FCPA Compliance and Ethics Blog

November 30, 2010

How to Begin Your FCPA Due Diligence

The task of where to begin a full compliance and ethics program can often times appear quite daunting. Most US companies fully understand the need to comply with the Foreign Corrupt Practices Act (FCPA). However most companies are not created out of new cloth but are ongoing enterprises with a fully up and running business in place. They need to bring resources to bear to comply with the FCPA while continuing to do business. This can be particularly true in the area of performing due diligence on foreign business partners or vendors in the supply chain. Many companies understand the need for a robust due diligence program to investigation third parties, but have struggled with how to create an inventory to define the basis of risk of each foreign business partner and thereby perform the requisite due diligence required under the FCPA.

At the SCCE 2010 Annual Conference, Ken Kurtz, Chairman and CEO of the Steele Foundation presented some ideas in a session entitled “Getting Unstuck, Tactics for Defining and Executing Systematic, Risk-Based Third Party Due Diligence for FCPA Compliance”. In this presentation he discussed some tools and tactics for ensuring third party due diligence compliance on foreign business partners such as agents, resellers, distributors, joint venture partners and any other such entities which might represent a US based company internationally. He gave the audience some ‘nuts and bolts’ guidance on cost-effective, risk based approaches to defining and vetting of foreign business partners.

The initial step in any system is to begin with a clear, demonstrable commitment to perform due diligence on foreign business partners. But equally importantly, a company should engage in a systematic approach which would involve a specific methodology. The due diligence program should begin with a solid foundation. This would include defined objectives and scope; defined roles for each person in the process and coherent definitions which an employee could rely on in making decisions. The process should also be scoped to include how to conduct the due diligence, what should be done if a Red Flag is discovered, when should due diligence be re-performed and how such information should be retained.

After this foundation has been set, Kurtz suggested that a company should then perform a third party inventory to define its risk basis. A company should determine which of its business areas present the greatest exposures in the area of FCPA compliance risk. This can be based on one or more factors including geography, types of business units or business relationships. Kurtz listed two different types of approaches. The first he labeled as “Programmatic” which has the following characteristics: assessment at the program and category level, incorporating a linear approach, with an emphasis of setting risk at an enterprise level and is consistent and systematic. The second approach he labeled as “Forensic” and this approach focuses more deeply on the individual level. However, he noted this approach is potentially inconsistent and also can be more costly.

Using these steps, a company can then begin to identify, rate and aggregate its foreign business partners to create a manageable due diligence process. This process should be intentional, consistent and systematic to ensure full transparency through the use of a central tool. This can allow audit trail accountability to ensure full visibility. The mechanisms which Kurtz outlined are useful tools for the Compliance Professional or Corporate Legal Department employee to demonstrate to management the ‘how’ of the mechanism of accomplishing this task in an ongoing FCPA compliance program.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

November 29, 2010

Proposed Reforms to the FCPA Part II: Limiting Successor Liability, Adding a Willfulness Requirement and Limiting a Parent’s Liability for Acts of a Subsidiary

Filed under: FCPA — tfoxlaw @ 3:16 pm
Tags: , ,

In a Whitepaper entitled “Restoring Balance-Proposed Amendments to the Foreign Corrupt Practices Act”, released earlier this month, authors Andrew Wiessmann and Alixandra Smith, writing on behalf of the US Chamber Institute for Legal Reform proposed amending the Foreign Corrupt Practices Act (FCPA), argued that the time is ripe to amend the FCPA to make the statute more equitable and its requirements clearer. They propose five (5) amendments to the FCPA which they argue would serve to improve the Act. In a prior post, we discussed two of those proposals, to create a compliance defense available to a company if it has an adequate compliance program, similar to the “adequate procedures” defense available under the UK Bribery Act and doing away with the doctrine of respondeat superior under the FCPA. This post will discuss, in greater specificity, three of their proposals: limiting successor liability, adding a willfulness requirement to the FCPA and limiting a corporate parent’s liability for the actions of its subsidiaries. 

I.          Successor Liability 

The authors argues that under the current enforcement regime, a company may be held criminally liable under the FCPA not only for its own actions, but for the actions of a company that it acquires or becomes associated with via a merger—even if those acts took place prior to the acquisition or merger and were entirely unknown to the acquiring company. They believe that this standard of criminal liability is “generally antithetical to the goals of the criminal law, including punishing culpable conduct or deterring offending behavior.” Acknowledging that a company can reduce its risk by conducting due diligence prior to an acquisition or merger (or, in certain circumstances, immediately following an acquisition or merger); this however is not a legal defense. Therefore, even when an acquiring company has conducted exhaustive due diligence and immediately self-reported the suspected violations of the target company, it is still currently legally susceptible to criminal prosecution and severe penalties. 

The authors argue that the FCPA should be amended so that a business, similarly to an individual, should not be held liable for the actions of another company with which it did not act in concert. However to able to get to this position, a company must engage in “sufficient due diligence” in investigating potential acquisition targets. The quantity and quality of sufficient diligence will vary depending on the inherent risks in a given merger or acquisition— e.g., whether the target company does significant business in regions that are known for corruption—and the size and complexity of the deal. The authors conclude by arguing that the Department Of Justice (DOJ) should provide this guidance and if followed, it would act as an absolute shield to such liability. 

II.                Adding a Willfulness Requirement 

The authors alleges that there is an anomaly in the current FCPA statute: although the language of the FCPA limits an individual’s liability for violations of the anti-bribery provisions to situations in which she has violated the act “willfully,” there is no similar limitation for corporations. This omission substantially extends the scope of corporate criminal liability because it portends that a company will face criminal penalties for a violation of the FCPA even if it (and its employees) did not know that its conduct was unlawful or even wrong. They believe that the absence of a “willful” requirement opens the door for the government to threaten corporations—but not individuals through whom they act—with what is tantamount to strict liability for improper payments under the anti-bribery provisions of the FCPA. 

The authors conclude that a “willfulness” requirement should be extended to corporate liability, at the very least to the anti-bribery provisions of the FCPA. This statutory modification would significantly reduce the potential for American companies to be criminally sanctioned for anti-bribery violations, particularly those of which the company had no direct knowledge or for which the company could not have anticipated that American law would apply. The statute should also preclude unknowing de minimus contact with the United States as a predicate for jurisdiction: the defendant should either have to know of such contact or the contact, if unknown, would have been foreseeable because it was substantial and meaningful to the bribery charged. 

III.             Limiting a Parent’s Liability for Acts of a Subsidiary 

Although acknowledging that the DOJ has not yet taken such action, the authors claims that the Securities and Exchange Commission (SEC) “routinely” charges parent companies with civil violations of the anti-bribery provisions based on actions taken by foreign subsidiaries of which the parent is entirely ignorant. Further this approach is contrary to the statutory language of the anti-bribery provisions, which—even if they do not require evidence of “willfulness”—do require evidence of knowledge and intent for liability.  The authors believe that such a position taken by the SEC is contrary to the position taken by the drafters of the FCPA, who recognized the “inherent jurisdictional, enforcement and diplomatic difficulties raised by the inclusion of foreign subsidiaries of U.S. companies in the direct prohibitions of the bill” and who made clear that an issuer or domestic concern should only be liable for the actions of a foreign subsidiary if the issuer or domestic concern engaged in bribery by acting “through” the subsidiary. This would seem to be at odds with the  stated position that a parent corporation “may be held liable for the acts of [a] foreign subsidiary[y] [only] where they authorized, directed, or controlled the activity in question.” 

The authors conclude that because the scope of this potential liability is not definitively established, it is a source of significant concern for American companies with foreign subsidiaries. A parent’s control of the corporate actions of a foreign subsidiary should not expose the company to liability under the anti-bribery provisions where it neither directed, authorized nor even knew about the improper payments in question. Hence, a parent should not have such FCPA liability. 

The inherent problem with each of these proposals is that none of them further the stated goals of the FCPA. The purposes for the bill were written into the Preamble to the original 1977 FCPA legislation. In this Preamble, Congress set out three clear policy goals for the enactment of the FCPA. First, was the public revelation that over 400 U.S. companies had paid over $300 million to bribe foreign governments, public officials and political parties. Such payments were not only “unethical” but also “counter to the moral expectations and values of the American public”. Second was that the revelation of bribery, tended “to embarrass friendly governments, lower the esteem for the United States among the citizens of foreign nations, and lend credence to the suspicions sown by foreign opponents of the United States that American enterprises exert a corrupting influence on the political processes of their nations”. Third was by enacting such resolute legislation, U.S. companies would be in a better position to resist demands to pay bribes made by corrupt foreign governments, their agents and representatives. Each of the three proposals would appear to provide mechanisms to escape liability, rather than the affirmative actions to prevent bribery and corruption. This is particularly so when one considers the initial proposal by the authors to provide an affirmative defense if a company has an adequate procedures type FCPA compliance program in place. 

Today author Wiessmann was one of several speakers to appear before the Senate Judiciary Committee, Subcommittee on Crime and Drugs, on a hearing entitled, “TIME CHANGE — Examining Enforcement of the Foreign Corrupt Practices Act.” It will be interesting to hear the DOJ’s response and the tenor of the hearing and debate going forward. 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

November 24, 2010

5 Important Fraud Investigation Interview Tips

Ed. Note-today we host a guest post by our Canadian colleague, Lindsay Khan of I-Sight

To conduct an investigation interview, you don’t need to be Sherlock Holmes- but it wouldn’t hurt to channel your inner detective. Fraud investigation interviews are a lot of work, but can take your investigation from ho hum to awesome. A successful investigation interview isn’t just a question and answer period. Asking good questions is just a small piece of a very big puzzle. To get the most out of your fraud investigation interviews, remember these 5 important steps:

1. Set Goals

First and foremost, set a list of goals. Identifying goals helps shape investigation interviews and allows you to put things in perspective. Goals will vary with each interview, but should be based on these primary objectives:

  • Gathering the facts- how long the fraud has been going on for, who was involved, what are their roles in the company, etc.
  • Determining the merits of the complaint- is the complaint valid?
  • Complying with legal obligations.
  • Maintaining confidentiality to the greatest extent possible.
  • Preserving the reputations of individuals and company.

2. Do Your Research

During a fraud investigation, you’ll want to do some digging to find out more about the people you’re interviewing. Reviewing personnel history of the potential interviewees will help clarify relationships and potential biases. This might also help you piece together multiple person involvement in the fraud scheme.

3. Bring Evidence Into the Interview

Documents, electronic files, expense reports and other evidence should be brought into the interview for reference. In the article “Anatomy of an Interview,” by Jim Marasco of StoneBridge Business Partners, Marasco writes:

“The most efficient and productive interviews are accomplished by advanced preparation. Questions should be prepared ahead of time along with evidential material that will be introduced during the interview. Having documents at your fingertips will move things along more quickly and offer the impression that your case is organized and solid.”

4. Background Questions

When interviewing someone about suspected fraud, kick off the interview with some basic background questions to gauge the individual’s reactions. The person you are interviewing is probably going to be uncomfortable regardless of how “welcome” you try to make the interview environment. By asking them questions related to their history at the company and the responsibilities of their position, you’ll get a better idea of their reactions and natural demeanor. Some background questions worth asking in a fraud investigation interview:

  • How long have you worked for the company?
  • What is your job title?
  • What is a typical day like for you in the office? What are your responsibilities?

*Probe deeper and ask specifics about how certain tasks are carried out- you should have gone over this information yourself before the interview, but hearing it from them adds to the investigation.

5. Double Check

Sometimes the facts involved in a fraud investigation can be a bit complicated. Always ask for clarification. Repeating statements and clarifying the facts are useful tips for making sure you’ve understood the interviewee’s story. You can’t afford to misinterpret or misunderstand what an interviewee is trying to say- it’ll ruin your investigation. Re-confirm their statements throughout the investigation interview, and at the end, have them sign your notes, stating that the statements are true and understood.

Ed. Note-Lindsay Khan regularly blogs on a wide variety of issues related to the compliance and ethics arena. You can follow her at http://www.customerexpressions.com/.

November 22, 2010

UK Bribery Act and the Pharmaceutical Industry

Filed under: Bribery Act — tfoxlaw @ 2:04 pm

Ed. Note-today we are pleased to have our first international guest post. By Barry Vitou & Richard Kovalevsky Co-authors www.thebriberyact.com

At the invitation of the UK’s Association of the British Pharmaceutical Industry (ABPI) Richard Alderman, Director of the UK’s Serious Fraud Office (SFO) recently addressed ABPI members at their Legal Day conference to speak about the SFO’s work and the new UK Bribery Act which comes into force in April next year. His comments though very important for the pharmaceutical sector went largely unreported.

Significantly, Mr. Alderman singled out the UK pharmaceutical industry noting that on anti-corruption it was on the “high risk register” of the U.S Department of Justice (DoJ) and “will be receiving a considerable amount of attention from the DoJ.”

In a stark warning to the pharmaceutical industry in the UK Mr. Alderman signaled that the SFO is also looking closely at the pharmaceutical industry. Mr. Alderman warned conference attendees not to “underestimate the amount of information sharing that goes on between us and the DOJ and the SEC about all of these issues”.

The warning echoes a similar warning issued a year ago at a US pharmaceutical industry conference where Lanny Breuer warned delegates that the pharmaceutical industry was in the cross hairs of the Department of Justice (DoJ).

The US DoJ and SEC pharmaceutical sector investigation

It has been well known for some time that the US is conducting a sector wide investigation into the US pharmaceutical industry following on from an ongoing and well publicized investigation into the medical device industry.

In November 2009, at the annual Pharmaceutical Regulatory and Compliance Congress’ forum in Washington, Lanny Breuer assistant attorney general for DOJ’s criminal division said a new focus of his department would be rooting out violations of the Foreign Corrupt Practices Act specifically in pharmaceutical companies. In part the US FCPA focus is because of the numerous contact points with government. Breuer said:

“I would like to share with you this morning one area of criminal enforcement that will be a focus for the Criminal Division in the months and years ahead – and that’s the application of the Foreign Corrupt Practices Act (or “FCPA”) to the pharmaceutical industry. According to PhRMA’s 2009 Membership survey, close to $100 billion dollars, or roughly one-third, of total sales for PhRMA members were generated outside of the United States, where health systems are regulated, operated and financed by government entities to a significantly greater degree than in the United States. As a result, a typical U.S. pharmaceutical company that sells its products overseas will likely interact with foreign government officials on a fairly frequent and consistent basis. In the course of those interactions, the industry must resist short-cuts. It must resist the temptation and the invitation to pay off foreign officials for the sake of profit. It must act, in a word, lawfully.”

“Our focus and resolve in the FCPA area will not abate, and we will be intensely focused on rooting out foreign bribery in your industry. That will mean investigation and, if warranted, prosecution of corporations to be sure, but also investigation and prosecution of senior executives. Effective deterrence requires no less. Indeed, we firmly believe that for our enforcement efforts to have real deterrent effect, culpable individuals must be prosecuted and go to jail where the facts and the law warrant.”

This prophetic statement was followed in the summer US 10-Q season with a slew of pharmaceutical companies reporting that they had either received requests from, or been subpoenaed by, the DoJ and/or SEC for information relating to their practices in various jurisdictions.

If you are a pharmaceutical company with ties to the US or the UK, your business is being scrutinized. Against that backdrop pharmaceutical businesses in the UK ignore the warning given by Mr. Alderman at their peril.

The law under the new Bribery Act

Under the new UK law coming onto the books next April bribing, receiving a bribe, bribing a foreign public official and importantly failing to prevent bribery are offences wherever they take place worldwide.

On top of offences which may be committed by organisations criminal liability is personal for directors and officers. As the SFO are fond of saying, liability for Bribery Act violations is brought directly into the Boardroom. The SFO is not shy of prosecuting CEO’s as Mr. Messent former CEO of city firm PWS insurance found to his cost recently when jailed for just under two years for bribery offences.

Under the new law whether you know about it or not on top of your own obligations you will be criminally responsible for bribery by business partners performing services for your business worldwide.

The UK’s Serious Fraud Office has identified its new long arm jurisdiction and the new failure to prevent bribery offence as the two most important features of the new law. Politicians and prosecution authorities have signaled a tough new enforcement approach. While closely related to the US Foreign & Corrupt Practices Act (FCPA) the new Bribery Act is not the same.

Commercial bribery is covered and there is no exception for facilitation payments and/or corporate hospitality.

Penalties for violations are harsh. Individuals risk prison. Organisations risk unlimited fines, blacklisting from EU/US/world bank contracts and forfeiture of proceeds of illegal deals under associated UK anti-money laundering law.

There is a defence under the Bribery Act for businesses who put in place adequate procedures to prevent bribery.

UK anti-corruption prosecution and investigation activity

Enforcement activities in the UK have increased significantly in the last two years. There have been a number of successful prosecutions and settlements (including within the medical device sector) involving close co-operation with the DoJ.

It is widely known that the UK SFO is involved in a numerous investigations which will see increased activity over the coming months and after the entry into force of the new law.

Prevention is better than cure

With the pharmaceutical sector under investigation pharmaceutical businesses are on notice to take steps now to ensure they have Bribery Act compliance programs fully implemented before the April 1 2011 deadline.

Pharmaceutical companies that do not may have to take some very unpleasant medicine.

Free masterclass for pharmaceutical companies-If you would like to learn more in the new year we shall be running a free masterclass dealing with the impact of the new law on the pharmaceutical industry with guest speakers for senior executives and in-house counsel of pharmaceutical companies.

Ed. Note-the authors of the site, www.BriberyAct.com, have put together an excellent resource for any US or other non-UK practitioner to help them guide through the Bribery Act.

November 17, 2010

Bring Out the Big Guns?

Ed. Note-today we host a Guest Post from our Fraud Examiner Expert colleague – Tracy Coenen

When companies have big problems, they usually bring out the big guns. The benefits of using large law firms, audit firms, and other professional service firms are undeniable. These firms offer a depth of experience that is invaluable, and they have seemingly unlimited resources in terms of manpower. A large firm often has the ability to mobilize an engagement team quickly, and can bring in experts from around the world. 

Does bigger mean better? Certainly the perception exists that larger firms provide better services. No one can fault an executive who chooses a big firm when trouble is brewing. There is an undeniable comfort level that comes with the big firms because they have established reputations and many resources. Even if the project goes poorly, no one can fault the executive who chose the large firm. 

Contrast this with the risk of using a small law firm or forensic accounting firm. Most board members and shareholders have never heard of the small firm. Is it competent? Does it have the resources to handle an investigation of this size? What if something goes wrong? The executive who chose the small firm is going to feel the heat.

Gradually, companies are becoming more willing to use smaller professional services firms. The first clear benefit of a small firm is the ability to get significant expertise focused on your project.  A small firm lawyer or accountant can have just as much knowledge as a big firm professional. The key is finding the right professional with a wealth of knowledge. 

A small firm professional is often more accessible to the client. In addition, she or he is likely to be doing the bulk of the work on the engagement, making it easy to get timely updates from the front lines of the project. 

Most important is the level of experience on a project.  With a small firm, the client is less likely to have young, inexperienced staff members cutting their teeth on the client’s project. Who wants to pay for on-the-job training for young personnel, when they could instead pay a highly experienced professional to do the bulk of the work? 

In addition, small firms can often control budgets better than large firms.  Smaller firms are more likely to use non-traditional billing arrangements, such as fixed fees, and are often more cost-conscious.  Larger teams can tend toward runaway fees, and the client doesn’t necessarily receive commensurate value. 

Choosing between small and large firms is not an all or nothing type of thing. Large firms are well suited to many engagements, but on highly specialized assignments, it might make sense for management to seek out a solo practitioner or small firm with the right expertise.  By focusing on getting highly-qualified professionals on a project, the company can often get greater value for its money. 

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, securities fraud, investment fraud, bankruptcy and receivership, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at tracy@sequenceinc.com or 312.498.3661.  

Ed.Note-this article initially appeared in the Securities Docket.


November 16, 2010

How To Risk-Base Supply Chain Vendors Under The FCPA

Filed under: compliance programs,FCPA,Supply Chain — tfoxlaw @ 7:39 pm
Tags: , , , ,

What are the methods to assess the risks of your Supply Chain vendors? Other than perhaps financial due diligence, such as through Dun & Bradstreet or quality control through your QHSE group, the Supply Chain probably does not command your Compliance Department attention as do other types of third party business partners such as agents, distributors and joint venture partners. This may be coming to an end as most Compliance Professionals recognize that third parties which supply goods or services to a company should be scrutinized similarly to other third party business partners. In the recently released Deferred Prosecution Agreement with Panalpina and six other oil-field service companies, the Department of Justice specifically noted that regarding business partners, such as Supply Chain vendors, a company should, ”it should institute appropriate due diligence” so as to help ensure compliance with the FCPA.

However to initiate “appropriate due diligence” a company must first rate the compliance risk of any third party, such as a Supply Chain vendor. The risk rating will inform the level of due diligence required. There are several methods that could be used to assess risk in the area of supply chain and vendors. The approach suggested by the UK’s Financial Services Authority (FSA) in its settlement of the enforcement action against the insurance giant AON would refer “to an internationally accepted corruption perceptions index” such as is available through Transparency International or other recognized authority. The approach suggested by the Department of Justice, in Release Opinion 08-02 would provide categories of “High Risk, Medium Risk and Low Risk”. Finally, writing in the FCPA Blog, Scott Moritz of Daylight Forensic & Advisory LLC has suggested an approach that incorporates a variety of risk-assessment tools, including, “the strategic use of information technology, tracking and sorting the critical elements”.

This commentary proposes an approach which would incorporate all three of the above cited analogous compliance areas into one risk-based assessment program for supply chain vendors. Based upon the assessed risk, an appropriate level of due diligence would then be required. The categories suggested are as follows:

  1. High Risk Suppliers;
  2. Low Risk Suppliers;
  3. Nominal Risk Suppliers; and
  4. Suppliers of General Goods and Products.

A.        High-Risk Suppliers

A High-Risk Supplier is defined as a supplier which presents a higher level of compliance risk because of the presence of one or more of the following factors:

  1. It is based in or supplies goods/services from a high risk country;
  2. It has a reputation in the business community for questionable business practices or ethics; or
  3. It has been convicted of, or is alleged to have been involved in, illegal conduct and has failed to undertake effective remedial actions.

B.        Low-Risk Suppliers

A Low-Risk Supplier is defined as an individual or private entity located in a Low-Risk Country which:

  1. Supplies goods or services in a Low-Risk Country;
  2. Is based in a low risk country where the goods or services are delivered, it has no involvement with any foreign government, government entity, or Government Official; or
  3. Is subject to the US FCPA and/or Sarbanes-Oxley compliance.

C.        Minimum Risk Suppliers

A Minimum Risk Supplier is an individual or entity which provides goods or services that are non-specific to a particular job or assigment and the value of each transaction is USD $10,000 or less. These types of vendors include office and industrial suppliers, equipment leasing companies and such entities which may supply routinely used services.

D.      Suppliers of General Goods and Products

A Supplier of General Goods and Products is an individual or entity which provides goods or services that are widely available to the general public and do not fall under the definition of Minimal-Risk Supplier. These types of vendors include transportation, food services and educational services providers.

This proposed rating is but one method to allow a company to assess its risks involving its Supply Chain vendors. As has been noted in both the Consultative Guidance to the United Kingdom Bribery Act and in the Panalpina settlements, both documents list the risk rating as a key component of a best practices anti-corruption and anti-bribery compliance program. A company need not engage in full due diligence for all Supply Chain vendors. However it must implement and follow a system to rate each vendor for that vendor’s FCPA compliance risk and evaluate and manage that relationship accordingly.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

November 15, 2010

What’s in a Name: Agents, Resellers and Distributors under the FCPA

Filed under: FCPA,Foeign Business Partner — tfoxlaw @ 1:57 pm
Tags: , , , ,

What is in a name? The terms agent, reseller and distributor are sometimes used interchangeably in the business world. However in the legal world they usually have distinct definitions. An agent can be generally defined as is a person who is authorized to act on behalf of another to create a legal relationship with a Third Party. An agent can also be a person who makes introductions and generally facilitates relationships between the seller of goods or services and end-using buyer. Such an agent usually receives some type of percentage of the final sale as his commission. An in-country national agent is often required in most Middle East and Far East countries. A reseller can be generally defined as a company or individual that sells goods to an end-using buyer. A reseller does not take title and thereby own the goods; the reseller is usually a conduit from the seller to the end-using buyer. A reseller usually receives a flat commission for his services, usually between 5-10% of the final purchase price. This format is often used in the software and hardware industries. A distributor can be generally defined as a company or individual which purchases a product from an original equipment manufacturer (OEM) and then independently sells that product to an end user. A distributor takes title, physical possession and owns the products. The distributor then sells the product again to an end-using purchaser. The distributor usually receives the product at some discount from the OEM and then is free to set his price at any amount above what he paid for the product. A distributor is often used by the US manufacturing industry to act as a sales force outside the US. 

The landscape of the Foreign Corrupt Practices Act (FCPA) is littered with cases involving both agents and resellers are they are the most clearly acting as representatives of the companies whose goods or services they sell for in foreign countries. However many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. They believe that as the distributor takes title and physical possession of the product, the legal risk of ownership has shifted to the distributor. If the goods are damaged or destroyed, the loss will be the distributor’s not the US business which manufactured the product. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However such belief is sorely miss-placed. 

As almost everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. But many US companies view distributors as different from other types of sales representatives such as company sales representatives, agents, resellers or even joint venture partners, for the purposes of FCPA liability. However the Department of Justice (DOJ) takes the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, joint venture partners but also distributors. No U.S. company can ignore signs that its distributors may be violating the FCPA. Company management cannot engage in conscious avoidance to the activities of a distributor that the company has put into a business position favorable to engaging in FCPA violations. Court interpretation of the FCPA has held that it is applicable where conduct violative of the Act is used to “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage. 

This scenario played out in China from 1997 to 2005 through AGA Medical Corporation. The Minnesota-based firm manufactured products used to treat congenital heart defects. To boost is China sales, AGA worked through its Chinese distributor. AGA sold products at a discounted rate to its Chinese distributor. This distributor then took some of the difference between his price from the equipment manufacturer AGA and the price he sold the equipment to Chinese hospitals to and paid corrupt payments to Chinese doctors to have them direct their government-owned hospitals to purchase AGA’s products. Its sales in China for the period were about $13.5 million. The Chinese distributor was found to have paid bribes in China of at least $460,000 to doctors in government-owned hospitals and patent-office officials. In 2008, AGA agreed to pay a $2 million criminal penalty and enter into a deferred prosecution agreement with the Department of Justice to settle Foreign Corrupt Practices Act violations. 

The same game was played by a Volvo subsidiary, Volvo Construction Equipment International (“VCEI”) when it used a Tunisian distributor to facilitate additional sales of its products to Iraq. VCEI reduced its prices to enable the distributor to make the illegal payments based on bogus after-sales service fees. Volvo’s 2008 settlement with the SEC included an agreement permanently enjoining it from future violations of Sections, ordering it to disgorge $7,299,208 in profits plus $1,303,441 in pre-judgment interest, and to pay a civil penalty of $4,000,000. In addition to this fine imposed by the SEC, Volvo also paid a $7,000,000 penalty pursuant to a deferred prosecution agreement with the DOJ. 

So what is in a name? Do we simply look to Shakespeare and his immortal words, “”What’s in a name? That which we call a rose; By any other name would smell as sweet.” Unfortunately I do not think the answer is quite so ethereal. It is more down to earth. If it walks like a duck and quacks like a duck, it probably is a duck. If you have a distributor, it must be subjected to the same FCPA scrutiny and management as an agent, reseller or joint venture partner. 

                                    *                      *                      * 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The author can be reached at tfox@tfoxlaw.com. 

© Thomas R. Fox, 2010

November 11, 2010

The End of the FCPA Facilitation Payment Exception?

In November, 2009 the Organization for Economic and Co-operation and Development (OECD) announced a new recommendation at the OECD’s celebration of “International Anti-Corruption Day” and the Tenth Anniversary of the “Entry into Force of the OECD Anti-Bribery Convention”. This change relates to facilitation payments (aka “grease payments”) which remain legal under the Foreign Corrupt Practices Act (FCPA). 

OECD Secretary-General Angel Gurría described these low-level payments, designed to expedite performance of a “routine government action” such as obtaining mail delivery, phone or power service, as “corrosive . . . particularly on sustainable economic development and the rule of law”. 

Facilitation payments, also known as “expediting payments” or “grease payments,” are bribes paid to induce foreign officials to perform routine functions they are otherwise obligated to perform. Examples of such routine functions include issuing licenses or permits and installing telephone lines and other basic services. The only countries that permit facilitation payments are the United States, Canada, Australia, New Zealand and South Korea. Facilitation payments, however, are illegal in every country in which they are paid. They have come under increasing fire under the FCPA as inconsistent with the totality of US policy on anticorruption. 

This change by the OECD brings the considerable problems associated with facilitation in the international business arena into keener focus. Just like large commercial bribes, grease payments abuse the public trust and corrode corporate governance. Treating them as anything other than outright bribery muddies the compliance waters and adds confusion where there should be clarity. This new stance by the OECD, coupled with the passage of the UK Bribery Act which bans facilitation payments and increased enforcement under the FCPA, may well bode the end of facilitation payments. 

I.          TRACE Facilitation Payments Benchmark Survey 

In October, 2009, TRACE International published the results of its “Facilitation Payments Benchmark Survey”. TRACE conducted a global survey with the following objectives: (1) to understand how facilitation payments are perceived in the international business community, including the level of risk they are deemed to pose and the compliance challenges they present; and (2) to map corporate policies on facilitation payments, including whether they are permitted and, if so, the types of safeguards corporations impose on their payment. 

The results of the TRACE survey reveal a definitive move by corporations to ban facilitation payments, coupled with an awareness of the added risk and complexity presented by facilitation payments: 

  • 76% of survey respondents believe it is possible to do business successfully without making facilitation payments given sufficient management support and careful planning.
  • Over 70% believe that employees of their company either never, or only rarely, make facilitation payments, even if their corporate policy permits facilitation payments.
  • Over 93% revealed that their job would be easier, or at least no different, if facilitation payments were prohibited in every country.
  • Nearly 44% reported that their corporations prohibit facilitation payments or simply do not address them because facilitation payments are prohibited together with other forms of bribery.
  • Almost 60% of respondents reported that facilitation payments pose a medium to high risk of books and records violations or violations of other internal controls.
  • Over 50% believe a company is moderately to highly likely to face a government investigation or prosecution related to facilitation payments in the country in which the company is headquartered. 

II. Facilitation Payments under the FCPA 

The original version of the FCPA, enacted in 1977, contained an exception for payments made to non-US officials who performed duties that were “essentially ministerial or clerical”. In 1988 Congress responded by amending the FCPA under the Omnibus Trade and Competitiveness Act to clarify the scope of the FCPA’s prohibitions on bribery, including the scope of permitted facilitation payments. An expanded definition of “routine governmental action” was included in the final version of the bill, reflecting the intent of Congress that the exceptions apply only to the performance of duties listed in the subcategories of the statute and actions of a similar nature. Congress also meant to make clear that “ordinarily and commonly performed actions”, with respect to permits or licenses, would not include those governmental approvals involving an exercise of discretion by a government official where the actions are the functional equivalent of “obtaining or retaining business for, or with, or directing business to, any person”. 

The FCPA now contains an explicit exception to the bribery prohibition for any “facilitation or expediting payment to a foreign official, political party, or party official for the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official”. “Routine government action” does not include any decision by a public official to award new business or continue existing business with a particular party. The statute lists examples of what is considered a “routine governmental action” including:

  • obtaining permits, licenses, or other official documents to qualify a person to do business in a country;
  • processing government papers, such as visas or work orders;
  • providing police protection, mail pick-up and delivery, or scheduling inspections associated with contract performance or transit of goods across country;
  • providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products from deterioration; and
  • actions of a similar nature. 

There is no monetary threshold for determining when a payment crosses the line between a facilitation payment and a bribe. The accounting provisions of the FCPA require that facilitation payments must be accurately reflected in an issuer’s books and records, even if the payment itself is permissible under the anti-bribery provisions of the law

 III.             Risks associated with relying on the “facilitation payments” exception. 

Facilitation payments carry legal risks even if they are permitted under the anti-bribery laws of a particular country. In the US enforcement agencies have taken a narrow view of the exception and have successfully prosecuted FCPA violations stemming from payments that could arguably be considered permissible facilitation payments. Violations of the accounting and recordkeeping provisions of the FCPA are also more likely when a company makes facilitation payments. Abroad, countries are increasingly enforcing domestic bribery laws that prohibit such payments. Companies that allow facilitation payments face a slippery slope to educate their employees on the nuances of permissible payments in order to avoid prosecution for prohibited bribes. 

A.    US enforcement authorities construe the exception narrowly. 

Other than as discussed above, there is no definitive guidance on circumstances in which the facilitation payments exception applies. There may be less risk of enforcement by US authorities in cases involving bona fide facilitation payments that are made specifically for one of the purposes enumerated in the FCPA. However, companies still face the risk of at least facing a governmental inquiry to explain the circumstances surrounding the payments, possibly resulting in penalties based on an unanticipated restrictive interpretation of the exception. As noted by the FCPA Professor, the recent Noble Non-Prosecution Agreement noted that the payments made by Noble’s Nigerian customs’ agent Panalpina, to facilitate the importation of its rigs into Nigeria did “not constitute facilitation payments for routine governmental actions within the meaning of the FCPA”.

B. Potential non-compliance with the FCPA’s accounting and recordkeeping provisions. 

While the anti-bribery provisions of the FCPA permit facilitation payments, the accounting and recordkeeping provisions of the law nevertheless require companies making such payments to accurately record them in their books and records. Companies or individuals may be reluctant to properly record such payments, as it shows some semblance of impropriety and effectively creates a permanent record of a violation of local law. However, failure to properly record such expenditures may result in prosecution by the Securities and Exchange Commission (SEC) even if the underlying payments themselves are permissible. One example of prosecution resulting from the misreporting of seemingly permissible facilitation payments involves Triton Energy Corporation, which settled an investigation by the SEC involving multiple alleged FCPA violations, including the miss-recording of facilitation payments. An Indonesian subsidiary of the company had been making monthly payments, of approximately $1,000, to low-level employees of a state-owned oil company in order to assure the timely processing of monthly crude oil revenues. The SEC did not charge that these payments violated the anti-bribery provisions of the FCPA; however, these payments were miss-recorded in corporate books and therefore violated the FCPA’s accounting and recordkeeping provisions. Triton Energy consented to an injunction against future violations of the FCPA and was fined $300,000. 

C. Increased enforcement of non-US laws that do not recognize an exception for facilitation payments. 

While the FCPA and certain other national anti-bribery laws contain exceptions for facilitation payments, such payments typically are considered illegal in the country in which they are made; there is not any country in which facilitation payments to public officials of that country are permitted under the written law of the recipient’s country. Accordingly, even if a particular facilitation payment qualifies for an exception of the FCPA, it, nevertheless, is likely to constitute a violation of local law – as well as under anti-bribery laws of other countries that also might apply simultaneously – and thus exposes the payer, his employer and/or related parties to prosecution in one or more jurisdictions. While enforcement to date in this area has been limited increased global attention to corruption makes future action more likely. Countries that are eager to be seen as combating corruption are prosecuting the payment of small bribes with greater frequency. 

D. Corporate approaches to facilitation payments may exceed the legitimate scope and applicability of the exception.

As demonstrated in the TRACE Benchmark Survey, businesses struggle with how to address the “facilitation payments” exception in their compliance policy and procedures, if the subject is covered at all. Businesses should be wary of allowing employees to decide on their own whether a particular payment is permissible. Unless such payments are barred completely or each payment is subject to pre-approval (which in many cases would be unrealistic (e.g., passport control)), there is always the risk that an employee, agent or other person whose actions may be attributed to the company will make a payment in reliance on the exception when in fact the exception does not apply. In addition, the temptation to improperly record otherwise permissible facilitation payments has been discussed above. 

IV.             End of facilitation payments?


The global business environment has changed even as the FCPA has remained static. After his prepared remarks at the Compliance Week 2010 Annual Conference, Assistant Attorney General for the Criminal Division of the US Department of Justice, Lanny Breuer took several questions from the audience. One of his more interesting responses was regarding facilitation payments and whether the US was moving towards the OECD/UK Bribery Act model of not allowing such payments. He responded that it was a question which needed consideration as compliance standards are evolving on a world wide basis. However, as of this date, Breuer was not aware of any proposed change in the FCPA on this issue but that it may be visited in the not too distant future. 

US companies should recognize the weakening of the argument supporting a facilitation payment exception and should develop compliance policies that do not permit any kind of grease payments. A policy that prohibits all payments (unless there is high level of legal and compliance approval) will relieve businesses of the compliance burden of differentiating between lawful and unlawful payments. From the point of view of the modern global corporation, a compliance regime that attempts to differentiate between “good” corrupt payments and “bad” corrupt payments will do more harm than good. 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The author can be reached at tfox@tfoxlaw.com. 

© Thomas R. Fox, 2010

Additional Proposed Amendments to the Foreign Corrupt Practices Act

Ed. Note-we are pleased to post a guest article by our colleague James McGrath.

A fortnight ago, the US Chamber Institute for Legal Reform issued a white paper entitled “Restoring Balance – Proposed Amendments to the Foreign Corrupt Practices Act”.  Written by Andrew Weissmann and Alixandra Smith, it is the Institute’s response to stepped-up FCPA enforcement activities over the past five years that have highlighted deficiencies in the statute.  These shortcomings make for onerous investigations, prosecutions, and penalties seemingly beyond its legislative intent.  This article suggests two additional amendments not in response to any textual deficiency, but rather, to evolving government enforcement philosophy.       

The FCPA is only a small part of the larger effort to get American business entities to behave ethically and police themselves, thereby ensuring good corporate citizenship. Since 1991, Chapter Eight of the United States Sentencing Guidelines has provided the framework for these efforts by mandating that companies institute and maintain vibrant compliance and ethics programs to ensure that corporations and their employees are trained in, and adhere to, morally-sound practices within their industries.  When there are ethical lapses, as infamously seen with Enron, et al., the Guidelines mandate that companies to respond to these breakdowns. 

These responses require businesses to impartially investigate what happened and why, and then to take remedial action to ensure that such breakdowns do not recur.  Remedial action may include retraining of employees, wholesale or partial re-vamping of compliance and ethics programs, self-reporting of perceived law-breaking to enforcement authorities, or a combination of these.  When companies do self-report and are prosecuted in criminal or civil actions brought by the government, resulting prison sentences, fines, and other penalties – including the disgorgement of profits – can be reduced significantly by cooperating with a federal agency’s investigation of the same.    

The problem with the current state of the FCPA is it’s imprecision.  An anti-bribery statute, it prohibits U.S. companies from giving, promising, or authorizing the giving of anything of value to a foreign official in order to secure a business advantage in a foreign country.  See 15 U.S.C. §78dd-1 through 15 U.S.C. §78dd-3. However, the statute specifies no culpable mental state such as “intentionally” or “knowingly”, provides little guidance as to what constitutes “anything of value”, and is vague in its definition of a “foreign official”.  Further, it contains no provisions defining a company’s liability for the prior acts of a company that it has later acquired or for that of a subsidiary acting without the parent’s knowledge.

Compounding this muddy state of affairs is the DOJ’s very aggressive stance on FCPA enforcement.  In recent years, it has essentially taken the positions that: (1) the FCPA is a strict liability offense, (2) the value threshold can be very low, even de minimus, (3) a foreign official can be almost any foreign national, and (4) successor and subsidiary liability is unlimited.  This makes tough sledding for companies doing business overseas, and DOJ Criminal Division Assistant Attorney General Lanny Breuer’s promise at Compliance Week 2010 of even more heightened FCPA enforcement surely influenced the US Chamber Institute’s formulation of its proposed amendments to that statute. 

The Institute white paper suggests five changes to the law: (1) addition of an affirmative “compliance defense”, (2) limiting corporate liability for prior acts of a company it has later acquired, (3) positing “willfulness” as the culpable mental state under the statute, (4) limiting a company’s liability for the acts of its subsidiaries, and (5) more clearly defining a “foreign official”. 

All of these are excellent proposals, and amending the FCPA by their incorporation would clarify the statute and go a long way toward leveling the enforcement playing field.  However, given statements made in the aforementioned May 27, 2010 address, two more amendments should be considered.  

As noted earlier, an effective compliance and ethics program requires companies to conduct internal investigations into possible FCPA violations.  In his presentation, Mr. Breuer advised that when a possible violation has been discovered, the corporation should (1) seek the government’s input on the front end of its internal investigation, (2) describe its work plan for conducting the inquiry, and (3) be responsive to DOJ questions, suggestions, and requests to expand the scope of the investigation.

From an internal investigations perspective, this “call first” demand constitutes a seismic shift in the government’s perception of its role in the process and should present tremendous business and legal concerns for a company in its crosshairs.  What the DOJ is asking for is access to the inner workings of private-sector companies and how they conduct themselves in a way that has heretofore not been seen.  

At present, when an FCPA violation occurs, there is generally the following investigatory timeline: (1) occurrence of the perceived corporate wrong, (2) performance of the company’s internal investigation, and (3) determination by the company of whether to self-report and cooperate with the government’s parallel investigation and potential litigation. 

In this sequence, the company conducts its own inquiry before making the critical decision to implicate itself or not.  Because these internal investigations are usually conducted by outside counsel, if no wrong is found by that independent investigation, its results are protected from disclosure to third parties by operation of the attorney-client privilege.  See: Upjohn Co. v. United States, 449 U.S. 383 (1981).  This safeguard to the company is vital.  In an era of global markets and instant information, the protection of an exonerated company’s reputation may very well save it from complete ruin, as the mere specter of dirty laundry can be damning on Wall Street.  

Alternatively, if a company contacts and co-ordinates its internal investigation from the outset with the DOJ, its ability to protect the direction, yield, and publicity of any such inquiry will be nil.  Dirty or not, it will have waived attorney-client privilege and laid open it entire operation to government investigators.  That should be unnerving to even the most ethical company. 

A line of cases beginning with Coolidge v. New Hampshire, 403 U.S 443 (1971) stands for the proposition that government  agents need not ignore evidence of other illegal activities they happen upon when they are lawfully present, even on an unrelated matter.  This “plain view” exception to the probable cause and warrant requirement is never lost on law enforcement.  It is therefore not difficult to imagine aggressive government investigators with access to a company’s every last document and memoranda hunting until they find wrongdoing to prosecute, be it the FCPA violation that they were invited in on, or something else. That is a daunting prospect to consider.

 This is not to advocate that companies should be able to hide their illegalities and avoid prosecution.  Quite the contrary.  The USSG laudably balances the sometimes-competing and sometimes-cooperating interests of ensuring self-policing, respecting corporate privacy, and doing justice by prosecuting wrongdoers.  To establish a precedent where the government is called into, and becomes a partner in, every FCPA internal investigation flies in the face of Chapter Eight of the USSG by eradicating the self-policing that is its purpose.  

To be clear, adhering to Mr. Breuer’s suggestion of early government involvement in a company’s internal investigation is not always going to be unacceptable or ill-advised.  Whether to do so or not is a business and legal decision that is best made by corporate leadership.  However, allowing his present request to ripen into a future demand, and then into a policy that over the course of time and through stare decisis becomes the law of the FCPA land, usurps the authority of Congress and is wrong. 

As a result, any prospective legislation amending the FCPA should protect the balance of interests in corporate criminal and civil prosecutions already struck by the USSG.   Involving the DOJ at the outset of the internal investigation process as mandatory for receiving cooperation credit under the Guidelines should be expressly prohibited.  And for those companies that do invite the government in as investigatory partners from the beginning, there should be some transactional or use immunity – or at least some limitation on penalties and sanctions – for other wrongs uncovered during the course of the FCPA investigation in recognition of their good-faith efforts to cooperate with the government.  

While neither of the foregoing proposals can nor will remedy the adverse publicity aspect of early DOJ involvement where elected, the former does safeguard corporate privacy and attorney-client privilege interests, while the latter fairly and justly limits the impact of a “corporate plain view” violation.    These are adviseable as counterweights to continued and vigorous government FCPA enforcement activity and will maintain a level playing field between companies seeking to ethically do business abroad and the DOJ. 

James J. McGrath is a former prosecutor and the managing partner of McGrath & Grace, Ltd., a law firm that specializes in conducting independent corporate internal investigations. He can be reached at james.mcgrath@mcgrath.grace.com.

November 5, 2010

FCPA Settlement Day:DOJ Guidance on the Best Practices of a Corporate Compliance Program

In what the FCPA Blog termed a day of making history “for the most companies to simultaneously settle FCPA-related violations, [the] Global logistics firm Panalpina and five of its oil-and-gas services customers resolved charges with the DOJ and SEC, and another customer settled with the SEC only”, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced settlements which totaled fines, penalties and profit disgorgements of over $236.5 million. The FCPA Professor noted that while the “DOJ and SEC enforcement actions principally focused on customs and related payments in Nigeria, but also including alleged improper conduct in Angola, Brazil, Russia, Kazakhstan, Venezuela, India, Mexico, Saudi Arabia, the Republic of Congo, Libya, Azerbaijan, Turkmenistan, Gabon and Equatorial Guinea.” He also noted that since July, “the U.S. government has brought FCPA enforcement actions totaling approximately $1.1 billion” in fines, penalties and profit disgorgement.

 However more was announced yesterday than simply raw dollars. Each resolved enforcement action provided to the FCPA compliance practitioner significant information on the most current DOJ thinking on what constitutes a best practice FCPA program. Each of the Deferred Prosecution Agreements released yesterday, included an Attachment C, a document entitled “Corporate Compliance Program”. Each Corporate Compliance Program was the same in all the DPAs announced yesterday. Each Corporate Compliance Program detailed the latest best practices its internal controls, policies, and procedures regarding compliance with the Foreign Corrupt Practices Act (FCPA). (This same information was also attached to the Noble Non-Prosecution Agreement as “Attachment B”.) 

The information included these collective Corporate Compliance Programs provides the FCPA compliance practitioner with the most current components that the Department of Justice believes should be included in a FCPA compliance program. Hence, this information is a valuable tool by which companies can assess if they need to adopt new or to modify their existing internal controls, policies, and procedures in order to ensure that their FCPA compliance program maintains: (a) a system of internal accounting controls designed to ensure that a Company makes and keeps fair and accurate books, records, and accounts; and (b) a rigorous anti-corruption compliance code, standards, and procedures designed to detect and deter violations of the FCP A and other applicable anti-corruption laws. 

The Preamble to each Corporate Compliance Program noted that these suggestions are the “minimum” which should be a part of a Company’s existing internal controls, policies, and procedures. Each Corporate Compliance Program had twhirteen points which are set out below. They are: 

1. Code of Conduct. A Company should develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA, including its anti-bribery, books and records, and internal controls provisions, and other applicable foreign law counterparts (collectively, the “anti-corruption laws”), which policy should be memorialized in a written compliance code. 

2. Tone at the Top. The Company will ensure that its senior management provides strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.

3. Anti-Corruption Policies and Procedures. A Company should develop and promulgate compliance standards and procedures designed to reduce the prospect of violations of the anti-corruption laws and the Company’s compliance code, and the Company should take appropriate measures to encourage and support the observance of ethics and compliance standards and procedures against foreign bribery by personnel at all levels of the company. These anti-corruption standards and procedures shall apply to all directors, officers, and employees and, where necessary and appropriate, outside parties acting on behalf of the Company in a foreign jurisdiction, including but not limited to, agents and intermediaries, consultants, representatives, distributors, teaming partners, contractors and suppliers, consortia, and joint venture partners (collectively, “agents and business partners”), to the extent that agents and business partners may be employed under the Company’s corporate policy. The Company shall notify all employees that compliance with the standards and procedures is the duty of individuals at all levels of the company. Such standards and procedures shall include policies governing: 

a. gifts;

b. hospitality, entertainment, and expenses;

c. customer travel;

d. political contributions;

e. charitable donations and sponsorships;

f. facilitation payments; and

g. solicitation and extortion. 

4. Use of Risk Assessment. A Company should develop these compliance standards and procedures, including internal controls, ethics, and compliance programs on the basis of a risk assessment addressing the individual circumstances of the Company, in particular the foreign bribery risks facing the Company, including, but not limited to, its geographical organization, interactions with various types and levels of government officials, industrial sectors of operation, involvement in joint venture arrangements, importance of licenses and permits in the company’s operations, degree of governmental oversight and inspection, and volume and importance of goods and personnel clearing through customs and immigration. 

5. Annual Review. A Company should review its anti-corruption compliance standards and procedures, including internal controls, ethics, and compliance programs, no less than annually, and update them as appropriate, taking into account relevant developments in the field and evolving international and industry standards, and update and adapt them as necessary to ensure their continued effectiveness. 

6. Sr. Management Oversight and Reporting. A Company should assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of the Company’s anti-corruption policies, standards, and procedures. Such corporate official(s) shall have direct reporting obligations to the Company’s Legal Counsel or Legal Director as well as the Company’s independent monitoring bodies, including internal audit, the Board of Directors, or any appropriate committee of the Board of Directors, and shall have an adequate level of autonomy from management as well as sufficient resources and authority to maintain such autonomy.

7. Internal Controls. A Company should ensure that it has a system of financial and accounting procedures, including a system of internal controls, reasonably designed to ensure the maintenance of fair and accurate books, records, and accounts to ensure that they cannot be used for the purpose of foreign bribery or concealing such bribery. 

8. Training. A Company should implement mechanisms designed to ensure that its anti-corruption policies, standards, and procedures are communicated effectively to all directors, officers, employees, and, where necessary and appropriate, agents and business partners. These mechanisms shall include: (a) periodic training for all directors and officers, and, where necessary and appropriate, employees, agents, and business partners; and (b) annual certifications by all such directors and officers, and, where necessary and appropriate, employees, agents, and business partners, certifying compliance with the training requirements. 

9. Ongoing Advice and Guidance. The Company should establish or maintain an effective system for: 

a. Providing guidance and advice to directors, officers, employees, and, where necessary and appropriate, agents and business partners, on complying with the Company’s anti-corruption compliance policies, standards, and procedures, including when they need advice on an urgent basis or in any foreign jurisdiction in which the Company operates; 

b. Internal and, where possible, confidential reporting by, and protection of, directors, officers, employees, and, where necessary and appropriate, agents and business partners, not willing to violate professional standards or ethics under instructions or pressure from hierarchical superiors, as well as for directors, officers, employees, and, where appropriate, agents and business partners, willing to report breaches of the law or professional standards or ethics concerning anticorruption occurring within the company, suspected criminal conduct, and/or violations of the compliance policies, standards, and procedures regarding the anticorruption laws for directors, officers, employees, and, where necessary and appropriate, agents and business partners; and 

c. Responding to such requests and undertaking necessary and appropriate action in response to such reports. 

10.  Discipline. A Company should have appropriate disciplinary procedures to address, among other things, violations of the anti-corruption laws and the Company’s anti-corruption compliance code, policies, and procedures by the Company’s directors, officers, and employees. A Company should implement procedures to ensure that where misconduct is discovered, reasonable steps are taken to remedy the harm resulting from such misconduct, and to ensure that appropriate steps are taken to prevent further similar misconduct, including assessing the internal controls, ethics, and compliance program and making modifications necessary to ensure the program is effective. 

11. Use of Agents and Other Business Partners. To the extent that the use of agents and business partners is permitted at all by the Company, it should institute appropriate due diligence and compliance requirements pertaining to the retention and oversight of all agents and business partners, including: 

a. Properly documented risk-based due diligence pertaining to the hiring and appropriate and regular oversight of agents and business partners;

b. Informing agents and business partners of the Company’s commitment to abiding by laws on the prohibitions against foreign bribery, and of the Company’s ethics and compliance standards and procedures and other measures for preventing and detecting such bribery; and 

c. Seeking a reciprocal commitment from agents and business partners. 

12. Contractual Compliance Terms and Conditions. A Company should include standard provisions in agreements, contracts, and renewals thereof with all agents and business partners that are reasonably calculated to prevent violations of the anticorruption

laws, which may, depending upon the circumstances, include: (a) anticorruption representations and undertakings relating to compliance with the anticorruption laws; (b) rights to conduct audits of the books and records of the agent or business partner  to ensure compliance with the foregoing; and (c) rights to terminate an agent or business partner as a result of any breach of anti-corruption laws, and regulations or representations and undertakings related to such matters. 

13. Ongoing Assessment. A Company should conduct periodic review and testing of its anticorruption compliance code, standards, and procedures designed to evaluate and improve their effectiveness in preventing and detecting violations of anticorruption laws and the Company’s anti-corruption code, standards and procedures, taking into account relevant developments in the field and evolving international and industry standards. 

Download the DPA for Panalpina here, Shell here, Tidewater here, Pride here, Transocean here, and the NPA for Noble here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com. 

© Thomas R. Fox, 2010

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