Unit 11 (FCPA)

domestic concerns

A domestic concern is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship that is organized under the laws of the United States or its states, territories, possessions, or commonwealths or that has its principal place of business in the United States. Officers, directors, employees, agents, or stockholders acting on behalf of a domestic concern, including foreign nationals or companies, are also covered.

local law defense

For the local law defense to apply, a defendant must establish that "the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official's, political party's, party official's, or candidate's country." The defendant must establish that the payment was lawful under the foreign country's written laws and regulations at the time of the offense. In creating the local law defense in 1988, Congress sought "to make clear that the absence of written laws in a foreign official's country would not by itself be sufficient to satisfy this defense." Thus, the fact that bribes may not be prosecuted under local law is insufficient to establish the defense. In practice, the local law defense arises infrequently, as the written laws and regulations of countries rarely, if ever, permit corrupt payments. Nevertheless, if a defendant can establish that conduct that otherwise falls within the scope of the FCPA's anti-bribery provisions was lawful under written, local law, he or she would have a defense to prosecution.

4B o What are some of the factors that DOJ and SEC consider in deciding to take enforcement action and the level of penalties they seek?

Whether and how DOJ will commence, decline, or otherwise resolve an FCPA matter is guided by the Principles of Federal Prosecution in the case of individuals, and the Principles of Federal Prosecution of Business Organizations in the case of companies. Self-Reporting, Cooperation, and Remedial Efforts While the conduct underlying any FCPA investigation is obviously a fundamental and threshold consideration in deciding what, if any, action to take, both DOJ and SEC place a high premium on self-reporting, along with cooperation and remedial efforts, in determining the appropriate resolution of FCPA matters. Criminal Cases Under DOJ's Principles of Federal Prosecution of Business Organizations, federal prosecutors consider a company's cooperation in determining how corporate criminal case. Specifically, prosecutors consider whether the company made a voluntary and timely disclosure as well as the company's willingness to provide relevant information and evidence and identify relevant actors inside and outside the company, including senior executives. In addition, prosecutors may consider a company's remedial actions, including efforts to improve an existing compliance program or appropriate disciplining of wrongdoers. A company's remedial measures should be meaningful and illustrate its recognition of the seriousness of the misconduct, for example, by taking steps to implement the personnel, operational, and organizational changes necessary to establish an awareness among employees that criminal conduct will not be tolerated. Civil Cases SEC's framework for evaluating cooperation by companies is set forth in its 2001 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, which is commonly known as the Seaboard Report. The report, which explained the Commission's decision not to take enforcement action against a public company for certain accounting violations caused by its subsidiary, details the many factors SEC considers in determining whether, and to what extent, it grants leniency to companies for cooperating in its investigations and for related good corporate citizenship. Specifically, the report identifies four broad measures of a company's cooperation: self-policing prior to the discovery of the misconduct; self-reporting of misconduct when it is discovered; remediation; and cooperation with law enforcement authorities. In 2010, SEC announced a new cooperation program for individuals. SEC staff has a wide range of tools to facilitate and reward cooperation by individuals, from taking no enforcement action to pursuing reduced sanctions in connection with enforcement actions. Although the evaluation of cooperation depends on the specific circumstances, SEC generally evaluates four factors to determine whether, to what extent, and in what manner to credit cooperation by individuals: the assistance provided by the cooperating individual in SEC's investigation or related enforcement actions; the importance of the matter in which the individual provided cooperation; the societal interest in ensuring that the cooperating individual is held accountable for his or her misconduct; and the appropriateness of a cooperation credit in light of the profile of the cooperating individual. In addition to considering whether a company has self-reported, cooperated, and taken appropriate remedial actions, DOJ and SEC also consider the adequacy of a company's compliance program when deciding what, if any, action to take. DOJ and SEC have no formulaic requirements regarding compliance programs. Rather, they employ a common-sense and pragmatic approach to evaluating compliance programs, making inquiries related to three basic questions: • Is the company's compliance program well designed? • Is it being applied in good faith? • Does it work?

4 • How is the FCPA enforced?

• US Department of Justice (DoJ): Criminal & civil enforcement • Penalty: A fine up to $2million or twice the benefit of corrupt payment (whichever one is higher); Imprisonment up to 5 years • US Securities Exchange Council (SEC): Civil enforcement over issuers & coordinates with DOJ • Penalty: $16k per violation (so DoJ is the real big fish) • Note: The real negative harm of an enforcement action is reputational (who wants to do business with a criminal?)

2C o What are the necessary elements in the anti-bribery provision of the FCPA?

split into next three slides

issuers

A company is an "issuer" under the FCPA if it has a class of securities registered under Section 12 of the Exchange Act or is required to file periodic and other reports with SEC under Section 15(d) of the Exchange Act. In practice, this means that any company with a class of securities listed on a national securities exchange in the United States, or any company with a class of securities quoted in the over-the-counter market in the United States and required to file periodic reports with SEC, is an issuer. A company thus need not be a U.S. company to be an issuer. Foreign companies with American Depository Receipts that are listed on a U.S. exchange are also issuers. Officers, directors, employees, agents, or stockholders acting on behalf of an issuer (whether U.S. or foreign nationals), and any co-conspirators, also can be prosecuted under the FCPA.

3A o What are the elements of a good compliance program?

A good compliance program depends on the specific circumstances (there's no "check off the box" approach). You should ask: • Is the company's compliance program well designed? • Is it being applied in good faith? • Does it work? Still, they provide some hallmarks of an effective compliance program: • Top management should be committed to disseminating "culture of compliance" • Write a code of conduct and policies & procedures that detail compliance efforts • Assign someone to oversee program & give him enough autonomy and resources • Implement a risk-based program (prioritize potential issues based on risk) • Train & provide guidance to employees • Provide appropriate incentives & disciplinary measures • Conduct due-diligence on third parties • Have a confidential reporting & internal investigation mechanism • Conduct periodic testing & review

2C1 ▪ What are the differences in the legal standard for intent between direct and indirect payments?

Because Congress anticipated the use of third-party agents in bribery schemes—for example, to avoid actual knowledge of a bribe—it defined the term "knowing" in a way that prevents individuals and businesses from avoiding liability by putting "any person" between themselves and the foreign officials. Under the FCPA, a person's state of mind is "knowing" with respect to conduct, a circumstance, or a result if the person: • is aware that [he] is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or • has a firm belief that such circumstance exists or that such result is substantially certain to occur. Thus, a person has the requisite knowledge when he is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist. In direct payment, intent is necessary (knowingly corrupt). In indirect payment, knowledge is necessary (lower standard actually, just need to know or reasonably expect) None?

(1) Prohibits corrupt payment of anything value to a foreign official for a business purpose

Corruptly: Intent or desire to wrongfully influence recipient, i.e., misuse of official position -Note: Attempt with a corrupt intent is sufficient (need not be successful) The word "corruptly" is used in order to make clear that the offer, payment, promise, or gift, must be intended to induce the recipient to misuse his official position; for example, wrongfully to direct business to the payor or his client, to obtain preferential legislation or regulations, or to induce a foreign official to fail to perform an official function. Anything of value: No minimum threshold for gifts but small payments might qualify if a part of a systemic or longstanding course of conduct. -Note: Value of a gift or payment will also depend on the intent with which it is given. Regardless of size, for a gift or other payment to violate the statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official. Foreign official: Any officer or employee of government or those acting on government's behalf. -Note: Also includes officials of state-owned entities, i.e., sovereign wealth fund. The FCPA prohibits payments to foreign officials, not to foreign governments. That said, companies contemplating contributions or donations to foreign governments should take steps to ensure that no monies are used for corrupt purposes, such as the personal benefit of individual foreign officials. Business purpose: Intended to help obtain or retain business (interpreted widely).

4A o What is the difference between DOJ and SEC in enforcing the FCPA?

DOJ has criminal FCPA enforcement authority over "issuers" (i.e., public companies) and their officers, directors, employees, agents, or stockholders acting on the issuer's behalf. DOJ also has both criminal and civil enforcement responsibility for the FCPA's anti-bribery provisions over "domestic concerns" (defined in a section below). Within DOJ, the Fraud Section of the Criminal Division has primary responsibility for all FCPA matters. FCPA matters are handled primarily by the FCPA Unit within the Fraud Section, regularly working jointly with U.S. Attorneys' Offices around the country. SEC is responsible for civil enforcement of the FCPA over issuers and their officers, directors, employees, agents, or stockholders acting on the issuer's behalf. SEC's Division of Enforcement has responsibility for investigating and prosecuting FCPA violations. In 2010, SEC's Enforcement Division created a specialized FCPA Unit, with attorneys in Washington, D.C. and in regional offices around the country, to focus specifically on FCPA enforcement. The Unit investigates potential FCPA violations; facilitates coordination with DOJ's FCPA program and with other federal and international law enforcement partners; uses its expert knowledge of the law to promote consistent enforcement of the FCPA; analyzes tips, complaints, and referrals regarding allegations of foreign bribery; and conducts public outreach to raise awareness of anti corruption efforts and good corporate governance programs. SEC civil fines limited to $12,000, companies violate all the time, little stigma. DoJ usually goes after companies (I think same with SEC), but criminal charges can be a lot higher and pursuing criminal actions, can be fined a lot more and bad stigma of being criminal, if an individual could go to jail.

3 • Why is it important to have a compliance program?

DoJ & SEC give you "credit" for having a good compliance program • DoJ & SEC don't have resources to go after every potential FCPA violation. • They rely on self-reporting, cooperation, & remediation instead.

4D o What is the DOJ opinion procedure?

DoJ opinion procedure: If you're unsure whether an action would violate the FCPA, you can seek interpretation from DOJ before taking action. • DOJ must respond in 30 days to real facts (no hypotheticals) & might take 30 more days. • But information is public, so it risks privacy & invites public scrutiny to a potential deal.

uh oh, you get caught. Now what?

First, don't do anything shady in the first place • DoJ opinion procedure: If you're unsure whether an action would violate the FCPA, you can seek interpretation from DOJ before taking action • DOJ must respond in 30 days to real facts (no hypotheticals) & might take 30 more days • But information is public, so it risks privacy & invites public scrutiny to a potential deal If you find an internal violation, tell the DoJ before someone else leaks it • If you go to the DoJ first, take appropriate action to correct the wrongdoing, and implement procedures to prevent it from happening again, they will go easier on you (they have an official program with explicit guidelines on "credit")

4C o What are the various forms of negotiated resolutions that a potential violator of the FCPA can reach with DOJ and SEC?

Litigation: Criminal & civil investigation, followed by indictments, fines, etc. (they will throw the book at you) . Negotiated outcome: This is the outcome you want, these include: -Plea agreements: You admit to some wrongdoing and get convicted of a (lesser) crime (you want to avoid this). -Deferred prosecution agreement: DoJ files charges but agrees to dismiss them under agreed conditions (you might have to admit some wrongdoing, beef up a compliance program, fire the "bad apple," even have someone monitor you, etc.) -Non-prosecution agreement: DoJ agrees to not file charges for the time being under agreed conditions (this is great because you never make the news). -Declination: DoJ officially declines to prosecute you at all (this is a big win).

Who is covered?

Issuers: Entities registered with SEC & their agents Domestic concerns: US citizen or resident; or entity organized in US or has principal place of business in US & their agents. Territorial jurisdiction: Anyone else acting within US territory & their agents

2A o Why was it enacted?

It was enacted after an embarrassing report came out where U.S. firms anonymously reported widespread bribery all around the world. Congress enacted the FCPA in 1977 after revelations of widespread global corruption in the wake of the Watergate political scandal. SEC discovered that more than 400 U.S. companies had paid hundreds of millions of dollars in bribes to foreign government officials to secure business overseas. SEC reported that companies were using secret "slush funds" to make illegal campaign contributions in the United States and corrupt payments to foreign officials abroad and were falsifying their corporate financial records to conceal the payments.

(2) Prohibits payments to third parties with knowledge that it will be used to bribe a foreign official

Knowledge: (1) Awareness of existence or substantial certainty of result; or (2) Firm belief of existence or substantial certainty of result. -Note: Be on the lookout for common "red flags" (e.g., unusually large consulting fees) when dealing with third parties

reasonable and bona fide expenditures

The FCPA allows companies to provide reasonable and bona fide travel and lodging expenses to a foreign official, and it is an affirmative defense where expenses are directly related to the promotion, demonstration, or explanation of a company's products or services, or are related to a company's execution or performance of a contract with a foreign government or agency. Trips that are primarily for personal entertainment purposes, however, are not bona fide business expenses and may violate the FCPA's anti-bribery provisions. Moreover, when expenditures, bona fide or not, are mischaracterized in a company's books and records, or where unauthorized or improper expenditures occur due to a failure to implement adequate internal controls, they may also violate the FCPA's accounting provisions. Purposeful mischaracterization of expenditures may also, of course, indicate a corrupt intent. Whether any particular payment is a bona fide expenditure necessarily requires a fact specific analysis. While certain expenditures are more likely to raise red flags, they will not give rise to prosecution if they are (1) reasonable, (2) bona fide, and (3) directly related to (4) the promotion, demonstration, or explanation of products or services or the execution or performance of a contract.

2C2 ▪ What are the exceptions in the anti-bribery provision?

The FCPA allows for two affirmative defenses (under which the burden of proof is placed on the accused): Local law defense: This applies if the payment was lawful under the foreign country's laws at the time of payment. -This defense is about what's on the books, not whether or not it is enforced. Reasonable and bona fide expenditures: These must be reasonable, bona fide, and directly related to promotion, demonstration, or explanation of products, services, or contracts. The FCPA also allows for "grease payments" (which puts the burden of proof on the accuser). -Facilitating or expediting payments: These are payments made to further routine governmental action. --Note: Routine action is non-discretional action (but what's truly non-discretionary is ambiguous). --Note: The DoJ and courts have interpreted "routine action" very narrowly.

territorial jurisdiction

The FCPA also applies to certain foreign nationals or entities that are not issuers or domestic concerns. Since 1998, the FCPA's anti-bribery provisions have applied to foreign persons and foreign non-issuer entities that, either directly or through an agent, engage in any act in furtherance of a corrupt payment (or an offer, promise, or authorization to pay) while in the territory of the United States. Also, officers, directors, employees, agents, or stockholders acting on behalf of such persons or entities may be subject to the FCPA's anti-bribery prohibitions.

This requirement is known as the "business purpose test" and is broadly interpreted.

The FCPA applies only to payments intended to induce or influence a foreign official to use his or her position "in order to assist ... in obtaining or retaining business for or with, or directing business to, any person."

2B o What are the two broad provisions within the FCPA?

The FCPA covers two major provisions, which are: Anti-bribery provisions: these prohibit various actors from bribing foreign officials. Accounting provisions: these require companies keep accurate records and prohibit falsifying records.

facilitating or expediting payments

The FCPA's bribery prohibition contains a narrow exception for "facilitating or expediting payments" made in furtherance of routine governmental action. The facilitating payments exception applies only when a payment is made to further "routine governmental action" that involves non-discretionary acts. Examples of "routine governmental action" include processing visas, providing police protection or mail service, and supplying utilities like phone service, power, and water. Routine government action does not include a decision to award new business or to continue business with a particular party. Nor does it include acts that are within an official's discretion or that would constitute misuse of an official's office. Thus, paying an official a small amount to have the power turned on at a factory might be a facilitating payment; paying an inspector to ignore the fact that the company does not have a valid permit to operate the factory would not be a facilitating payment. Whether a payment falls within the exception is not dependent on the size of the payment, though size can be telling, as a large payment is more suggestive of corrupt intent to influence a non-routine governmental action. But, like the FCPA's anti-bribery provisions more generally, the facilitating payments exception focuses on the purpose of the payment rather than its value. Labeling a bribe as a "facilitating payment" in a company's books and records does not make it one.

2 • What is the FCPA?

The Foreign Corrupt Practices Act of 1977 is a federal anti-bribery law. The Act was intended to halt those corrupt practices, create a level playing field for honest businesses, and restore public confidence in the integrity of the marketplace.

1 • What is the OECD Convention and what is the relationship between it and the FCPA?

The OEDD Anti-Bribery Convention (1997) is an international treaty established by the Organization for Economic Co-operation and Development (OCED). -The OECD itself is an IGO with no enforcement mechanism comprised of developed nations. -In 1998, the FCPA was updated (it greatly expanded extraterritorial jurisdiction) to conform to the OECD Anti-Bribery Convention. In 1988, Congress requested that the President negotiate an international treaty with members of the Organisation for Economic Co-operation and Development (OECD) to prohibit bribery in international business transactions by many of the United States' major trading partners. Subsequent negotiations at the OECD culminated in the Convention on Combating Bribery of Foreign Officials in International Business Transactions (Anti-Bribery Convention), which, among other things, required parties to make it a crime to bribe foreign officials. In 1998, the FCPA was amended to conform to the requirements of the Anti-Bribery Convention. The Anti-Bribery Convention came into force on February 15, 1999, with the United States as a founding party. OECD followed FCPA, codified bribery for international law, FCPA implemented into domestic law (does not matter if OECD is self executing because US implemented domestically).

FCPA Accounting Provisions

• Books & records: Keep accurate records • Internal controls: Have a system of internal accounting controls • For more details, ask your accounting professor ¯\_(ツ)_/¯ The accounting provisions require issuers to make and keep accurate books and records and to devise and maintain an adequate system of internal accounting controls. The accounting provisions also prohibit individuals and businesses from knowingly falsifying books and records or knowingly circumventing or failing to implement a system of internal controls.