FCPA Guidance: Understanding Key Issues and Ensuring Compliance LIVE Webcast

Speaker Firms and Organization:

Jeffrey A. UdellPartner

Olshan Frome Wolosky LLP

James SlearPartner

Thompson Coburn LLP

Walter RicciardiPartner

Paul, Weiss, Rifkind, Wharton & Garrison LLP

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Olshan, a law firm based in New York, represents major businesses and entrepreneurs for their most significant

transactions, problems and opportunities. Olshan’s clients range from public companies, hedge, venture capital, private equity and other investment funds to

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Brief Speaker Bios:

Jeffrey A. Udell

Jeffrey A. Udell is a partner in the Litigation Group at Olshan, with experience litigating a wide variety of matters in both federal and state courts. His practice focuses on white-collar criminal defense, regulatory enforcement and internal investigations, and he represents both corporations and individuals in some of their most sensitive, complex and high-stakes matters. He also represents hedge funds, investors and companies in complex commercial litigations. He has tried cases in a variety of forums, including federal district courts in New York and Ohio, New York State court, FINRA, New York’s Judicial Conduct Commission and the New York City Police Department Trials Commission. For three years (2008-2011), Jeff chaired the New York City Bar Association’s Professional Responsibility Committee.

9January 24, 2014

James Slear

Jim Slear is a partner in Thompson Coburn's International Trade practice. He focuses his practice on international trade compliance and enforcement, including the FCPA, the economic and trade sanctions administered by the OFAC, ITAR, and the EAR. He advises domestic, foreign and multinational clients in a wide array of industries, including aerospace, biomedicine, defense, financial services, insurance, Internet services, manufacturing, semiconductor and telecommunications. Jim has more than 25 years of experience conducting investigations and has conducted internal investigations for numerous clients in international trade and other matters--such as antitrust and securities--both domestically and abroad, including Europe, the Middle East, Japan, the People's Republic of China and Malaysia. Prior to entering private practice, Jim was a Judge Advocate with the U.S. Air Force.

Brief Speaker Bios:

10

Walter Ricciardi

Walter G. Ricciardi is a partner in the Securities Litigation and Enforcement Group at Paul, Weiss. Walter has extensive experience

defending a broad variety of investigations conducted by the U.S. Securities and Exchange Commission and other regulatory

authorities. Prior to joining Paul, Weiss Walter was the Deputy Director of the SEC's Division of Enforcement, where he supervised

many of the Commission's most significant investigations related to financial fraud, Foreign Corrupt Practices Act, insider trading and

broker-dealer and mutual fund compliance issues.

Prior to joining the SEC, Walter spent 20 years with PricewaterhouseCoopers and its predecessor, Coopers & Lybrand, where he was

in charge of defending the firm's litigation and regulatory matters. While at PwC, he was elected by his partners to serve on the firm's

board, which is responsible for overseeing the management of the firm, and to serve on the Global Oversight Board of the PwC global

organization.

January 24, 2014

► For more information about the speakers, you can visit: http://www.knowledgecongress.org/speakers_2013_Ensuring_Compliance.html

http://www.knowledgecongress.org/speakers_2013_Ensuring_Compliance.html

The joint Department of Justice and Securities and Exchange Commission, “A Resource Guide to the U.S. Foreign Corrupt Practice Act”, highlights the agencies intention and approach to halt corrupt practices and bribery of U.S companies to foreign officials.

Aside from addressing enforcement issues, (1) Definition of Foreign Official; (2) Issues on Gifts, travel and Entertainment; (3) Mergers and Acquisition and Successor Liability; and (4) Effective Compliance Program, were also discussed as they are deemed relevant to FCPA. But, above all, the guidance aims to help U.S companies comply with FCPA rules, mitigate potential pitfalls and prevent costly errors.

Join us in this two-hour Live webcast as our panel of distinguished leaders and practitioners provide an in-depth discussion of the significant issues included in the guidelines, along with training and other best practices in complying. The panel will also be available to answer questions and illuminate the latest regulations for participants.

11January 24, 2014

Featured Speakers:

12January 24, 2014

SEGMENT 1:

Jeffrey A. UdellPartnerOlshan Frome Wolosky LLP

SEGMENT 2:

James SlearPartnerThompson Coburn LLP

SEGMENT 3:

Walter RicciardiPartnerPaul, Weiss, Rifkind, Wharton & Garrison LLP

Introduction

Jeffrey A. Udell is a partner in the Litigation Group at Olshan, with experience litigating a wide variety of matters in both federal and

state courts. His practice focuses on white-collar criminal defense, regulatory enforcement and internal investigations, and he

represents both corporations and individuals in some of their most sensitive, complex and high-stakes matters. He also represents

hedge funds, investors and companies in complex commercial litigations. He has tried cases in a variety of forums, including federal

district courts in New York and Ohio, New York State court, FINRA, New York’s Judicial Conduct Commission and the New York City

Police Department Trials Commission. For three years (2008-2011), Jeff chaired the New York City Bar Association’s Professional

Responsibility Committee.

Prior to joining Olshan, Jeff served for six years as an Assistant U.S. Attorney in the Criminal Division of the U.S. Attorney's Office for

the Southern District of New York. He was also a public defender for two years at the Office of the Appellate Defender. Jeff began his

legal career by clerking for the Honorable Edward R. Korman, U.S. District Judge for the Eastern District of New York.

• Email – [email protected]

• T:212.451.2238

• F:212.451.2222

13

SEGMENT 1:


January 24, 2014

mailto:[email protected]

FCPA: The Basics

I. History and Purpose of the FCPA

II. Key FCPA Provisions

III. Anti-Bribery Provisions

IV. Accounting and Internal Controls Provisions

V. The DOJ & SEC FCPA Resource Guide

14

SEGMENT 1:


January 24, 2014

I. History and Purpose of the FCPA

• FCPA enacted in 1977

• Drafted in response to: Watergate scandal SEC report of widespread payments to foreign and domestic officials to secure business

• Congress found that corruption: Created market inefficiencies and instability Lead to sub-standard products Created unfair playing field for honest companies Tarnished image of United States business

15

SEGMENT 1:


January 24, 2014

Source: DOJ/SEC Guide at 3-4

I. History and Purpose of the FCPA (cont’d)

• Fluctuation in DOJ FCPA enforcement: 1977 2004: minimal enforcement 2004 2006: 3 6 actions per year 2007 2009: 20 25 actions per year 2010: over 35 actions 2011 2012: 10 20 actions per year January to June, 2013: 17 actions

• Several reasons for fluctuation

16

SEGMENT 1:


January 24, 2014

II. Key FCPA Provisions

• Anti-bribery provisions prohibit payments or offers to pay money or anything of value to foreign officials, or third parties acting on their behalf, if payment made to assist in obtaining or retaining business (15 U.S.C. § 78dd-1)

• Accounting and internal controls provisions require public U.S. companies to maintain accurate books and records and internal controls (15 U.S.C. § 78m)

17

SEGMENT 1:


January 24, 2014

III. Anti-Bribery Provisions

What Persons and Entities Are Covered?

Anti-bribery provisions apply to:

• All U.S. companies, citizens or residents, whether or not they act within or outside of the U.S.

• All foreign companies listed on U.S. stock exchanges

• All foreign companies or individuals who execute any part of a bribery scheme from within the U.S.

• Officers, directors, employees or agents of the above

18

SEGMENT 1:


January 24, 2014


III. Anti-Bribery Provisions (cont’d)

Elements of an FCPA Bribery Offense

Anti-bribery provisions prohibit:

• Offer, promise, or payment of a thing of value

• To a foreign official

• Made with corrupt intent

• To assist in obtaining or retaining business

19

SEGMENT 1:


January 24, 2014

Source: 15 U.S.C. § 78dd-1 (a)


What Is an Offer, Promise, or Payment?

• Broadly defined: offering or giving anything of value • Payment need not be made; attempts count• No de minimus exception• Can include:

Money or gift cards Gifts (e.g., a holiday bottle of whiskey) Charitable contributions or donations Travel or entertainment (e.g., flights, dinners, a show) Anything else of value (e.g., tuition, loan, services)

20

SEGMENT 1:


January 24, 2014

Source: DOJ/SEC Guide at 14-16.


Who Is a Foreign Official?

• Any official regardless of rank or title• Not always obvious, sometimes investigation is required• Any officer or employee of:

Any “foreign government” “[A]ny department, agency, or instrumentality” of a foreign government (e.g., the Ministry of

Energy) Any state-owned or controlled company Any “foreign political party” Any “public international organization” (e.g., the U.N.)

• Any candidate for foreign political office

21

SEGMENT 1:


January 24, 2014

Source: DOC/SEC Guide at 19-21


Use of Third Parties or Knowing Avoidance

• It is unlawful to make a payment to a third party while knowing all or a portion of that payment will go directly or indirectly to a foreign official Knowledge = actual knowledge OR conscious avoidance

• Many types of payments to third parties can put a company at risk, including those to:

22

SEGMENT 1:


January 24, 2014

Subsidiary or other affiliate Agent, sponsor, distributor, consultant Freight forwarder

Customs broker Joint venture partner Relative of a foreign official



Corrupt Intent

• A violator must intend to induce the foreign official to misuse his/her official position

• Intent includes acting willfully and intending to do something unlawful Awareness of the specific law violated by the conduct is not required Even if you do not know you are violating the FCPA, you can still be liable

23

SEGMENT 1:


January 24, 2014

Source: DOJ/SEC Guide at 14


Business Purpose

• Payment or offer or thing of value must be made to assist in: Obtaining business Retaining business Directing business to any person or entity

• Very broad and covers payments intended to:

24

SEGMENT 1:


January 24, 2014

Obtain a contract Reduce taxes Reduce customs duties

Gain non-public information Influence a lawsuit Create exceptions in regulations



Narrow Exception: Gifts and Facilitation Payments

• FCPA does not prohibit reasonable gifts to foreign officials as tokens of esteem or gratitude where: Made openly and transparently Properly recorded in a company’s books Appropriate under local law, customary where given and reasonable for the occasion (e.g.,

moon cakes)

• Grease or facilitation payments not prohibited FCPA exempts small payments to further “routine governmental action” that involve non-

discretionary acts

25

SEGMENT 1:


January 24, 2014

Source: DOJ/SEC Guide at 15, 25


Bona Fide Business Expenses

Affirmative defense to FCPA enforcement where payment: Reasonable and bona fide; and Directly related to either:

o Promotion, demonstration, or explanation of products or services, or o Execution or performance of a contract

Examples of bona fide business expenses:

26

SEGMENT 1:


January 24, 2014

Travel to a factory Travel for training

Product Demonstrations Promotional Activities

Source: DOJ/SEC Guide at 24

IV. Accounting and Internal Controls Provisions

Books and Records Provision

• Applies only to public companies

• Issuers must maintain books, records and accounts which in reasonable detail accurately reflect the transactions and dispositions of their assets

• “Books and records” is very broadly defined

• No materiality requirement

27

SEGMENT 1:


January 24, 2014


IV. Accounting and Internal Controls Provisions (cont’d)

Internal Controls Provision

• Also applies only to public companies

• Issuers must have a system of internal accounting controls to provide reasonable assurance that Transactions are authorized by management and Financial statements are in conformity with GAAP

28

SEGMENT 1:


January 24, 2014



Oracle Settlement

• In August 2012, SEC alleged in a complaint: Oracle’s Indian subsidiary structured transactions with India’s

government so that distributors placed $2.2 million of proceeds in unauthorized side funds, all unknown to parent

Funds were used to pay local vendors on false invoices

• SEC alleged Oracle violated FCPA’s books and records and internal controls provisions by: Failing to properly record the side funds on its books Failing to “audit and compare the distributor’s margin against the end user price” and failing to

“seek transparency in or audit third party payments made by distributors”

• Oracle agreed to a $2 million penalty to settle matter

29

SEGMENT 1:


January 24, 2014

Source: SEC Press Release , Aug. 16, 2012


Oracle Settlement

The Oracle settlement shows:

• SEC may seek to apply the books and records and internal controls provisions under what is tantamount to a strict liability standard. There was no claim that: Oracle ever paid any bribes to officials or otherwise Parent had knowledge of the side funds Parent saw any red flags

• SEC appears to believe that companies must proactively audit all distributors

30

SEGMENT 1:


January 24, 2014

Source: FCPA Blog, Nov. 25, 2013

V. DOJ & SEC FCPA Resource Guide

• Guide provides: Centralized compendium of current FCPA law and policy written in lay terms Practical guidance for companies establishing compliance programs Numerous examples and hypotheticals Extensive appendix of FCPA related references

• Guide does not provide: No new policies No new bright-line rules to make it easier for companies to comply with FCPA

31

SEGMENT 1:


January 24, 2014

Introduction

Jim Slear is a partner in Thompson Coburn's International Trade practice. He focuses his practice on international trade

compliance and enforcement, including the FCPA, the economic and trade sanctions administered by the OFAC, ITAR, and

the EAR. He advises domestic, foreign and multinational clients in a wide array of industries, including aerospace,

biomedicine, defense, financial services, insurance, Internet services, manufacturing, semiconductor and

telecommunications. Jim has more than 25 years of experience conducting investigations and has conducted internal

investigations for numerous clients in international trade and other matters--such as antitrust and securities--both

domestically and abroad, including Europe, the Middle East, Japan, the People's Republic of China and Malaysia. Prior to

entering private practice, Jim was a Judge Advocate with the U.S. Air Force.

32January 24, 2014

SEGMENT 2:


Recurring Theme: Third Party Liability

“DOJ’s and SEC’s FCPA enforcement actions demonstrate that third parties, including agents, consultants, and distributors, are commonly used to conceal the payment of bribes to foreign officials in international business transactions.”

33January 24, 2014

SEGMENT 2:


Prohibition on Indirect Payments

FCPA expressly prohibits corrupt payments made through third parties or intermediaries.

Specifically covers payments made to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly” to a foreign official.

34January 24, 2014

SEGMENT 2:


Liability for Third Party Payments

How much do you need to “know”?

“Substantially certain” corrupt payment will be made

Aware of “high probability” corrupt payment will be made

Liable if there is . . . .

“Reckless disregard” “Conscious avoidance”

“Deliberate Ignorance”

35January 24, 2014

SEGMENT 2:


SEC/DOJ First Guiding Point

As part of risk-based due diligence, companies should understand the third-party’s:

Qualifications Associations Business reputation Relationship, if any, with foreign officials

Scrutiny should increase as red flags surface

36January 24, 2014

SEGMENT 2:


SEC/DOJ Second Guiding Point

Understanding business rationale for including the third party, including its role and necessity, and the timing of its introduction.

Ensure contract terms specifically describe services to be performed. Compare payment terms to typical terms in industry and country and confirm compensation is

commensurate with services provided. Confirm actual performance of contracted services.

37January 24, 2014

SEGMENT 2:


SEC/DOJ Third Guiding Point

Undertake some form of ongoing monitoring of third-party relationships.

Where appropriate may include: updating due diligence periodically exercising audit rights providing periodic training requesting annual compliance certifications

38January 24, 2014

SEGMENT 2:


SEC/DOJ Final Guiding Point

Inform third parties of the company’s compliance program and commitment to ethical and lawful business practices.

Where appropriate, seek assurances from third parties, through certifications and otherwise, of reciprocal commitments.

39January 24, 2014

SEGMENT 2:


Takeaways from SEC/DOJ Guidance

All third parties present risk Focus on risk-based due diligence, with increasing scrutiny as red flags are uncovered An effective compliance program will include mechanisms to reduce risk at all stages of the third party

relationship

40January 24, 2014

SEGMENT 2:


Red Flags

High risk country Excessive commissions Unreasonably large discounts to distributors Vaguely described services Different line of business than that for which engaged Related to or closely associated with foreign official Express request or insistence of the foreign official Shell company incorporated in offshore jurisdiction Requests for payment to offshore bank accounts Required prepayment in advance of work Lack of adequate resources to do work

41January 24, 2014

SEGMENT 2:


Third Parties

Local agents/sales representatives Consultants/advisors Subcontractors Subsidiaries JV Partners Distributors Freight forwarders Attorneys Other intermediaries

42January 24, 2014

SEGMENT 2:


Agents

UTStarcom, Inc. (2009):

o U.S. telecom company allegedly paid $1.5 million to agent in Mongolia for a “license fee.”

o Fee was only $50,000

o Balance used to make improper payment to foreign official

43January 24, 2014

SEGMENT 2:


Subsidiaries

SEC/DOJ Guidance on parent liability for subsidiary’s conduct under agency principles “evaluate the parent’s control—including the parent’s knowledge and direction of the subsidiary’s

actions, both generally and in the context of the specific transaction”

Schnitzer Steel Ind. Inc. (2006): Alleged bribes by subsidiaries and employees to obtain business states: “Schnitzer Steel accepts and acknowledges that it is responsible for the acts of . . . its wholly owned subsidiary”

44January 24, 2014

SEGMENT 2:


Consultants/Advisors

Alcatel-Lucent SA (2010) French issuer’s senior executives approved retention and payment of millions of dollars to

consultants with no relevant experience or in other cases despite obvious indications that the consultants were performing little or no legitimate work.

45January 24, 2014

SEGMENT 2:


Distributors

Pfizer H.C.P. (2012). Pfizer entered exclusive distribution contract with Kazakh company, believing at least some value from the contract would be given to a Kazakh government official to ensure registration of a Pfizer product in Kazakhstan.

Weatherford Services Limited (2013): Subsidiary provided volume discounts to Iraqi distributor believing those discounts would be used to create slush fund to make bribes to foreign officials of a government-owned national oil company.

46January 24, 2014

SEGMENT 2:


Subcontractors

Data Systems & Solutions LLC (2012)

Paid bribes to officials at Ignalina Nuclear Power Plant through third-party subcontractors in exchange for large contracts

Disguised through fictitious scopes of work to subcontractors and paid at above-market rates

47January 24, 2014

SEGMENT 2:


Joint Venture Partners

Weatherford Services Limited (2013)

Employees established JV in Africa with two local entities controlled by foreign officials.

JVPs did not contribute capital, expertise or labor.

Sole purpose of JVPs was to funnel payments to the foreign officials controlling them.

Foreign officials awarded JV lucrative contracts, gave WSL inside information about pricing, and took contracts away from competitors.

Other third party violations were involved.

48January 24, 2014

SEGMENT 2:


Freight Forwarders/Logistics Companies

Panalpina World Transport (2010)

Swiss company bribed numerous foreign government officials on behalf of customers to circumvent local customs processes in various countries.

Customers also were held liable for FCPA violations

49January 24, 2014

SEGMENT 2:


Ten Steps for Due Diligence

One: Consider country’s reputation for corruption Reports (e.g., Transparency International), news, enforcements

Two: Determine value sought from third party Why do we need a third party? Why was this third party selected? What value is the third party providing?

Three: Assess competence of third party Qualifications (expertise, resources) to provide desired services

50January 24, 2014

SEGMENT 2:



Four: Determine integrity of third party Open source research and restricted party lists (U.S. and others) References, interviews, discreet inquiries Third party audits Cooperation (e.g., audit rights)

Five: Identify relationships with government officials Interview or Questionnaire Identify directors / officers / key employees Require information about past/present relationships with government List of anticipate non-employee resources

51January 24, 2014

SEGMENT 2:



Six: Determine reasonableness of compensation Is pay commensurate with the effort expected? Special payment terms (advances, split payment, off shore accounts)

Seven: Verify due diligence responses Verify information received from consultant with interviews of business references and background

search or third party diligence

52January 24, 2014

SEGMENT 2:



Eight: Integrate FCPA safeguards into the contract Certifications Audit rights

Nine: Provide for continuing oversight of the activities of third party Develop compliance plan Assign responsible employee

Ten: Ensure accurate books and records Periodic review Training

53January 24, 2014

SEGMENT 2:


Final Thoughts

No one-size fits all solution

Recognize and mitigate risk

Adequate due diligence may be costly (e.g., Burma)

Training is an essential complement to due diligence

54January 24, 2014

SEGMENT 3:


Contact Information

Jim [email protected]

55January 24, 2014

SEGMENT 2:


Introduction

Walter G. Ricciardi is a partner in the Securities Litigation and Enforcement Group at Paul, Weiss. Walter has extensive

experience defending a broad variety of investigations conducted by the U.S. Securities and Exchange Commission and

other regulatory authorities. Prior to joining Paul, Weiss Walter was the Deputy Director of the SEC's Division of

Enforcement, where he supervised many of the Commission's most significant investigations related to financial fraud,

Foreign Corrupt Practices Act, insider trading and broker-dealer and mutual fund compliance issues.

Prior to joining the SEC, Walter spent 20 years with PricewaterhouseCoopers and its predecessor, Coopers & Lybrand,

where he was in charge of defending the firm's litigation and regulatory matters. While at PwC, he was elected by his

partners to serve on the firm's board, which is responsible for overseeing the management of the firm, and to serve on the

Global Oversight Board of the PwC global organization.

56January 24, 2014

SEGMENT 3:


FCPA Trends

I. SEC and DOJ Have Sought Higher Penalties and Disgorgement

II. Growth of Specialized Government Resources for FCPA Investigations

III. Brave New World for Whistleblowers

IV. Government Expectations regarding Cooperation

57January 24, 2014


SEGMENT 3:

Disgorgement And Penalties Sought By The SEC And DOJ From Corporations To Settle Have Grown

Three recent settlements have joined the FCPA top ten all time largest list with total payments exceeding $100 million

58January 24, 2014


Alcoa Inc.January 9, 2014

$384 Million

Weatherford InternationalNovember 26, 2013

$152.8 million

Total S.A.May 29, 2013$382.2 million

SEGMENT 3:

Growth Of Specialized Government Resources For FCPA Investigations

“An Embarrassment of Resources”

Charles DurossDeputy Chief, DOJ Fraud SectionHead of the FCPA Unit

• 20 full time DOJ prosecutors

Kara BrockmeyerChief SEC Enforcement FCPA Speciality UnitUnits evolved from “working groups” on January 13, 2010

• Brockmeyer elevated to Chief September 27, 2011

• “Three dozen” SEC Enforcement professionals -- 75% in DC, 25% in the regional offices

59January 24, 2014


SEGMENT 3:

Whistleblower Incentives And Protection

Section 21F of the Dodd-Frank Act (2010), “Securities Whistleblower Incentives and Protection”

Mandatory for SEC to award 10-30% of the monetary sanctions collected to whistleblowers who:

voluntary provide original information;

that leads to a successful Commission Enforcement action;

resulting in sanctions exceeding $1 million

Office of the Whistleblower

Sean X. McKessy, Chief since February 18, 2011

Jane A. Norberg, Deputy Chief since January 17, 2012

SEC Final Rules effective August 12, 2011

60January 24, 2014


SEGMENT 3:

Whistleblower Incentives And Protection, (con’t)

Number of Complaints

FY 2011 - 334 FY 2012 - 3001 FY2013 - 3238

149 FCPA tips in FY 2013, up from 115 in FY 2012

Whistleblower submissions received from individuals in all 50 states and 68 foreign countries – 66 from UK; 62 from Canada; 52 from PRC

Six awards, including $14 million awarded on October 1, 2013

SEC Investor Protection Fund balance at FY 2013 -- $439 million

Confidentiality

Whistleblowers entitled to confidentiality

Breach of duty of confidentiality could be retaliation

Intangible harm could be actionable – Menendez v. Halliburton, Inc.

61January 24, 2014


SEGMENT 3:

Government Expectations Regarding Cooperation

Ralph Lauren Corporation - Settlement April 22, 2013

SEC and DOJ Non-prosecution agreement

$700,000 disgorgement and interest

$882,000 penalty

“The NPA shows the benefit of implementing an effective compliance program. Ralph Lauren Corporation discovered the problem after it put in place an enhanced compliance program and began training its employees. That level of self-policing along with its self-reporting and cooperation led to this resolution.”

62January 24, 2014


SEGMENT 3:

Government Expectations Regarding Cooperation, (con’t)

What is expected?

Controls and due diligence to avoid infractions

Credible response to “red flags”

Prompt remedial action

Self-Report?

63January 24, 2014


SEGMENT 3:

Government Expectations Regarding Cooperation, (con’t)

Impact on Weapons in government arsenal Any charges? Financial penalty and disgorgement Bribery or books and records charges Admissions Criminal plea, deferred prosecution agreement, non-prosecution agreement Entity - parent or subsidiary Monitor Individuals

64January 24, 2014


SEGMENT 3:

► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type

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► Questions will be answered in the order they are received.

Q&A:

65January 24, 2014

SEGMENT 1:


SEGMENT 2:


SEGMENT 3:


66January 24, 2014

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