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FCPA Compliance in Latin America 2014 Implementing Compliance Programs and Mitigating Legal Risks
Today’s faculty features:
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WEDNESDAY, JANUARY 29, 2014
Presenting a live 90-minute webinar with interactive Q&A
Jay Holtmeier, Partner, Wilmer Cutler Pickering Hale and Dorr, New York
Matteson Ellis, Special Counsel, Miller & Chevalier, Washington, D.C.
Matthew J. Feeley, Shareholder, Buchanan Ingersoll & Rooney, Miami
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FCPA in Latin America 2014 Recent Developments
Jay Holtmeier
Wilmer Cutler Pickering Hale and Dorr LLP
January 29, 2014
WilmerHale 5
FCPA Background Two provisions: (1) anti-bribery and (2) accounting (books and
records/internal controls)
Applies to: – “Issuers”: U.S. or foreign companies with securities listed on U.S.
exchanges Includes officers, directors, employees, agents, or stockholders acting on behalf of issuers
– “Domestic Concerns”: U.S. companies and citizens, nationals, residents
– Territorial Jurisdiction: foreign persons that engage in any act in furtherance of a corrupt payment “while in the territory of the United States”
– Anti-bribery provisions may not directly apply to Latin American entities/subsidiaries (but conspiracy, aiding and abetting, agency)
– Accounting provisions apply only to “issuers”
WilmerHale 6
FCPA Background DOJ brought 14 actions in
2013; SEC brought 10 actions
In 2013, 12 companies paid $731.1 million in penalties, compared to 12 companies in 2012 paying $259.4 million; and 15 companies in 2011 paying $508.6 million.1
Three recent, large settlements: Total S.A. ($398M); Alcoa ($384M); Weatherford ($152M)
1: See FCPABlog.Com at http://www.fcpablog.com/blog/2014/1/2/2013-fcpa-enforcement-index.html
WilmerHale 7
FCPA Key Trends
Decline in number of enforcement actions
– But 2013 saw two of the largest settlements in FCPA history (Total S.A. at $398M; Weatherford at $153M)
SEC: increased use of out-of-court settlements
Use of “hybrid” monitors
Continued focus on industry sweeps
Continued focus on prosecution of individuals
Increased number of publicly announced declinations
Continued emphasis on risks of third parties
Increased involvement of enforcement authorities in company investigations – increased burden and costs
WilmerHale 8
Region Overview
Country Rank Country / Territory 9 Canada 19 United States 19 Uruguay 22 Chile 33 Puerto Rico 49 Costa Rica 63 Cuba 72 Brazil 83 El Salvador 83 Peru 94 Colombia
102 Panama 102 Ecuador 106 Argentina 106 Bolivia 106 Mexico 123 Guatemala 123 Dominican Republic 127 Nicaragua 140 Honduras 150 Paraguay 160 Venezuela 163 Haiti
Transparency International - 2013 Index: Americas
WilmerHale 9
FCPA Cases Involving Latin America
Wide range of industries involved in Latin American FCPA settlements, including: – Telecom
– Infrastructure
– Energy
– Agriculture
– Technology
– Pharmaceuticals/medical device/healthcare
WilmerHale 10
Recent FCPA Cases in Latin America PetroTiger (Jan. 2014): BVI Gas/Oil Company in Colombia, New Jersey
DOJ unsealed charges filed in 2013 against former PetroTiger executives for alleged scheme to
pay bribes (totaling ~$333,500) to a Colombian Ecopetrol official to approve an oil services contract.
– Former GC pleaded guilty to one-count information for conspiracy to violate the FCPA and
to commit wire fraud.
– Former Co-CEOs, Joseph Sigelman and Knut Hammarskjold, charged with conspiracy to
violate FCPA and three FCPA counts.
Ecopetrol – SOE: Created by national law, 89.9% owned by government, government can elect
majority of board (which included senior government officials).
Payments made directly (not through a third party) to official and official’s wife (for purported
services she did not actually provide).
Hammarskjold was arrested in November 2013 in a New Jersey airport. Sigelman was arrested in
January 2014 in the Philippines and appeared in Guam. No charges against the company. No SEC
case.
WilmerHale 11
Recent FCPA Cases in Latin America Archer Daniels Midland (Dec. 2013): Global food processor in U.S.
ADM entered into a NPA with the DOJ, and a subsidiary pleaded guilty; ADM also settled with SEC (SEC
settlement and subsidiary guilty plea related only to Ukraine, not Latin America).
ADM’s 50% owned joint venture in Venezuela received over-payments from customers and returned
overage into foreign bank accounts controlled by customer employees.
– This practice was apparently primarily designed to avoid local currency controls.
– These payments often were made through customer brokers and were disguised on the company’s
books as commission payments.
– ADM learned of problematic conduct when evaluating JV.
– DOJ alleged ADM instituted policy but failed to follow it and did not adequately train or monitor.
In Ukraine portion of case, ADM faulted for making charitable donations that were intended to influence
officials.
NPA alleged ADM’s failure to implement adequate internal controls. Company must self-monitor for 3 years
and report to DOJ. ADM’s cooperation included global risk assessment.
WilmerHale 12
Recent FCPA Cases in Latin America Stryker Corp. (Oct. 2013): Medical device manufacturer in U.S.
Per the SEC, Stryker subsidiaries in Argentina, Mexico, and elsewhere made approximately $2.2M in
illicit payments.
– Mexico: subsidiary made 3 payments over $76,000 to foreign officials. For example, it directed a
Mexican law firm to pay $46,000 to a Mexican government employee to secure contract. Payment
booked as “legal expenses.”
– Argentina: subsidiary made 392 “honoraria” payments to doctors in public health care, totaling
more than $966,500. Payments based on percentage of sales, not work performed.
– Greece: donation to “pet project” – payment made to public university (not individual), but
described as a quid pro quo.
Foreign subsidiaries described as de-centralized, run by local country managers; global anti-corruption
policy not adequately implemented locally.
Agreed to pay $13.2M to settle SEC’s books and records and internal controls charges in an
administrative proceeding. No DOJ case.
WilmerHale 13
Recent FCPA Cases in Latin America Ralph Lauren (Apr. 2013): Apparel/accessories designer in U.S.
Argentine subsidiary made payments to customs broker for “loading and delivery” and “stamp tax/label
tax” in connection with improperly securing importation of products. Payments totaled over $568,000
over four-year period (unclear how much of that amount was paid to customs officials).
Ralph Lauren Argentina general manager approved gifts to customs officials (perfume, dresses,
handbags).
No anti-corruption program at all at time of conduct.
Government applauded the company’s cooperation, including: voluntarily disclosing within two weeks of
discovering illegal payments; producing documents “expeditiously”; providing English translations;
summarizing witness interviews the company’s investigators conducted overseas; making overseas
witnesses available for staff interviews, and conducting a global risk assessment.
Agreed to pay $734,846 in disgorgement and prejudgment interest to the SEC in the SEC’s first NPA in
an FCPA case, and $882,000 in criminal penalties to the DOJ under a NPA.
WilmerHale 14
Recent FCPA Cases in Latin America Siemens: German technology company
In 2011, both the DOJ and SEC pursued cases against numerous employees and agents
of Siemens Argentina.
In April 2013, U.S. District Court Judge Scheindlin (SDNY) approved a $275,000
settlement between former Siemens AG Board member Uriel Sharef and the SEC.
While Sharef was a manager of an “issuer,” several other defendants in the cases were
not employed by the issuer – DOJ’s indictment nonetheless described them as
“‘officer[s], director[s], employee[s], [and] agent[s]’ of an ‘issuer’ Siemens AG, as those
terms are used in the [FCPA].”
SEC case against Herbert Steffen was dismissed on jurisdiction grounds in February of
2013. Judge Scheindlin concluded Siemens Argentina CEO, who was a Germann
citizen, was too tangential to meet the minimum contacts test required to establish
personal jurisdiction.
WilmerHale 15
Recent WilmerHale Investigations Involving Latin America Payments to hospital and pharmacy officials in Mexico regarding product sales.
Payments relating to currency issues in Venezuela.
Payments to customs officials (through freight forwarder and customs broker) in connection with
transport of products between Brazil and Argentina.
Payments to court officials (by law firms) to assist in executing court orders in Brazil.
Payments to licensing and permitting authorities in connection with building projects in Brazil.
Payments (by consultant) to police to obtain information for employee background checks in Brazil.
Inaccurately documented payments to third parties (ultimate recipients unknown) in connection with
transportation issues in Chile.
Payments (through distributors) in connection with public tenders for medical equipment in Mexico.
Payments to a law firm in Mexico potentially passed on to regulatory officials.
Payments (through consultants) to police and other officials in Mexico, Panama, and elsewhere.
WilmerHale 16
Publicly Acknowledged Ongoing FCPA Investigations Wal-Mart: Department store based in U.S.
SEC Filing on 12/6/2013: As of 10/31/2013, the company incurred $224M in investigatory expenses for the previous nine months.
– Walmex (Wal-Mart Mexico subsidiary) is cooperating with Mexican government agencies. Wal-mart is cooperating with the DOJ/SEC.
HP: Technology company based in U.S.
As of 12/6/2013 SEC filing: HP is cooperating with the investigating agencies, including the DOJ, SEC, German Public Prosecutor’s Office, and others. HP is in “advanced discussions with the U.S. enforcement agencies to resolve their investigations.”
– The DOJ are SEC are investigating “public-sector transactions in Russia, Poland, the Commonwealth of Independent States, and Mexico, among other countries.”
WilmerHale 17
Earlier FCPA Cases in Latin America Eli Lilly (2012): Brazilian subsidiary gave distributor unusual discount
to create a larger profit margin, which allegedly was used to bribe Brazilian health officials to purchase Lilly products.
Biomet (2012): Argentine employees paid $1.5M in bribes to publicly employed health officials and described the payments as commissions, royalties, consulting fees, etc. in exchange for buying Biomet products.
Bizjet (2012): Mexico and Panama – allegedly bribed Mexican federal police and others in connection with aircraft service and repair projects.
Orthofix (2012): recently purchased Mexican subsidiary allegedly made improper payments.
WilmerHale 18
Earlier FCPA Cases in Latin America Bridgestone (2011): Mexico and “Other Latin American Countries” –
Tire and rubber manufacturer conspired to rig bids and make payments to Mexican state employees.
Ball Corporation (2011): Argentina – US-based household product manufacturer bought company in Argentina that was making payments to customs officials, and Ball did not implement effective post-acquisition internal controls.
Tyson Foods, Inc. (2011): Mexico – Food processor made payments, including through sham jobs to relatives, to Mexican veterinarians in charge of certifying products for export.
WilmerHale 19
Earlier FCPA Cases in Latin America Alcatel-Lucent (2010): Costa Rica, Honduras, Nicaragua and
Ecuador – French telecom company made payments, through intermediaries, to government officials at state-owned telecom authorities for telecom contracts.
Panalpina (2010): Brazil – Swiss freight forwarder made improper payments to receive preferential customs treatment for its customers.
Nature’s Sunshine (2009): Brazil – Brazilian subsidiary of nutritional products company made payments to customs officials; two senior officers charged by SEC under “control person” theory.
Siemens (2008): Argentina, Venezuela and Mexico – Improper payments by Siemens subsidiaries to win infrastructure projects.
WilmerHale 20
Conclusion
Jay Holtmeier
Wilmer Cutler Pickering Hale and Dorr LLP
(212) 295-6413
Jay.Holtmeier@wilmerhale.com
© 2013 Miller & Chevalier Chartered
FCPA in Latin America
Strafford Publications January 29, 2014
Matteson Ellis Miller & Chevalier Chartered
22 22
General Corruption Risks in Latin American Countries
2012 Latin America Corruption Survey:
•Half of all respondents believe their company has lost business to competitors making illicit payments in the region.
•Only 28% of respondents believe anti-corruption laws are effective in the country where they work. Chile (78%) and the United States (70%) are seen as having the most effective laws.
• 44% of respondents consider corruption to be a “significant obstacle” to doing business in the region
© 2013 Miller & Chevalier Chartered
23 23
General Corruption Risks in Latin American Countries
2012 Latin America Corruption Survey:
• Most significant corruption challenges: Venezuela, Argentina, Mexico, Bolivia
• Lowest overall government corruption: Chile, Uruguay, and the United States
• Risks by area of government Mexico (Police, Municipal/Local) Venezuela (Judicial, Customs) Argentina (Executive Branch, Customs) Brazil (Legislative Branch, Police, Municipal/Local, Customs) Colombia (Legislative Branch, Municipal/Local)
© 2013 Miller & Chevalier Chartered
24 24
Three Prominent Corruption Risks throughout Latin America
• The Police Highest consistent bribery risk of any government institution no
matter the country Personal security concerns Extortion
• Regulatory Quality Byzantine and costly regulatory regimes Ranked by World Bank in bottom half worldwide Implications on corruption
• Family Owned Businesses Common to partner with companies that lack common accounting
standards, corporate governance transparency, basic internal controls
© 2013 Miller & Chevalier Chartered
25 25
Brazil – Common Corruption Risks
• M&A: Vetting acquirees when they are family-owned • Customs: Using despachantes • Tax Regimes: How complex rules create risk • Distributors: Risks associated with selling goods • Sophisticated Schemes in Public Procurements: How
public contracting can be manipulated in a sophisticated economy
© 2013 Miller & Chevalier Chartered
26 26
Brazil – Local Law Developments
Brazil’s Anti-Bribery Law (comes into force today) Corporate administrative and civil liability Prohibited acts: domestic & foreign bribery, public
procurement-related violations Strict liability – no need to show intent Significant sanctions (ie., up to 20% of the gross revenue
of the legal entity) Explicit credit for compliance programs, self-disclosure,
and cooperation
© 2013 Miller & Chevalier Chartered
27 27
Brazil – Local Law Developments
© 2013 Miller & Chevalier Chartered
Brazil’s Anti-Bribery Law – Key topics What to expect from enforcement officials
(Embraer investigation) The extraordinary number of enforcement authorities Impending regulations The problem with leniency agreements
28 28
Mexico – Common Corruption Risks
Police: How petty corruption affects Mexican business Security and Extortion: When duress and bribe
requests meet Large-Scale Procurements: How corruption arises in
expensive public contracting Gifts and Hospitality: The expectation of meals and
entertainment from government clients Politically-Linked Companies: When the powerful elite
engage in business and politics
© 2013 Miller & Chevalier Chartered
29 29
Mexico – Local Law Developments
© 2013 Miller & Chevalier Chartered
• New Anti-Money Laundering Law (July 2013) Regulates 15 activities that are vulnerable to money laundering but not
covered by AML rules applicable to financial institutions For example: donations, construction/property development,
professional services • Federal Anti-Corruption Law in Public Procurement (June 2012) Applies to Mexican and foreign persons, natural and legal Prohibits bribery of non-Mexican officials and officials of public
international organizations Requires Mexican law enforcement to cooperate with other countries’
investigations Penalties up to the higher of USD $9.2M or 35% of value of public
contract, and up to a 10-year bar from participating in procurement processes
30 30
Other Local Law Developments in the Region
• Chile: Corporate criminal liability in a region where it is
uncommon Corporate compliance certifications Leniency agreements in practice
• Peru: Steps toward joining the OECD Anti-Bribery Convention Advancements in corporate liability Participation of civil society
© 2013 Miller & Chevalier Chartered
31 31
Matteson Ellis Miller & Chevalier Chartered
mellis@milchev.com (202) 626-1477
© 2013 Miller & Chevalier Chartered
Mitigating FCPA Risk in Latin America • Compliance Programs • Due Diligence • Identified FCPA Violations Matthew J. Feeley Miami matthew.feeley@bipc.com 305-347-5794 January 29, 2014
33
Compliance Program Why?
– Prevent FCPA violations – Evidence of commitment to ethics may
help avoid prosecution or reduce penalty
34
Compliance Program Begin With Baseline Risk Assessment
of Your Business – Contact with potential “government officials” &
“SOEs” – Use of consultants, agents, and distributors – Licensing, permitting – Past or ongoing noncompliance
35
Compliance Program
36
Compliance Program Local Culture
– Brazil: sophisticated bribery and kick-back schemes; high level of government regulation allows for corruption opportunities
– Venezuela: traditionally high corruption, in part, due to petroleum industry and centralization of government
– Chile: relatively low corruption; confidence in government and transparency
37
Compliance Program Local Culture
– Engage local agent/attorney or U.S. attorney with particular knowledge of the country/region/events
– Example: Brazil in preparation for World Cup and Olympics (see “Brazil’s Olympics and World Cup Projects Highlight FCPA Risk,” by Raymond Barrett, POLICY & REGULATORY REPORT, included materials)
38
Compliance Program Industry Reputation – Examples of
High Risk – Public works contracts and construction – Utilities – Real estate – Mining – Power generation and transmission – Pharmaceutical and healthcare
39
Compliance Program Additional FCPA Risks in Latin America
– Minimal local enforcement of anti-corruption laws
– Custom officials/visa officials – Family members of government officials – Legal and judicial – Government monopolies – State and municipal public works – Public bidding issues
40
Compliance Program Identify Control Function
– Tone at the top is imperative – Senior management – Depending on scope, consider compliance
officer that directly reports to Board’s audit committee
41
Compliance Program Consult “Guidance” issued in
November, 2012 – http://www.justice.gov/criminal/fraud/fcpa/guide.pdf
42
Compliance Program Integral Components
– Education and training – Due diligence in relation to pertinent business
function (consultants/distributors/agents) – Monitoring – Accurate financial record keeping (books and
records) Particularly in regard to travel and entertainment expenses Train finance staff Precise entries Retain documents Perform periodic audits in high-risk markets
43
Compliance Program Integral Components (cont.)
– Mechanism for reporting violations (e.g. whistleblower hotline)
– Facilitation payments – Integration with local laws – Documentation
44
Compliance Program Written Policy
– Describe law and manner in which company will comply
– How relationships with third parties will be structured
– Clearly worded and translated into local language
45
Compliance Program Education and Training
– Integral component of any compliance program – Draw on initial risk assessment information on local
culture; craft training to be culturally sensitive and to directly reference local anti-corruption laws
– Written documentation in local language Summary of FCPA FAQ Other guides (permissible foreign payments, dealing with
minor foreign officials, etc.)
– Provision of a “helpline”
46
Compliance Program Education and Training (cont.)
– Presentations/Seminars Live or video/computer based “Real world” hypotheticals to fit business model Written certifications from employees
– Specific guidelines for gifts, travel end entertainment
– Training of business partners – Definition of “foreign official” & SOE
47
Compliance Program
48
Compliance Program Monitoring
– Regularly scheduled – Review of policies and procedures – Identification of sensitive individuals/functions – Interviewing and spot audits – Review of education and training
49
Due Diligence Third Party Relationships
– Charles E. Duross, Deputy Chief, Fraud Section, Criminal Division, U.S. Department of Justice: “Third party risk still remains most significant FCPA risk.”
– Kara Brockmeyer, Chief of SEC FCPA Unit: “60-70% of SEC cases involve intermediaries.”
50
Due Diligence Third Party Relationships (cont.)
– Agents, consultants & distributors – Local reputation/background check – FCPA certification – Provision of sample contracts/contract
language
51
Due Diligence Third Party Relationships (cont.)
– Red Flags: 1. No business purpose/vague business purpose 2. Duplicative services 3. No infrastructure or support 4. No historical data
52
Due Diligence Merger & Acquisition Context
– Protect against “Successor Liability” (see Guidance)
– Inform valuation – How?
Evaluate target’s existing systems and controls Analyze target’s risk Specific audit
– Risk can be managed by Adjusting deal price Allocating responsibility for potential fines Indemnification agreements
53
Identified FCPA Violations Self-Assessment
– Internal investigation (in-house and/or outside counsel)
– Knowledge – Scope/depth
54
Identified FCPA Violations Management of Potential
Whistleblowers – Increased importance due to Dodd-Frank and
SEC Whistleblower Office http://www.sec.gov/whistleblower
– Monetary payment of 10%-30% of any sanction greater than $1,000,000
– If you determine you want self-reporting credit, it may be a race to report between you and whistleblower
55
Identified FCPA Violations Decide Whether to Self-report
– Fact specific determination – Enforcement authorities encourage self-reporting
Attempting to find a way to publicize declinations Increased use of NPAs and DPAs Increasing amount of enforcement actions that are not fruit of
self-reporting
– Expect to be asked: “What have you done to prevent the issue that brought you here today?”
56
Identified FCPA Violations Always
– Consistently follow discipline protocol in compliance program
– Remediate compliance program at the same time you investigate
– Documentation – particularly important if you decline to self-report. If you are ever “called to the carpet” by enforcement authorities, you will want to be able to demonstrate your investigation and remediation
– If you do self-report, engage with enforcement authorities
57
Conclusion Minimize FCPA Risk
– Compliance – Due diligence – Address violations and modify compliance
program
58
Matthew J. Feeley Buchanan Ingersoll & Rooney PC
(305)347-5794 matthew.feeley@bipc.com
Miami, Florida, USA
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