Transcript ANTI-CORRUPTION LAW: FOREIGN CORRUPT PRACTICES ACT

Anti-Corruption Law: Foreign
Corrupt Practices Act Panel
Bill Stuckwisch
Kirkland & Ellis
Mark Mendelsohn
Paul Weiss
2012 OFII General Counsel Conference
Karen Popp
Sidley Austin
Washington, D.C.
Overview
•
•
•
•
•
•
•
•
•
Significant New Prosecutions & Settlements
Compliance Program Developments
M&A diligence and joint ventures
Declinations, DPAs and NPAs
Voluntary Disclosure
Whistleblower Update
FCPA Legislative Reform Efforts and DOJ Guidance
Foreign Official Opinion Release
Non-US Developments
2012 OFII General Counsel Conference
Washington, D.C.
2
Significant New Prosecutions & Settlements:
DOJ and SEC Investigations
2012 OFII General Counsel Conference
Washington, D.C.
3
Significant New Prosecutions & Settlements:
Top Ten Corporate FCPA Fines
2012 OFII General Counsel Conference
Washington, D.C.
4
Significant New Prosecutions & Settlements:
Morgan Stanley Declination (April 25, 2012)
• The DOJ and SEC declined to charge Morgan Stanley for the
actions of its former managing director, Garth Peterson
• The DOJ stated in its press release:
–
After considering all the available facts and circumstances, including
that Morgan Stanley constructed and maintained a system of
internal controls, which provided reasonable assurances that its
employees were not bribing government officials, the Department
of Justice declined to bring any enforcement action against Morgan
Stanley related to Peterson’s conduct. The company voluntarily
disclosed this matter and has cooperated throughout the
department’s investigation
• Peterson, according to the DOJ and SEC, was a “rogue employee”
2012 OFII General Counsel Conference
Washington, D.C.
5
Significant New Prosecutions & Settlements:
Garth Peterson Sentenced (July 17, 2012)
• Morgan Stanley’s former managing director for real estate in China
was sentenced to nine months in federal prison
– Garth Peterson pleaded guilty in April to a one-count criminal
information charging him with conspiring to evade internal accounting
controls that Morgan Stanley was required to maintain under the FCPA
– He also agreed in April to pay approximately $250,000 in disgorgement
and forfeit Shanghai real estate worth $3.4 million to settle civil FCPA
charges filed by the SEC
2012 OFII General Counsel Conference
Washington, D.C.
6
Significant New Prosecutions & Settlements:
FalconStor Software Inc. (June 27, 2012)
• SEC’s complaint charged FalconStor with violating, inter alia, the
books-and-records and internal controls provisions in order to reach
conduct involving commercial bribes
– FalconStor admitted concealing over $400,000 in bribes to a JP Morgan
Chase official, including gambling slush funds and stock options
– SEC: $2.9 million civil fine
– DOJ: DPA and $2.9 million penalty
– The case demonstrates that the SEC can use the books and records
provisions in non-FCPA bribery cases involving non-foreign government
officials
2012 OFII General Counsel Conference
Washington, D.C.
7
Significant New Prosecutions & Settlements:
Orthofix International N.V. (July 10, 2012)
• Orthofix International N.V., a Texas-based medical device company,
settled FCPA charges relating to bribes in Mexico
– The complaint alleged that between 2003 -2012 Orthofix’s Mexican subsidiary,
Promeca S.A. de C.V., bribed officials at Mexico’s government-owned health
care and social services provider in order to win lucrative healthcare contracts,
falsely recording them as promotional and training costs
– According to the SEC, Orthofix asked about the charges but didn't take
immediate action or launch an investigation
– Eventually Orthofix learned of the bribery and self-reported it to the SEC; the
company also took corrective action including firing the Promeca executives who
orchestrated the bribery scheme
– SEC: $5.2 million civil fine
– DOJ: DPA and $2.22 million penalty
2012 OFII General Counsel Conference
Washington, D.C.
8
Significant New Prosecutions & Settlements:
Pfizer (August 7, 2012)
•
Pfizer H.C.P. Corporation (Pfizer HCP), a wholly-owned subsidiary of Pfizer
Inc. (Pfizer), entered into a two-year deferred prosecution agreement and
paid $15 million criminal penalty to resolve FCPA violations involving
conduct in multiple countries:
– Government alleged that Pfizer’s employees and agents paid bribes in Bulgaria,
China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia to foreign
officials ”for the purpose of improperly influencing foreign officials in connection
with regulatory and formulary approvals, purchase decisions, prescription
decisions, and customs clearance”
•
Pfizer, Inc. paid the SEC $26.3 million in disgorgement and pre-judgment
interest
• Wyeth LLC, acquired by Pfizer three years ago, separately agreed to pay
$18.8 million to the SEC in disgorgement and pre-judgment interest, for preacquisition conduct
2012 OFII General Counsel Conference
Washington, D.C.
9
Significant New Prosecutions & Settlements:
Pfizer (August 7, 2012)
• DOJ and SEC statements of facts describe multiple schemes,
including, e.g.:
– Providing HCPs lavish incentive trips and/or cash based on prescription volume
– Sponsorship agreements in exchange for prescriptions
– Sham consulting agreement payments to officials holding influence over
registration and reimbursement decisions
– Hospital bonuses used to influence sales and the “inclusion of pharmaceutical
products in tenders or on formulary lists”
– Making payments through third parties to influence registration and prescription
decisions
– Utilizing collusive vendors to falsify invoices and generate cash for improper
payments
– Making questionable donations of goods to hospitals
2012 OFII General Counsel Conference
Washington, D.C.
10
Significant New Prosecutions & Settlements:
Morgan Stanley Declination
An effective
compliance program
can save a company
from prosecution
2012 OFII General Counsel Conference
Washington, D.C.
11
Compliance Program Developments
• DOJ Compliance Appendix sets forth DOJ’s evolving views on the
essential elements of an effective anti-corruption compliance
program
• Two recent additions to the list [Bizjet; DS&S; NORDAM; Pfizer] –
– Conduct mergers and acquisitions due diligence on prospective targets
– Ensure prompt application of the acquirer’s policies and procedures to
the newly acquired or merged entities
– Promptly train directors, officers, employees, agents, consultants,
representatives, distributors and JV partners of the newly acquired or
merged entities
– Conduct FCPA-specific audits of the newly acquired or merged entities
as quickly as possible
2012 OFII General Counsel Conference
Washington, D.C.
12
Compliance Program Developments
• Johnson & Johnson “Enhanced Compliance Obligations”
– Appointment of an experienced, senior corporate executive as Chief Compliance
Officer, with a direct reporting line to the Audit Committee
– Appointment of heads of compliance within each business unit and corporate
function
– Maintain a global compliance leadership team, reporting directly to the Chief
Compliance Officer
– Maintain stringent gifts, hospitalities and travel policies and procedures
– Maintain an effective reporting and complaint hotline and mechanisms for
promptly and consistently responding to corruption issues
– Conduct periodic risk assessments and audits
– M&A elements as noted above
– Third party diligence procedures and standard contractual provisions
– Training and certification
2012 OFII General Counsel Conference
Washington, D.C.
13
Compliance Program Developments
• Pfizer HCP Corporation “Enhanced Compliance Obligations”
– Tailored to Pfizer, but generally comparable to Johnson & Johnson
– A pharmaceutical industry-wide standard?
– A new standard of general application?
2012 OFII General Counsel Conference
Washington, D.C.
14
M&A Diligence and Joint Ventures - The
Goals of M&A Due Diligence
• Identify possible corruption exposure that may cause deal to be
aborted or modified
– Better early than late
– Also, better late than never
• Weigh risks of successor liability
• Mitigate potential liabilities where corruption found
• Impart effective anti-corruption program and remedial action in preclosing and closing period
2012 OFII General Counsel Conference
Washington, D.C.
15
M&A Diligence and Joint Ventures: Risk
Based Assessment - Factors to Consider
• What countries does Target operate in?
– How do they rank on TI’s Corruption Perceptions Index?
•
•
•
•
Is the Target’s business susceptible to corruption?
Is the Target highly regulated?
Does it sell to/or regularly deal with foreign governments?
Has the Target been the subject of corruption allegations or
sanctions?
2012 OFII General Counsel Conference
Washington, D.C.
16
M&A Diligence and Joint Ventures: Risk
Based Assessment - Factors to Consider
• Have background checks on shareholders, management,
customers, and agents identified red flags?
• Does the Target rely on third-parties to conduct business?
• Does the Target have effective anti-corruption compliance policies
and procedures?
2012 OFII General Counsel Conference
Washington, D.C.
17
M&A Diligence and Joint Ventures:
Stages of Due Diligence
Commencement of Process
Initial Review
Execute Non-Binding Letter of Intent
Detailed Review
Decision
Enter into Definitive Agreement
Integration
(Pre-closing/Post-closing)
Monitoring
2012 OFII General Counsel Conference
Washington, D.C.
18
Declinations, DPAs, and NPA
• Scrutiny of enforcement practices also driving some transparency
regarding resolution decision making
– Lanny Breuer (September 13, 2012):
• “Because Morgan Stanley voluntarily disclosed Peterson’s misconduct, fully
cooperated with our investigation, and showed us that it maintained a
rigorous compliance program, including extensive training of bank
employees on the FCPA and other anti-corruption measures, we declined to
bring any enforcement action against the institution in connection with
Peterson’s conduct. That is smart, and responsible, enforcement.”
– Huntsman Corporation SEC Filing (Aug. 1, 2012): SEC and DOJ
declined to take enforcement action in light of the company’s prompt
self-disclosure, cooperation, and termination of employees involved in
the improper conduct
2012 OFII General Counsel Conference
Washington, D.C.
19
Declinations, DPAs, and NPA
• In 2011, Representative Sandy Adams
(R-FL) asked Greg Andres (DOJ) about
the DOJ’s FCPA declination decisions
and requested that the DOJ provide
more detail as to its declination
decisions, including the DOJ’s reasons
and rationale for why it did not pursue
enforcement actions in certain cases
• In August 2011, the DOJ responded to
Congresswoman Adams request and
listed several elements the DOJ takes
into consideration when deciding to issue
a declination decision
2012 OFII General Counsel Conference
Washington, D.C.
20
Declinations, DPAs, and NPA
• According to the DOJ’s letter, the Department declined matters in which
some or all of the following circumstances existed:
– A corporation voluntarily and fully self-disclosed potential misconduct
– Corporate principals voluntarily engaged in interviews with the Department and
provided truthful and complete information about their conduct
– A parent corporation voluntarily and fully self-disclosed information to the Department
regarding alleged conduct by subsidiaries
– A parent company conducted extensive pre-acquisition due diligence of potentially
liable subsidiaries, and engaged in significant remediation efforts after acquiring the
relevant subsidiaries
– A company agreed to a civil resolution with the SEC, while also demonstrating that a
declination was appropriate for additional reasons
– A single employee, and no other employee, was involved in the provision of improper
payments
– The improper payments involved minimal funds compared to overall business revenue
2012 OFII General Counsel Conference
Washington, D.C.
21
Declinations, DPAs, and NPA
• DOJ also continues to utilize non-prosecution and deferred
prosecution agreements heavily and views them as a key
enforcement tool
– Lanny Breuer (September 13, 2012):
“Over the past three-and-a-half years, the Department of Justice has entered
into dozens of DPAs, and non-prosecution agreements, or NPAs. I’ve heard
people criticize them and I’ve heard people praise them. What I’m here to tell
you, is that, along with the other tools we have, DPAs have had a truly
transformative effect on particular companies and, more generally, on
corporate culture across the globe . . . . The result has been, unequivocally,
far greater accountability for corporate wrongdoing – and a sea change in
corporate compliance efforts. Companies now know that avoiding the
disaster scenario of an indictment does not mean an escape from
accountability . . . Companies also realize that if they want to avoid
pleading guilty, or to convince us to forego bringing a case altogether,
they must prove to us that they are serious about compliance.
2012 OFII General Counsel Conference
Washington, D.C.
22
Declinations, DPAs, and NPA
• We are now seeing the SEC utilize these types of settlements,
including in the FCPA context
– In 2011, Tenaris, a Luxembourg-based pipe maker became the first
company to enter into a DPA with the SEC in any kind of enforcement
action
– As part of the DPA, Tenaris is required to update its code of conduct
and undertake certain compliance program measures
– Robert Khuzami, director of SEC division of enforcement announced
that the SEC would be using DPAs, NPAs, and other tactics to
encourage greater cooperation, and noted “This is a potential gamechanger for the division of enforcement. There is no substitute for
the insiders' view into fraud and misconduct that only cooperating
witnesses can provide.”
2012 OFII General Counsel Conference
Washington, D.C.
23
Voluntary Disclosure
•
DOJ/SEC position is that companies will receive meaningful credit for selfreporting, potentially including:
–
–
–
–
–
•
But benefits depend on prosecutorial discretion
–
•
Better chances of declination or NPA from DOJ, or administrative settlement or DPA from
SEC
Credit under U.S. Sentencing Guidelines, reducing any fine
Further reduction in any fine below bottom of sentencing guidelines range
More opportunity to shape factual basis of any resolution
More likely to avoid compliance monitor
Publicly resolved cases do not clearly demonstrate the benefits of voluntarily disclosure vs.
other factors influencing resolutions (e.g., cooperation, remediation, litigation risk)
Costs of voluntary disclosures can be steep
–
–
–
–
Responding to government’s requests and inquiries
Expansion of scope
Loss of control
Post-resolution obligations
2012 OFII General Counsel Conference
Washington, D.C.
24
Voluntary Disclosure
• Factors to consider
– Independent disclosure obligations
– Risk that the government will discover from another source
• Whistleblower
– Dodd-Frank whistleblower provisions increase this risk
• Competitors/industry-wide investigation
• Foreign law enforcement
• Media
– Seriousness of possible violation
– Where possible violation occurred
• Important to investigate internally and remediate, whether or not
disclose to government
2012 OFII General Counsel Conference
Washington, D.C.
25
Whistleblower Update
•
Dodd-Frank Act whistleblower provisions effective July 21, 2010
–
–
•
Rewards whistleblowers with 10-30% of penalties
–
–
–
•
•
SEC implementing rules proposed November 3, 2010, and adopted, after extensive public
comment, on May 25, 2011, effective August 12, 2011
Office of the Whistleblower administers program
Whistleblower must provide “original information” to the SEC
Information must lead to enforcement penalties of $1 million or more
Some factors that may be considered in determining an award are: significance of the
information provided; degree of assistance provided; programmatic interest of the SEC; etc.
New private right of action for whistleblowers who suffer retaliation by the
company
SEC (and DOJ) officials report increase in quality of tips under
whistleblower program
–
FCPA whistleblower bar has emerged
2012 OFII General Counsel Conference
Washington, D.C.
26
Whistleblower Update
•
No requirement to report internally, but an employee may still receive
reward if reported to internal compliance prior to government
–
–
–
•
Whistleblowers have 120 days to report to the government after internally reporting
Internal reporting constitutes a factor that could increase the amount of the award, while
interference with the internal reporting process could decrease the amount of the
whistleblower’s award
Whistleblowers who report internally may get credit for all of the information uncovered as a
result of the company’s internal investigation, increasing their potential reward
Internal compliance and audit personnel may qualify for whistleblower
status if:
•
•
•
at least 120 days have elapsed since provided information to audit committee, chief legal or
compliance officer, or supervisor
reasonable basis to believe disclosure necessary to prevent conduct likely to cause
substantial injury to financial interest or property of company or investors
reasonable basis to believe company is engaged in conduct that will impede investigation
2012 OFII General Counsel Conference
Washington, D.C.
27
Whistleblower Update
• Steps to consider in light of whistleblower incentives
– Reinforce compliance culture
– Publicize internal reporting mechanisms and encourage their use
– Assure employees that complaints will be taken seriously and addressed in
timely manner and that there will be no retaliation
– Ensure that procedures and resources for responding to and investigating
complaints are adequate to fairly and quickly resolve complaints
– Proactively investigate potential violations in order to learn sufficient facts to
make informed decision as to whether voluntary disclosure may be
appropriate
– Communicate appropriately with employee who raises concerns so
comfortable concerns are being addressed
– Maintain records of complaints, investigations, resolution, and remediation
2012 OFII General Counsel Conference
Washington, D.C.
28
FCPA Legislative Reform Efforts and DOJ
Guidance
• US Chamber of Commerce white paper and proposed amendments
– Adding a compliance defense
– Limiting a company’s liability as an acquirer for the conduct of an
acquired company
– Adding a “willfulness” requirement for corporate liability
– Limiting a company’s liability for the acts of a subsidiary
– Defining a “foreign official” under the statute
• OECD review of US implementation and related recommendations
– Guidance for the private sector
2012 OFII General Counsel Conference
Washington, D.C.
29
FCPA Legislative Reform Efforts and DOJ
Guidance
• DOJ Guidance
– Promised by AAG Lanny Breuer on November 8, 2011
– Subsequently, USG consulted with corporate community, NGOs and the
Chamber
– Topics might include: self-reporting; successor liability; definition of
“foreign official”; corporate hospitality; M&A diligence
• SFO Guidance [Issued October 10, 2012]
–
–
–
–
Self-reporting
Facilitation payments
Gifts and hospitalities
Tone
2012 OFII General Counsel Conference
Washington, D.C.
30
“Foreign Official” Opinion Release
•
FCPA Opinion Release 12-01 (September 18, 2012)
– Requested by U.S. lobbying firm proposing to hire consulting company in which
royal family member was partner to introduce lobbying firm to foreign country
embassy and assist in providing lobbying services for foreign country embassy
– First and only release of 2012
– Seven months from request to opinion
•
•
Mere membership in royal family does not make one a “foreign official”
Fact-intensive, case-by-case inquiry, with no single factor being dispositive
– control or influence over levers of governmental power
– how foreign government characterizes the individual
– whether and under what circumstances individual may act on behalf of or bind
the government
2012 OFII General Counsel Conference
Washington, D.C.
31
“Foreign Official” Opinion Release
• DOJ cited earlier opinion release (No. 10-3) involving consultant
who acted on behalf of government under unrelated contracts
– In that opinion, DOJ emphasized that acting on behalf of foreign government
could, depending on the circumstances, render an individual a foreign official
• DOJ cited multi-factor test articulated in U.S. v. Carson for
determining whether a state-owned entity is an “instrumentality”
–
–
–
–
–
–
foreign state’s characterization of entity and employees
foreign state’s degree of control
purpose of entity’s activities
entity’s obligations and privileges under foreign state’s law
circumstances surrounding entity’s creation
foreign state’s extent of ownership/financial support of entity
2012 OFII General Counsel Conference
Washington, D.C.
32
“Foreign Official” Opinion Release
•
DOJ concluded that particular royal family member did not “presently”
qualify as foreign official—so long as he did not directly or indirectly
represent that acting on behalf of royal family or in capacity as royal family
member
2012 OFII General Counsel Conference
Washington, D.C.
33
Non-US Developments
• Increased activity / enforcement outside the United States
–
–
–
–
–
Planned amendments to India’s anti-corruption law
Mexican Federal Anti-Corruption Law adopted (June 2012)
Russia accedes to OECD Anti-Bribery Convention (Apr. 2012)
Amendments to Chinese Anti-Corruption Law (2011)
Increased cooperation among in-country and foreign law enforcement
agencies, e.g.:
• Serious Fraud Office
• Russian Federal Anti-Monopoly Service
• Hong Kong / Guangdong anti-corruption bureaus
– Use of multilateral legal assistance treaties to investigate cross-border
activity
– U.S. government training foreign prosecutors and sharing best practices
2012 OFII General Counsel Conference
Washington, D.C.
34
Non-US Developments: UK DPA
• On 17 May 2012 the Ministry of Justice announced an intention to
use DPAs for serious economic crime committed by commercial
organisations and solicit comments from the public
– Serious economic crime is defined as “...fraud (which includes any
financial, fiscal or commercial misconduct or corruption), bribery
(specifically offences under the Bribery Act 2010), and moneylaundering.”
– Summary of the responses are expected to be published week
beginning 22 October 2012.
– After public consultation, government intends to proceed with
introduction of DPAs and will be introduced in Parliament soon.
2012 OFII General Counsel Conference
Washington, D.C.
35
Non-US Developments: UK DPA
• The Government (and many others) considers deferred prosecution
agreements, as currently in use in the US, are necessary to
effectively deal with economic crime committed by corporations.
– Investigations and prosecutions of economic crime are expensive and
lengthy
• This Announcement after Innospec Case
– Lord Justice Thomas found plea agreements are not available to
prosecutors as a tool for dealing with economic crime committed by
organisations, stating “the imposition of a sentence is a matter for the
judiciary.”
2012 OFII General Counsel Conference
Washington, D.C.
36
Non-US Developments: UK DPA
• Transparency
– DPA process will probably be more transparent than the U.S. process
– Judicial involvement will occur at an early stage, with the proposed DPA
considered at a preliminary hearing before it returns for final judicial
approval. In line with other court proceedings, the details of the
finalised and approved DPA will also be published.
• Consistency
– Another key principle under the consultation is to ensure consistency:
– A Code of Practice, procedural rules and operational guidance will be
adopted to ensure the consistency of decisions and treatment.
2012 OFII General Counsel Conference
Washington, D.C.
37
Non-US Developments: UK DPA
•
Composition Will be Similar to the US, possible elements are:
–
–
–
–
–
–
statement of facts
a time period for the duration of the agreement, usually between 1-3 years.
a financial penalty (expected to be the most common condition);
disgorgements of profits, or benefits;
reparation to victims;
make available to the prosecutor all relevant, non-privileged information and
material and to provide access to witnesses;
– remove/replace implicated individuals, or pull out from the market in which the
wrong doing is admitted;
– put in place anti-fraud and anti-corruption policies and procedures, as well as
having independent monitors.
•
Non-Prosecution Agreements Not Available
2012 OFII General Counsel Conference
Washington, D.C.
38
Non-US Developments: UK SFO Guidance
• SFO Guidance [Issued October 10, 2012]
–
–
–
–
Self-reporting
Facilitation payments
Gifts and hospitalities
Tone
• Most significant change – clarifies that self-reporting does not
guarantee that company will not be prosecuted
• Fact of self-reporting will be a relevant consideration to extent set
out in Guidance on Corporate Prosecutions
– Must be “genuinely proactive approach”
– Each case turns on own facts
2012 OFII General Counsel Conference
Washington, D.C.
39
Questions?
Bill Stuckwisch
Kirkland & Ellis
(202) 879-5023
william.stuckwisch@kir
kland.com
Mark Mendelsohn
Karen Popp
Paul Weiss
Sidley Austin
(202) 736-8053
(202) 223-7377
[email protected]
mmendelsohn@paulwe
iss.com
2012 OFII General Counsel Conference
Washington, D.C.
40