6/10/2014 Origins of the FCPA? The FCPA, Al Capone and the IRS Congress enacted the U.S. Foreign Corrupt Practices Act (FCPA or Act) in 1977 in response to: June 11, 2014 1. SEC discovered that more than 400 U.S. companies had paid hundreds of millions of dollars in bribes to foreign government officials 2. SEC reported that companies were using secret “slush funds” to make illegal campaign contributions in the Ron Stefani, CFO Partner United States ron.stefani@aventinehillinc.com 832 ‐ 922 ‐ 2200 (mobile) 3. Lockheed, Boeing, and McDonnell Douglas Anti ‐ Trust 713 ‐ 580 ‐ 9400 (office) Violations in the 1970’s paved the way for the FCPA 1 2 Prohibitions Consequences • Offering Anything of Value • Civil and criminal penalties • To a foreign official in order to influence any act or • Sanctions decision of the foreign official in his or her official capacity; • Remedies, including fines, disgorgement, and/or imprisonment • or to secure any other improper advantage in order to obtain or retain business. 3 4 1
6/10/2014 FCPA Coverage FCPA Coverage A. Anti ‐ bribery B. Accounting Provisions 1. Domestic Concerns 1. Book and Records 2. Issuers 2. Internal Controls 3. Territorial Jurisdiction 5 6 Current Events Al Capone and the IRS (SEC Enforcement Actions for FCPA Violations) So, you think you have this FCPA thing figured out? 70 60 If so…do you know the story of Al Capone, Eliot Ness and the IRS? 50 40 Al thought he had the Feds beat on Bootlegging Charges 30 What did the Feds bust Al on? Income Tax Evasion!! 20 10 How does this pertain to the FCPA? 0 1970's 1980's 1990's 2000's 2010's 7 8 2
6/10/2014 Current Events Current Events 20% of companies materially manipulate their earnings. 3 June 2013 ‐ Mary Jo White…”The SEC is a law enforcement agency,…..we will continue to focus on FCPA violations and External auditors have reduced their findings of material financial statement fraud and mischievous accounting…..” 1 weaknesses in internal control ‐ no warning signs for Lehman Brothers, Citigroup accounting shenanigans. 4 December 2012 ‐ SEC called out the internal audit departments at Eli Lilly and Allianz for negligence in failing to properly audit C ‐ Suite behaving badly…2012 a record year for corporate internal controls, books and records 2 criminal fines; insider trading; bribery; conflicts of interest. 5 3. Ilia Dichev and Shiva Rajgopal of Emory University and John Graham of Duke University, Sept. 9, 1. Wall Street Journal – June 23, 2013 2012 2. SEC Website – http://www.sec.gov/spotlight/fcpa/fcpa ‐ cases.shtml ‐ 4. Forbes, Francine McKenna, October 18, 2012 December 20, 2012 5. Bloomberg Businessweek, Louis Lavelle, December 13, 2012 and Jeff Kaplan, Conflict of Interest Blog 9 10 Current Events Current Events On May 23, 2014, Canada sentenced business executive Nazir March 11, 2014 ‐ The SEC charged AgFeed Industries Audit Karigar to three years in prison for conspiracy to bribe foreign Committee Chairman, K. Ivan Gothner, with scheming to avoid or public officials. delay disclosure of an accounting fraud once he learned about it in 2011. 7 This is the first jail sentence handed down under Canada’s Bank of America Suspends Buyback & Dividend Increase ‐ Bank Corruption of Foreign Public Officials Act (CFPOA) since it came of America executives had been using the wrong calculations into force in 1999. since 2009. California Teachers Pension calls for No Vote of Audit Committee Members. 8 All previous prosecutions have been against corporations and were disposed of with guilty pleas and fines. 6 7. SEC.gov ‐ Washington D.C., March 11, 2014 6. FCPA Compliance and Ethics Blog, June 2, 2014 8. WSJ – April 28, 2014 11 12 3
6/10/2014 Internal Controls Internal Controls • The payment of bribes often occurs in companies that Effective Internal Control Programs Have have weak internal control environments 1. An effective control environment – Tone at the Top • Internal controls over financial reporting are the 2. Risk Assessments (FCPA, Fraud, Internal Audit) processes used by companies to provide reasonable assurances regarding the reliability of financial 3. Control Activities reporting; 4. Formal Information and Communication Protocols • And the preparation of financial statements 5. Monitoring 13 14 Internal Controls Books & Records Companies with ineffective internal controls often face • Bribes, both foreign and domestic, are often risks of: mischaracterized in companies’ books and records 1. Embezzlement • Consistent with the FCPA’s approach to prohibiting 2. Self ‐ dealing by Employees payments of any value that are made with a corrupt purpose, there is no materiality threshold under the 3. Commercial bribery books and records provision 4. Export control problems 5. Violations of other U.S. and local laws 15 16 4
6/10/2014 Books & Records Books & Records • As with the anti ‐ bribery provisions, DOJ’s and SEC’s Bribes Have Been Mischaracterized As: enforcement of the books and records provision has • Commissions or Royalties typically involved misreporting of either large bribe • Consulting Fees payments or; • Sales and Marketing Expenses • Widespread inaccurate recording of smaller payments • Scientific Incentives or Studies made as part of a systemic pattern of bribery • Travel and Entertainment Expenses • Rebates or Discounts • After Sales Service Fees 17 18 Books & Records Bribery of a Foreign Official Bribes Have Been Mischaracterized As: • In 1998, the FCPA was amended to expand the • Free Goods definition of foreign official • Intercompany Accounts • Includes employees and representatives of public • Supplier / Vendor Payments international organizations • Write ‐ offs • Organizations such as schools and hospitals • Customs Intervention • Miscellaneous Expenses • Petty Cash Withdrawals 19 20 5
6/10/2014 Bribery of a Foreign Official Bribery of a Foreign Official Examples of Actions Taken to Obtain or Retain Business • Currently, public international organizations include • Winning a contract entities such as the World Bank, the International • Influencing the procurement process Monetary Fund, and the World Trade Organization • Circumventing the rules for importation of products • A comprehensive list of organizations can be found on • Gaining access to non ‐ public bid tender information the U.S. Government Printing Office website at • Evading taxes or penalties http://www.gpo.gov/fdsys/ • Influencing the adjudication of lawsuits or enforcement actions • Obtaining exceptions to regulations • Avoiding contract termination 21 22 FCPA High Risk Processes FCPA High Risk Processes • Foreign Payroll Advances • Contracts – Should contain provisions for COBC, Anti ‐ Bribery Program, Bank Account, Method of Payment, • Immigration – fines, work visas, temporary visas Fee Structure, Right to Audit, Market Based Compensation • Customs – devil is in the detail – special handling, other services, expediting services • P ‐ Cards, Credit Cards, Petty Cash • Distributors • Permits • Gifts and Charitable Contributions to foreign schools & • T&E hospitals 23 24 6
6/10/2014 FCPA High Risk Processes Acceptable Payments – T&E • The FCPA allows companies to provide reasonable and • Inter ‐ Company Transactions (Subsidiaries & Joint bona fide travel and lodging expenses to a foreign Ventures) official; • Facilitating and Expediting Payments • For expenses directly related to the promotion, demonstration, or explanation of a company’s products • Non ‐ PO Purchases or services; • Agents, Intermediaries, or Foreign Business Associates • Or are related to a company’s execution or performance of a contract with a foreign government • All Cash Transactions or agency 25 26 Acceptable Payments Acceptable Payments (Facilitating or Expediting) (Facilitating or Expediting) • Providing police protection, mail pickup and delivery, or The FCPA’s bribery prohibition contains a narrow exception for scheduling inspections associated with contract facilitating or expediting payments made in furtherance of performance or inspections related to transit of goods routine governmental action. across country; Examples of Routine Governmental Action • Providing phone service, power and water supply, loading An action which is ordinarily and commonly performed by a and unloading cargo, or protecting perishable products or foreign official in: commodities from deterioration; or • Obtaining permits, licenses, or other official documents to • Actions of a similar nature qualify a person to do business in a foreign country; • NOTE: Most foreign countries regard facilitating or • Processing governmental papers, such as visas and work expediting payments as illegal orders; 27 28 7
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