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RISK CONTAINMENT: Tailoring Contract Provisions With Third Parties to Minimize FCPA Risk and Maximize Compliance Safeguards

January 7, 2014

www.paulhastings.com ©2013 Paul Hastings LLP

Chelsie Chmela Events Manager [email protected] 703.960.2360

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Dan Seltzer Managing Director – Legal; Senior Director – Anticorruption, Accenture John Cunningham Partner, Investigations & Compliance, Baker & McKenzie Crystal Jezierski Senior Associate, Investigations & Compliance, Baker & McKenzie

SPEAKING TODAY

© 2013 Baker & McKenzie LLP

The Foreign Corrupt Practices Act (FCPA)


U.S. Foreign Corrupt Practices Act Actions

*Numbers are not yet final for calendar year 2013. 6


Top 20 FCPA Settlements (millions) Siemens $800 KBR/Halliburton $579 BAE $400 Total S.A. $398 ENI S.p.A. $365 Technip $338 JGC Corporation $219 Daimler $185 Weatherford $152 Alcatel-Lucent $137 Deutsch / Magyar Telekom $95 Panalpina $82 Johnson & Johnson $70 Pfizer / Wyeth $60 ABB $58 Pride International $56 Marubeni Corporation $54 Archer-Daniels-Midland $54 Diebold $48 Baker Hughes $44

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2007

2008

2009

2010

2013

2011

2012


Severe U.S. Jail Sentences for Individuals

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Anti-Corruption Enforcement Is Active –  What is happening?

§  Increase in enforcement actions and/or penalties §  Massive corporate fines §  Jail time for individual violators §  U.S. and non-U.S. companies

–  Who are the enforcers? §  U.S. Department of Justice (“DOJ”) and U.S. Securities

and Exchange Commission (“SEC”) (and FBI) §  Political commitment from White House and Congress §  Foreign laws and regulators + cross-border cooperation

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What is the FCPA? –  US federal securities statute (15 U.S.C. §78dd-1 et. seq.) –  Enacted in 1977 to prevent corporate bribery of foreign

officials by US companies –  Main US government enforcement bodies:

§  Department of Justice (“DOJ”) §  Securities and Exchange Commission (“SEC”)

–  Anti-bribery provision is main focus: §  Prohibits issuers, domestic concerns, and “other

persons” (and their officers, directors, employees, or agents) from corruptly offering, giving, or promising, or authorizing, directly or indirectly, “anything of value” to foreign officials, political parties or officials, and candidates for public office, for purpose of obtaining or retaining business for or with, or directing business to, any person/company


Who Do the Provisions Apply To? –  Provisions apply broadly to:

§  “Issuers” ~ Publicly-held companies considered “issuers” under the Exchange Act, including companies that hold American Depository Receipts

§  “Domestic Concerns” ~ Citizen, national, or resident of the US, or entity with principal place of business in US or organized under US law

§  “Other Persons” ~ Includes US nationals who commit bribery anywhere, and non-US nationals who commit bribery in the US

–  A foreign company (or person) is subject to liability if it causes, directly or indirectly, an act in furtherance of a corrupt payment occurring within the US


Elements of the Bribery Offense –  Elements of the FCPA anti-bribery provisions

§  A payment, offer, or promise to pay “anything of value” directly or indirectly

§  To any foreign official §  Made with a corrupt intent (i.e., bad purpose):

Ø  Influence act/decision by recipient in official capacity Ø  Induce official to do or omit act in violation of duty Ø  Secure any improper advantage Ø  (Corrupt act need not succeed - attempt is sufficient)

§  In order to obtain or retain business


What Constitutes a Payment? –  Payment, or promise of payment, of money or

anything of value –  Gifts, charitable contributions, donations –  Lavish hospitality –  In-kind services –  Travel expenses can also be a problem


Who is a Foreign Official? –  Any officer or employee of:

§  Any non-U.S. government (e.g., mayor, governor, legislator, etc.)

§  Any department, instrumentality, or agency of a non-U.S. government (e.g., M.D. at public hospital, director of Institute)

§  A foreign state-owned or controlled entity

§  Any non-U.S. political party

§  Any public international organization (e.g., UN, WHO)

–  Any person acting in any official capacity for such organization –  Candidates for foreign political office –  Influential member of royal family –  Note: Foreign companies often have ties to foreign officials (e.g.,

airlines and oil companies may have government involvement)


FCPA – Affirmative Defenses (Bribery) –  Payment is lawful under the written laws and/or

regulations of the country §  Very limited in practice

–  Payment is a reasonable and bona fide expenditure directly related to §  The promotion of products or services OR §  The execution of a contract with a foreign

government or agency


FCPA – Exception (Bribery)

–  Facilitating or “Grease” Payments §  Small gratuities paid to government officials for

performing essentially clerical activities (not involving discretion) in order to expedite service

§  Examples include customs clearance, vehicle registration, visa renewal, police protection, and utilities services

§  DOJ has referred to $100 as general guide on amount, although this is merely indicative

§  Caution: such payments might breach local law or company policy


Special Concern – Third Parties

–  A company may be liable for the actions of a third party if the latter makes illegal payments, even if company had no actual knowledge of payments

–  Recent cases reveal risks of dealing with intermediaries in emerging markets: appearances can be deceiving and focused due diligence is critical

–  To avoid responsibility for third party actions, set high standards and consistently adhere to protective measures

–  Undertake due diligence on, and monitoring of, intermediaries


Accounting Aspects of the FCPA –  Books and Records

§  Issuers, etc., are required to make and keep detailed books, records, and accounts that fairly and accurately reflect transactions and dispositions of assets

–  Internal Accounting Controls §  Issuers must devise and maintain internal accounting controls to

ensure that financial records are accurate for external reporting, that access to assets is permitted only in accordance with management instructions, and that the books are audited at reasonable intervals

–  Importance of these two aspects of the FCPA §  More readily established than the payment of a bribe §  Sarbanes-Oxley requires disclosure of deficiencies in internal

controls and fraud, audit committee oversight, and increased legal scrutiny all triggered by corrupt payments


The UK Bribery Act


The General Bribery Offenses –  Directly or indirectly offering, promising, or giving (or

requesting, agreeing to receive or accepting) a financial or other advantage, to/from another person, intending the advantage to induce or reward someone for performing a relevant function improperly

–  Directly or indirectly offering, promising, or giving a financial or other advantage, intending to influence an foreign public official (FPO) in his capacity as an FPO, with the intention of obtaining or retaining business or a business advantage


Corporate Hospitality and Facilitation Payments –  Corporate Hospitality

§  No de minimis amount, but should not penalize “reasonable and proportionate hospitality which seeks to improve the image” of the company or “establish cordial relations”

§  Higher risk in relation to FPOs –  No exemption for facilitation payments (but prosecutorial discretion)

§  Issue a clear policy §  Written procedures for employees §  Procedures to be followed by employees §  Keep records of FPs §  Inform local authorities of FPs being requested §  Take practical steps to curtail and phase out FPs


New Corporate Offense –  Strict liability offense of failure to prevent bribery by an

associated person –  Offense can be committed by a relevant commercial

organization (“RCO”) where a person associated with the RCO bribes another person intending— §  To obtain or retain business for the RCO; or §  To obtain or retain a business advantage in the conduct of

business for the RCO –  Defense for the RCO to prove that it had adequate procedures

designed to prevent associated persons from engaging in bribery (six principles: proportionality, top level commitment, risk assessment, DD, communication, monitoring and review)


Scope of the Offense - RCO –  RCOs include UK corporations AND any other corporation carrying

on a business or part of a business in the UK –  “…carries on a business, or part of a business…” ª potentially very

broad application §  UK sales? §  UK branch? §  UK subsidiary? §  UK listing?

–  Business conducted in UK does not need to be connected to act of bribery

–  Intended to create a level playing field - prosecutorial discretion


Scope of the Offense – Associated Person –  Associated person is someone who performs services for or on

behalf of RCO §  Capacity in which associated person performs services on

behalf of the RCO is irrelevant §  (But, legal presumption of association regarding employees) §  Whether agents, subsidiaries, JVs, distributors, consultants, etc.

are associated persons is determined by reference to all relevant circumstances, not merely by nature of relationship

–  Breadth of individuals and entities that may be considered associated persons must be reflected in adequate procedures

–  UK Government Guidance suggests that JVs and subsidiaries should not automatically be considered “associated persons”


FCPA and Bribery Act Comparison

Is it an Offense? FCPA Bribery Act Bribery of FPOs Yes Yes Domestic bribery No Yes Private sector bribery No Yes Facilitation payments No Yes

Strict liability No Yes Failure to keep accurate records

Yes No

Liability for acts of third parties

Yes Yes


Defining Third Parties


Defining Third Parties –  How do we define third parties?

§  Statutory language §  Guidance from government authorities §  Other actions that result in fines

–  Statutes §  FCPA: “acting on behalf of” §  UK Bribery Act: “for or on behalf of” §  Both: “agents” §  More than just a company’s officers, employees, etc.

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Defining Third Parties –  Examples

§  Business development agents / sales agents §  Consultants / advisors §  Distributors §  Sales affiliates §  Subcontractors §  Clients §  Vendors §  Alliance partners §  Joint venture partners §  Other intermediaries

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Defining Third Parties –  Why worry?

§  Proportion of FCPA cases involving third parties: 90% §  Company is liable for third party actions §  Hard to define who qualifies as a third party

–  Third parties cannot: §  “Offer, promise, or authorize anything of value to a

foreign official in order to obtain or retain business.” §  More expansive than just securing a contract or sale

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Considering Government Expectations


Government Expectations –  What is expected?

§  Due diligence §  Reasonable “oversight” of relationships §  “[P]rovisions reasonably calculated” to prevent violations §  Most important: ethics and compliance clauses

integrated into written agreements with third parties –  How do we know?

§  DOJ and SEC have stated expectations repeatedly §  The FCPA Resource Guide

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Government Expectations –  Companies with Global Operations

§  Particularly difficult to meet expectations §  Heavy reliance on third-party intermediaries §  Hundreds or thousands of relationships §  Expectations are high for all companies §  And more risk means higher expectations

§  DOJ and SEC expect expenditure of significant resources §  Integrate robust ethics and compliance provisions §  Reduce risk posed by intermediaries §  Ongoing monitoring of third-party engagements

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Starting with Core Guidelines

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Core Guidelines for Contract Provisions –  Are There Best Practices?

§  Not exactly: clauses should be risk-based §  Require ethical business decisions §  Require compliance with law (FCPA, UK Bribery Act)

–  “The Big Three” §  Anti-corruption representations and warranties §  Audit rights §  Termination rights

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Core Guidelines for Contract Provisions –  Clauses, Disclosures, and Certifications

§  Agreement not to engage in corrupt behavior §  Agreement to comply with other party’s anti-corruption

policies §  Disclosure of certain business or personal relationships §  Disclosure of ongoing or past investigations §  Disclosure of conflicts, settlements, or contributions §  Certification of “gifts and hospitality” compliance §  Certification for existing ethics and compliance program

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Core Guidelines for Contract Provisions –  Clauses: Not Enough?

§  Clauses can protect against third-party (“on behalf of”) liability

§  Omitted or hastily drafted = increased risk §  Reputational damage, investigations, criminal charges

–  Clauses: Too Many? §  Clauses create demands on third parties §  Inconsistent or overly broad = increased risk

§  Onerous terms are costly, create tension §  May drive away potential partners

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Core Guidelines for Contract Provisions –  FCPA Resource Guide (non-binding)

§  Update due diligence regularly §  Exercise audit rights §  Obtain annual compliance certifications §  Assure commitment to ethical and legal conduct

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Tailoring for Risk and Proportionality

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Tailoring for Risk –  Some good news!

§  U.S. authorities are relatively flexible with third party issues

§  Some accommodating language in the guidance §  Integrate provisions “where appropriate” §  Use certain provisions “depending on the circumstances”

–  But don’t get too excited... §  No “one size fits all” strategy §  Mitigating risk requires considerable thought

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Tailoring for Risk –  Contract language

§  Always use some protective language §  Use “the big three” (when appropriate)

–  Risk templates §  Sort intermediaries into high, medium, and low risk §  Come armed to the negotiations with the appropriate

agreement template –  Case by case analysis

§  Depends on nature and location (Canada or Russia?) §  Depends on the third party (some may refuse!)

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Risk Containment

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Tailoring Contract Provisions With Third Parties to Minimize FCPA Risk and Maximize Compliance Safeguards Questions? Thank You.

Risk Containment:

John P. Cunningham Baker & McKenzie LLP Partner, Investigations & Compliance 815 Connecticut Avenue, NW Washington, D.C. 20006 [email protected]

Crystal R. Jezierski Baker & McKenzie LLP Senior Associate, Investigations & Compliance 815 Connecticut Avenue, NW Washington, D.C. 20006 [email protected]

Dan Seltzer Accenture Managing Director-Legal; Senior Director, Anti-Corruption 50 West San Fernando St #1200 San Jose, CA 95113 [email protected]

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