46
Public Contracting Institute: FCPA Presentation September 28, 2016
Public Contracting Institute:FCPA Presentation
September 28, 2016
PwC
Agenda
1) Introductions
2) FCPA Primer
3) Select global anti-corruption regulations
4) Enforcement trends
5) Design and implementation of compliance programs
6) Contracting with business partners
7) Mergers & Acquisitions
8) Investigations
9) Potential investigation outcomes
10) Wrap-up and Q&A
2
PwC
Introductions
3
PwC
Presenter Bio
Jacob Frenkel, Esq.
• Jacob is a Member and Chair of the Government Investigations and Securities Practice at Dickinson Wright
• He has 14 years of government experience, including:
• Senior Counsel in the SEC Division of Enforcement
• US federal criminal prosecutor of corruption and financial crime
• He has practiced in the private sector for 17 years in such areas as financial crimes, FCPA, public corruption, and securities
• Jacob is licensed to practice law in Louisiana and Maryland
• He holds a Doctor of Law (J.D.) from Tulane University Law School and a Bachelor of Arts in Public Policy from Tulane University College of Arts and Sciences
4
PwC
Presenter Bio
James Gargas, MAcc, CPA, CFE, CFF
• James is the Senior Director in PwC’s Forensics Practice in Washington, D.C.
• He has 11 years of specialized anti-corruption experience, including:
• Cross-border corruption investigations;
• Anti-corruption compliance auditing;
• Compliance program build, implementation,
testing and refinement; and
• Investment-setting due diligence.
• James is a Certified Public Accountant (CPA), licensed in Ohio, Virginia and the District of Columbia. He is also a Certified Fraud Examiner and is Certified in Financial Forensics by the American Institute of Certified Public Accountants.
5
PwC
Polling Question #1
Question: What is your current role?
Answer Choices:
1) Legal
2) Compliance
3) Internal Audit
4) Procurement
5) Sales/Marketing
6) Accounting/Finance
7) Human Resources
6
PwC
Polling Question #2
Question: Is the facilitation payments exception within the
FCPA similar to most other anti-corruption statutes and the
OECD guidance?
Answer Choices:
1) Yes
2) No
3) I don’t know!
7
PwC
FCPA Primer
8
PwC
FCPA Primer
• FCPA enacted in 1977 to address bribery of foreign officials
• Violations:
◦ pays, offers to pay, or authorizes;
◦ the payment of money or anything of value;
◦ to a foreign official, foreign political party, candidate for political office, or official of a public international organization;
◦ to secure an improper business advantage
• Books and records provisions
◦ Make and keep books and records, which, in reasonable detail, accurately and fairly reflect the disposition of assets
• Internal controls
◦ Devise and maintain a system of internal controls to provide reasonable assurance that transactions are recorded appropriately
9
PwC
Select Global Anti-Corruption Regulations
10
PwC
Select global anti-corruption regulations
11
US FCPA and
China Anti-Corruption
Law (Criminal Code)
(1977)
False Claims Act (Amended
1986)
US Federal Sentencing Guidelines
(1991)
Inter –American Convention
Against Corruption (1996)
US FCPA (Amended
1998)
OECD Anti-Bribery
Convention (1997)
1980’s 1990’s 2000’s
US Travel Act(1961)
Sarbanes-Oxley Act
(2002)
PwC
Select global anti-corruption regulations
12
U.N. Convention
Against Corruption
(2005)
UK Bribery Act and Dodd-
Frank Act (2010)
Issuance of US FCPA Guidance
(2012)
Canadian CFPOA
(Amended 2013)
Issuance of UK Bribery Act
Guidance, and
China Anti-Corruption
Law Amended
(2011)
Brazil Clean Companies
Act(2013)
2000’s 2010’s
Indian Lokpal Bill
(2014)
Federal Law Against
Corruption in Public
Procurement (2012)
PwC
Global Anti-Corruption DevelopmentsLegislative and Enforcement Developments
GERMANY
• Admin. Offenses Act (Amended 2013)
• Increased fines, allowed successor liab.
• 2013: Proposed Corporate Criminal Code
• Would impose variety of sanctions
• Ranks 2nd to US in enforcement actions
• No credit given for compliance program
13
RUSSIA
• Anti-Corruption Act (Amended 2012)
• Added corporate comp. requirements
• Allows fines of up to 100 times bribe amt.
• Includes narrow definition of “bribe”
• Emphasis on liability for third parties
• No corp. criminal liability in Russia
INDIA
• Lokpal Bill
• Spurred by high-profile scandals
• Creates independent anti-corrupt. agency
• National Co. Law Tribunal established
• Provides for whistleblower / class action
• Imposes fines and prison (up to 7 years)
UNITED KINGDOM
• Bribery Act (2010)
• ~65 active investigations
• Limited use of DPA’s now allowed
• Updated sentencing guidelines
• Fines will have “real economic impact”
PwC
Global Anti-Corruption DevelopmentsLegislative and Enforcement Developments
BRAZIL
• Clean Companies Act (Aug. 2013)
• Civil statute, applicable only to entities
• Coexists with existing anti-bribery leg.
• Receiving training from US DOJ
• No exception for facilitation payments
• Credit given for compliance programs
14
CHINA
• Laws cover commercial and gov’t bribes
• Recent crackdown on domestic bribery
• Gov’t investigated 30K+ cases over 5 yrs
• New rules include background checks
• $1,500 is min. for bribe to be criminal
• Penalties include life in prison or death
CANADA
• CFPOA (Amended 2013)
• Received strong criticism from OECD
• Amendment imposed stricter rules
• Recent fine of USD 10.5M
• Recently convicted first individual
• No exception for facilitation payments
COLOMBIA
• Anti-Corruption Act (2011)
• OECD Anti-Bribery Convention in 2013
• New Presidential anti-corruption office
• Institutional reforms in progress
• CPI: Fallen from 59th to 94th in 10 years
• Inadequate regulatory mechanisms
PwC
Enforcement Trends
15
PwC
USD 3.7 Billion in DOJ and SEC Settlements
-
5
10
15
20
25
2011 2012 2013 2014 2015 2016
Nu
mb
er
of
Co
mp
an
y S
ett
lem
en
ts
Amounts in USD
721 M1,566 M
509 M
261 MAvg.
34 M
Avg.
80 M
Avg.
22 M
Avg.
80 M
Avg.
157 M
68 Companies Settled from Jan. 2011 – Jun. 2016 (Avg. Value: USD 55M)
139 M
Avg.
44M
16
523 M
Avg.
14 M
PwC
Current US Regulatory & FCPA TrendsIndividual SEC and DOJ Indictments Jan. 2011 – Jun. 2016
C-Suite (26)
• Vice President - 12• CEOs - 8• CFOs - 4• President - 2
Management (13)
• Director - 10• Controller - 2• Manager - 1
Employee (10)
• Other - 5• Employee - 3• Sales - 2
Third Party (1)
• Agent - 1
Board Member (2)
• Board Member - 2
17
PwC
Count %
1. Transparent Description of Services /Account Classification 49 84
2. Third Party Due Diligence and/or Oversight 38 66
3. Adequate Supporting Documentation 31 53
4. Meals and Entertainment Policy 27 47
5. Cash Management 25 43
6. Travel Policy 25 43
7. Communication and Training on Policies and Procedures 22 38
8. Gift Policy 22 38
9. Preventing the Reoccurrence of Violations after Detection 21 36
10. Employee Expense Reimbursement Policy 15 26
Focus on Internal Controls: Jan. 2011 – Jun. 201658 SEC Actions against 55 Companies with SEC Violations: Mapping of Control Violations
18
PwC
US Enforcement Landscape: Jan. 2011 – Jun. 201668 Companies and the Locations of their Violations
North America
11
Central America
10
South America
17
Asia
94
Africa
41
Europe
49
Middle East
30
19
PwC
Asia
94 Violations
• China – 34%• Indonesia – 14%• Russia – 13%• Uzbekistan – 5%• Vietnam – 5%
Africa
41 Violations
• Egypt – 20%• Nigeria – 12%• Congo – 12%• Angola – 10%• Guinea – 8%
Europe
49 Violations
• Poland – 19%• Greece – 16%• Montenegro – 8%• Macedonia – 8%• Romania – 8%
Middle East
30 Violations
• Saudi Arabia – 23%• Iraq – 17%• Iran – 13%• Turkey – 10%• UAE – 10%
South America
17 Violations
• Argentina – 47%• Brazil – 30%• Venezuela – 6%• Peru – 6%• Colombia – 6%• Bolivia – 6%
Central America
10 Violations
• Panama – 40%• Costa Rica – 30%• Bahamas – 20%• Cuba – 10%
North America
11 Violations
• Mexico – 100%
US Enforcement Landscape: Jan. 2011 – Jun. 2016Countries with the Highest Percentage of Violations per Continent
20
PwC
Recent Enforcement Trends and Hot Topics
• Increase in both Department of Justice (DOJ) and Securities and Exchange Commission (SEC) Settlements:
• Increasing company settlements in Q1 2016 compared to 2015.
• Fines and penalties in Q1 2016 represent a 259% increase from the total fines and penalties for the full year of 2015.
• Life Sciences industry is present in four of the eight settlements of Q1 2016, while the majority of the fines and penalties involved the Telecommunications industry.
• 50% of settlements of Q1 2016 include allegations of improper payments in China.
• Coordination of regulators globally:
• Continued coordination among SEC, DOJ and law enforcement and regulatory authorities in other countries (e.g., Brazil, Poland, UK).
21
PwC
IndustryCompany
Count Total
US Penalties
Aerospace & Defense 5 $37 M
Agriculture 1 $54 M
Chemicals 1 $384 M
Conglomerate 1 $50 M
Consumer Goods 7 $171 M
Energy 5 $709 M
Engineering & Construction
5 $276 M
Which Companies have violated the FCPA?
IndustryCompany
Count
Total US
Penalties
Entertainment/ Media 1 $9 M
Financial Services 3 $44 M
Industrial Products 8 $871 M
Life Sciences 16 $390 M
Technology 9 $219 M
Telecommunications 4 $504 M
Jan. 2011 – Jun. 2016
22
PwC
Jan. 2011 to Jun. 2016: Settlements vs. Open Cases
4
9
1
16
8
3
5
5
7
3
1
1
5
1
4
9
2
11
11
10
4
5
16
8
2
3
- 5 10 15 20 25 30 35
Transportation and Logistics
Telecommunications
Technology
Motor Vehicles
Life Sciences
Industrial Products
Financial Services
Entertainment and Media
Engineering and Construction
Energy
Consumer Goods
Conglomerate
Chemicals
Agriculture
Aerospace and Defense
Settled Cases Open Cases 23
PwC
Polling Question #3
Question: What region of the world has had the highest
number of corruption violations by US companies since 2011?
Answer Choices:
1) Europe
2) Africa
3) Asia
4) South America
24
PwC
Design and Implementation of Compliance Programs
25
PwC
Design and Implementation of Compliance ProgramsSentencing guidelines used as a starting point
• Seven Elements set forth in the Federal Sentencing Guidelines:
- Standards and Procedures
- Assign Compliance Responsibility
- Diligence in Delegation of Authority
- Communicate Effectively/Training
- Monitor & Audit
- Disciplinary & Incentive Mechanisms
- Respond Appropriately
26
PwC
Design and Implementation of Compliance ProgramsCompliance responsibility
• Direct and Regular Access to the Board
• Participates in Training Programs
• Credible with the Businesses
• Credible with the Regulators
• Sufficient Resources
• Credible with Auditors and Counsel
27
PwC
Contracting with Business Partners
28
PwC
Contracting with Business Partners
Representations and warranties to consider to mitigate corruption risk:
• Pledge not to engage in bribery of any kind;
• Promise to follow anti-corruption laws;
• Implement (or verify existence of) an anti-corruption compliance program;
• Inform partner if the business partner comes under any kind of investigation;
• Covenants encompassing all payments made by the business partner (e.g. no cash payments, no payments to tax havens without legitimate business purpose);
• Agreement to report all political contributions;
• No close relationships with foreign officials (e.g. foreign officials who own or are employees of the third party) and obligation to update if change;
• Guidance on invoicing and regular provision of documents (e.g. receipts for disbursements to government entities);
• Maintain adequate books and records for a minimum period of time (e.g. at least 7 years)
29
PwC
Mergers & Acquisitions (M&A)
30
PwC
Why conduct anti-corruption/FCPA due diligence?
• FCPA due diligence is now a clear regulatory expectation (e.g. US, UK, and more)
• Mitigate the risk of FCPA successor liability
• Mitigate the risk of penalties/fines
• Mitigate remediation costs
• Make any purchase price adjustments that may be required with respect to tainted revenue streams
• Get a “jump start” on implementing acquirer’s compliance program
31
PwC
Regulatory Expectations
DOJ and SEC encourage companies engaging in mergers & acquisitions to:
• Conduct thorough risk-based FCPA and anti-corruption due diligence on potential new business acquisitions
• Apply their code of conduct, compliance policies, and FCPA and other anti-corruption procedures as quickly as practicable to new acquisitions
• Train all levels of employees, and business partners and agents when appropriate, of merged or acquired companies on FCPA and other anti-corruption laws, the company’s code of conduct and compliance policies and procedures
• Conduct an FCPA-specific audit of all newly acquired or merged businesses as quickly as practicable
In some instances, the DOJ and SEC have declined to take action against companies that voluntarily disclosed and remediated conduct and cooperated with DOJ and SEC in the merger and acquisition context.
32
Source: A Resource Guide to the U.S. Foreign Corrupt Practices Act
PwC
Regulatory ExpectationsRecent FCPA deferred prosecution agreement
• The company should ensure that its target’s policies and procedures regarding anti-corruption laws and regulations apply as quickly as is practicable, but in any event no less than one year post-closing, to newly acquired businesses, and promptly:
• Train directors, officers, employees, agents, consultants, representatives, distributors, joint venture partners, and relevant employees thereof, who present corruption risk to the company, on the anti-corruption laws and regulations and the company’s related policies and procedures;
• Conduct an FCPA-specific audit of all newly acquired businesses within 18 months of acquisition
33
PwC
Polling Question #4
Question: Which of the following is NOT one of the reasons why
anti-corruption due diligence should be performed as part of a
merger or acquisition?
Answer Choices:
1) Mitigate the risk of fines/penalties
2) Jump start on implementing acquirer’s compliance program
3) Minimize the cost of SEC filing costs
4) FCPA due diligence is a regulatory requirement
34
PwC
Investigations
35
PwC
FCPA investigationsSource/Cause
• Disgruntled (or Entrepreneurial, in light of new Dodd-Frank Whistleblower Bounty Program) Employee/Whistleblower
• Competitor
• Internal/External Auditor
• SEC/DOJ
• Due Diligence (M&A)
36
PwC
FCPA investigations (continued)Main reasons to investigate
• Minimize possibility of intense government investigation, government sanctions and punitive damages
• Increase likelihood of favorable settlement
• Compliance with Sarbanes-Oxley has raised the stakes for non-compliance with the FCPA
- Section 302 – requires CEOs and CFOs to personally sign off on the accuracy of financial statements
- Section 404 – requires top executives to certify adequacy of internal controls over financial reporting
• Meet stakeholder expectations/potentially minimize litigation
37
PwC
FCPA investigations (continued)Benefits of external investigator
• FCPA, accounting, and investigative experience
• Credibility with regulators
• Expedited global coverage
• Impartial
• Independent
• Relieves internal time and resource constraints
38
PwC
FCPA investigations (continued)Typical red flags – Where to look
Overall Risk- Business Conditions
• High Risk Countries
Treasury
• Cash Payments
• Re-directed payments
• “Off the books” bank accounts or funds
Local Business Practices
• Compliance Sensitive Expenses
- Donations
- Political & Social Contributions
- Gifts
- Travel and Entertainment
Other Third Parties
• Processing Agents (e.g., Customs agents, Freight Forwarding agents)
• Consultants (e.g., tax consultants)
Payroll
• Non-employees paid through payroll (e.g., third parties)
Sales
• Use of commercial third parties
• Unusual Compensation Agreements
• Free products or services
39
PwC
FCPA investigations (continued)Potential work streams and procedures
• Interviews of Employees (and third parties)
• Analysis of Financial Data
• Analysis of E-mails
• Analysis of Third Party Contracts and Payments
• Reporting
40
PwC
FCPA investigations (continued)Decision to voluntarily disclose
Why to Disclose?
• Minimize Punishment
• Avoid Criminal Charges
• Limit Civil Charges
• Reduce Litigation Risk
• Deal with Violators Proactively
Why Not to Disclose?
• Allegation not yet Substantiated
• Trigger Government Investigation
• Negative Publicity
• Waiver of Privilege
41
PwC
Polling Question #5
Question: Which of the following would be considered a
compliance sensitive account that should be selected for further
review as part of an FCPA investigation?
Answer Choices:
1) Travel and Entertainment
2) Property, Plant and Equipment
3) Salaries Expense
4) Interest Income
42
PwC
Potential Investigation Outcomes
43
PwC
Potential Investigation Outcomes
• Fines
• Penalties
• Disgorgement
• Debarment
• Deferred Prosecution Agreement
• Non-Prosecution Agreement
• Cease & Desist Order
• Compliance Monitor
44
PwC
Presenter Information
Jacob Frenkel - Member, Dickinson Wright
(202) 466-5953
James Gargas – Senior Director, PwC Forensics
(202) 412-2352
45
PwC
Thank You!Any Questions?
46
