • Federal statute passed by post-Watergate Congress in 1977

  • Generally prohibits bribery of foreign government officials for the purpose of obtaining or retaining business

  • Two provisions:

    • Anti-bribery provision

    • “Books and records” provision

  • Enforceable by Department of Justice and SEC

    • Enforcement activity has dramatically increased in recent years




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FCPA’sBooks and Records Provisions

  • Applicable to any issuer under the federal securities laws

    • Any entity (whether U.S. or non-U.S.) that has a class of securities (including ADRs) registered pursuant to Section 12 of the 1934 Act or is required to file periodic reports pursuant to Section 15(d) thereof

  • Issuer must “[m]ake and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer”

  • Issuer must also “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances” that

    • Transactions are executed and access to assets is permitted only in accordance with management authorization and that

    • Transactions are recorded in a way to permit financial statements to be prepared in accordance with GAAP




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Books and Records (cont.)

  • No “scienter” requirement

    • Issuer is subject to penalties even if issuer’s officers do not know of the inaccuracies

    • Strict liability for inaccurate books of all subsidiaries whose books roll up into issuer’s financials

    • Requires issuer to exercise control over books and records of foreign subs and other controlled entities

  • No “materiality” requirement

  • Issuer liable for books and records violation for inaccurately recorded bribe that occurs entirely outside U.S.

    • A bribe to a foreign official must be recorded as a bribe – not as a “fee” or other seemingly innocuous transaction

  • Books and records violations can occur in non-bribery contexts




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FCPA’s Anti-Bribery Provisions

  • Applicable to:

    • U.S. citizens, nationals and residents, U.S.-based corporations/partnerships, wherever conduct occurs

    • Anyissuer under the federal securities laws

      • Issuer can be liable for anysubsidiary’s or controlled entity’s bribery if issuer authorized, directed or was “willfully blind” to the activities of the entity

    • Any person or entity committing a proscribed act in the U.S.




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FCPA’s Anti-Bribery Provisions (cont.)

  • Make it unlawful to:

    • Corruptly make (or offer or promise to make) a payment or gift of money or anything of value

    • Directly to a “foreign official”

    • Or indirectly to a “foreign official” through an intermediary while “knowing” the payment or gift will be passed on

  • If purpose is to obtain a quid pro quo, i.e.,

    • To influence official act or decision

    • To induce official to act or not act

  • In order to “secure an improper advantage” (obtain, retain or direct business)

  • Bottom line: avoid giving benefits that may have appearance of impropriety




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FCPA: Who is a Foreign Official?

  • Foreign government officials

    • Very broadly defined, not limited to senior or “federal” officials

    • Employees of government-owned or -controlled entities

    • Persons acting officially on behalf of government entity

    • Can include private persons who are “advisors”

    • Can include, as a practical matter, relatives of officials

    • Includes foreign political parties, party officials and candidates

    • Includes employees of 75+ international organizations, including UN entities, Asian and African Development Banks

  • Examples from DOJ and SEC cases:

    • President of Kazakhstan

    • Director of a regional health fund in Poland

    • Officials at a government-owned bank in Argentina

    • Airport employees in Thailand




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Areas of Potential Interaction with Foreign Gov’t Officials

  • The potential for interactions with foreign officials is limitless. Some examples:

  • Approvals by governmental entities for acquisitions and other transactions

  • Marketing of products or services to government agencies or employees

  • Participation in a bidding process for the award of government projects

  • Renegotiation of government contract terms

  • Hiring a foreign official or seating a foreign official on board of directors

  • Lobbying government officials for favorable legislation

  • Inspections of manufacturing facilities by governmental authorities

  • Interactions with officials regarding customs duties and sales taxes on imports/exports

  • Sponsoring events, retreats, conferences for clients

  • Charitable contributions




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Payments Not Barred by the FCPA Officials

  • Payments to government agencies and municipalities

  • Reasonable payments to officials for legitimate services

    • E.g., officials who may have law practices or other businesses providing goods or services to issuer at fair market value

    • Payments must be carefully scrutinized, documented and executed

  • Facilitating payments

    • To secure or expedite “routine governmental action” to which the issuer is entitled

    • E.g., obtaining permits, processing visas, providing utility services, customs clearance, police protection

    • NOT government decisions to award or continue business

    • Facilitating payments may be barred by local law

    • Issuer should adopt appropriate policies and control and reporting procedures if it expects to make any facilitating payments




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Affirmative Defenses Officials

  • Payments clearly lawful under written local laws

    • “Custom” or “practice” not enough

    • Silence in local law not enough

    • Rarely applies

    • Get written opinion from local counsel

    • Even if permitted by local law, need to book payment properly

  • Reasonable and bona fide expenditures directly related to product/services education and/or performance of contract with government agency

    • Modest travel expenses are permitted

    • No sightseeing, lavish meals/hotels, entertainment or payments for official’s family members or friends

    • DOJ has recently issued more detailed guidance (FCPA Op. Proc. Rels. 2007-01 and 2007-02 )




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Penalties for FCPA Violation Officials

  • Other civil remedies generally available to SEC (injunctions, cease and desist orders, accounting/disgorgement)

  • Alternative Fines Act

    • Allows a criminal fine to be up to twice the gross gain or gross loss associated with the conduct




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Retention of Third Parties Officials

  • Third party is any intermediary: agents, brokers, distributors, consultants, law firms

  • Liability if covered person/entity “knows” improper payments made by third party

  • to an official -- knowledge includes “willful blindness”

  • Companies need to perform and document due diligence on third parties

  • Written contracts with third parties should include:

    • Agreements to comply with FCPA and disclose government connections

    • Provision allowing for contract termination at will if FCPA violated

    • Prohibition on assignment of duties

  • Payments to third party:

    • Must be commensurate with services provided

    • Should be through normal mechanisms

    • Should be made through a US bank, at a local bank, or at least not through Swiss, Liechtenstein or similar country




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Joint Ventures Officials

  • Liability in majority ownership situations

    • Liability for bribery similar to the parent-sub scenario

    • Liability for books and records is triggered by 50+ percent “voting power” with respect to the venture

    • Possible liability if found to be in “control” even if no voting power

  • Non-majority ownership control

    • Veto rights and “negative control”

    • BellSouth case (ability to control Board decisions)

  • Even if minority interest, duty to take reasonable steps to prevent violations, such as by seeking to require:

    • Adequate systems, controls and compliance programs

    • Investigations of potentially improper payments

  • Essential to perform and document due diligence on partner, including beneficial owner

  • JV agreements should include FCPA provisions




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“Red Flags” Officials

  • Presence of “red flags” may be perceived by DOJ/SEC as showing willful blindness or deliberate ignorance by an issuer

  • Red flags include:

    • Country in question has reputation for bribery

    • Unusual or excessive payment requests

      • Up front payments

      • Payments to third country account

      • Payments to a third party

      • Cash payments

      • Large bonuses

    • Payments exceeding local law or custom

    • Refusal to promise in writing to abide by anti-bribery laws

    • Third party is related to an official

    • Retention of the particular third party or JV partner was recommended by a government official

    • Third party/partner lacks adequate staff to perform agreed upon functions

    • Third party is “close” to government officials but performs no actual services




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M&A Considerations Officials

  • Determine if target company is subject to FCPA, or if continuation of target’s business could violate FCPA post-acquisition

  • Necessity of including FCPA in due diligence review

  • Contractual protections

    • Representations and warranties

    • Audit rights

    • Suspension/termination rights

  • Government position that structuring transaction as an asset deal may not avoid historical FCPA liability (Sigma-Aldrich Business Holdings)

  • Titan disclaimers when filing merger agreement as part of merger proxy statement




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M&A Guidance: OfficialsHalliburton (Op. Proc. Rel. 2008-02)

  • DOJ recently issued an opinion providing guidance on M&A due diligence

    • Halliburton sought to acquire public U.K. company in bidding process

    • No ability to disclose violations pre-acquisition and limited due diligence

  • Raises the bar for expected due diligence and post-acquisition compliance

  • Requires Halliburton to perform extensive FCPA review immediately after closing and to report results to DOJ

  • Strongly encourages confidentiality agreement that allows pre-acquisition disclosure of discovered violations




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M&A Due Diligence Officials

  • Considerations in tailoring due diligence:

    • Assessment of the risk profile of countries where target operates

    • Analysis of the risk profile of the industry/business activity involved

  • Halliburton requirements:

    • Due diligence should address the use of

      • agents and other third parties

      • commercial dealings with state-owned customers

      • any joint venture, teaming or consortium arrangements

      • customs, immigration, tax, licensing and permit matters

    • Retain external counsel and accountants to conduct due diligence

  • Activities should include:

    • Review of the internal audit reports and internal investigations

    • Interviewing employees of target/seller who have contact with officials

    • Review of the records/reports prepared by target’s/seller’s auditors

    • Review JV agreements and material contracts that will continue post-acquisition

    • Sample past contracts and third-party agreements to identify red flags




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Halliburton Opinion: OfficialsM&A Post-Acquisition Compliance

  • Post-closing, immediately impose the acquirer’s Code of Conduct and anti-corruption policies on the target and communicate those polices to all employees

  • Within 60 days, provide FCPA-related training to all target employees in management, sales, accounting and financial control positions

  • Provide the same training to “all other appropriate target employees” within 90 days




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Insights From Other Recent FCPA Cases Officials

  • Must focus on anti-bribery and records/controls issues

  • Jurisdiction and scienterlimits on anti-bribery provisions are important but not very meaningful for complex multinationals

  • Government is seeking more intrusive remedies (monitors, approval of compliance personnel)

  • Fines and disgorgement payments are increasing

  • Foreign issuers/persons subject to enforcement actions

  • Prosecution of private companies as domestic concerns

  • Voluntary disclosure and non-prosecution agreements

  • Increasing focus on M&A deals