Foreign Corrupt Practices Act: 2013 in review
The FCPA remained a key issue in 2013. The number of cases commenced under the FCPA by the DOJ and the SEC was slightly above pace from the previous year, providing evidence of the agencies’ continued commitment to aggressive pursuit of FCPA cases. The year started with a major change in leadership at the DOJ: Lanny Breuer, the AAG for the Criminal Division, long a stalwart of FCPA prosecutions, stepped down on 1 March and was replaced by Acting AAG Mythili Raman, 1 who, from the outset, indicated that prosecution of corporate executives will be more robust than ever. “The message to be drawn from these prosecutions over the last few months is clear: we are now — more than ever — holding individual wrongdoers to account.” 2 The first half of 2013 evidenced Acting AAG Raman’s assurance; over a dozen individuals were prosecuted for engaging in foreign bribery schemes. At the SEC, Mary Jo White was sworn in as the new chair, placing a former prosecutor at the helm of the regulatory and enforcement agency. We also saw the SEC’s inaugural use of a non-prosecution agreement (NPA) in an FCPA action, highlighting the benefits of self-reporting, cooperation, and proper remediation. Such tools and best practices will continue to be permanent fixtures in any expedited resolution of purported FCPA violations. 1 Leslie R. Caldwell was nominated to be Assistant Attorney General for the Criminal Division on 18 September 2013 and is awaiting confirmation. 2 Raman, supra n.1. Contributions by Stuart M. Altman and Natalie T. Sinicrope4 Hogan Lovells By the numbers In 2012, case initiations by the DOJ and SEC dropped as the large scale oil-for-food investigations and prosecutions wrapped up. As we reported last year, this did not reflect a decrease in enforcement zeal; rather, it was simply a conclusion to a mass investigation that netted many easy targets. In 2013, the enforcement effort continued unabated, albeit against more significant targets. The DOJ initiated 15 prosecutions and the SEC opened 12 enforcement actions. The pace of enforcement actions is on a slight uptick from 2012. This increase in activity may reflect the government’s efforts to enforce the statute by devoting to the mission 60 prosecutors and enforcement attorneys whose efforts are supported by the U.S. Attorneys and regional enforcement offices across the country. Acting AAG Raman has said, “In concrete terms, [ ] we are not going away — indeed, our efforts to fight foreign bribery are more robust than ever” 3 — an indication that enforcement will continue to heat up in coming years. Among the new cases in 2013 were two yielding more than US$500 million in fines. These actions highlight a surge in FCPA activity by federal regulators with a focus on individual prosecutions, cross-border investigations, and large settlement agreements. However, not all news is bad for companies. In the wake of this aggressive enforcement, the SEC offered its first ever NPA to resolve bribery allegations. And both agencies have acknowledged publicly that a company’s remediation efforts play a significant role in how U.S. authorities will respond to evidence of misconduct. Nonetheless, this increase in activity has left companies and individuals alike at a heightened risk for FCPA investigations and prosecutions and increasingly looking for guidance on bribery and corruption issues. As discussed in our Global Bribery and Corruption Review 2012 and Top Seven Things You Need to Know about the New DOJ/SEC FCPA Guide 4 client alert, on 15 November 2012, the DOJ and the SEC jointly issued the much-anticipated FCPA Resource Guide. On 19 February 2013, a coalition of 31 business organizations headlined by the U.S. Chamber of Commerce submitted a letter expressing appreciation for the agencies’ “tremendous effort” to provide a “single central source of information.” 5 But the letter also identified “several areas of continuing concern for businesses seeking in good faith to comply with the FCPA.” These areas include: ● adding an affirmative corporate compliance defense; ● clarifying the definition of “foreign official” and “instrumentality;” 3 Raman, supra n.1. 4 See Hogan Lovells, Investigations, White Collar and Fraud Alert, Top Seven Things You Need to Know About the New DOJ/SEC FCPA Guide (15 Nov. 2012), available at http://ehoganlovells.com/cv/2797593e70840f2206c026707973e1e2a69ee622. 5 U.S. Chamber of Commerce, U.S. Chamber Institute for Legal Reform, Letter to Assistant Attorney General Lanny A. Breuer and Acting Director of Enforcement George S. Canellos Regarding the FCPA Resource Guide (19 Feb. 2013), http: //www. instituteforlegalreform.com/uploads/sites/1/Coalition_Letter_to_DOJ_and_SEC_re_ Guidance_2-19-13.pdf. TOTAL AGGREGATE FCPA ENFORCEMENT ACTIONS: 2005-2013 2005 2006 2007 DOJ SEC DOJ SEC DOJ SEC 7 5 7 8 18 20 2011 2012 2013 DOJ SEC DOJ SEC DOJ SEC 23 25 13 12 15 12 2008 2009 2010 DOJ SEC DOJ SEC DOJ SEC 20 13 26 14 48 26Global Bribery and Corruption Review 2013 5 ● limiting the liability of U.S. multinational companies for the acts of foreign subsidiaries; ● limiting successor liability for the prior acts of an acquired company; ● requiring corporate knowledge as a prerequisite for establishing corporate criminal liability; and ● increased visibility into declination decisions. Despite what appears to be an increase in the number of reported declinations in the months following publication of the FCPA Resource Guide, publicly available information concerning these declinations remains spotty. Nevertheless, public filings suggest that in each of the eight declinations announced in 2013, the company in question voluntarily disclosed the matter to government agencies. These declinations are an encouraging sign that the DOJ and the SEC are making good on their long-standing pledge to provide meaningful credit to companies who self-report suspected violations and take prompt remedial actions. We see the following trends in the FCPA cases announced or initiated in 2013: ● Prosecutions of and enforcement actions against individuals are a top priority for U.S. enforcement authorities. The United States has dramatically increased the pace at which it goes after individual executives and employees in cases where it suspects bribery. ● Both the DOJ and the SEC have continued to closely examine travel and entertainment expense claims and look skeptically at claims that payments to foreign officials are legitimate business expenses. ● Recent enforcement actions against companies in collaboration with foreign enforcement counterparts demonstrate the increasing prevalence of “carbon copy prosecutions.” The U.S. is using the upsurge in foreign government interest in anti-corruption investigations to fuel its own enforcement docket. ● Risk management is more than simply risk assessment — in virtually every case we report on, we see the government’s use of bargaining tools, such as NPAs, demonstrating its willingness to reward companies and individuals alike for self-reporting, cooperating, and undertaking proper remedial actions. This continues to be a clear theme both in case resolution and in public statements by DOJ and SEC officials. Discussed below are the major U.S. enforcement actions from 2013, as well as an analysis of the increasingly vigorous anti-corruption enforcement, legislative activities from the year past, and predictions for the future. Executives on the chopping block It seems that in 2013 more than ever, the DOJ has made prosecuting individuals a deliberate enforcement priority. The DOJ has made clear, “Our recent string of successful prosecutions of corporate executives is worth highlighting. Those actions show, in concrete terms, that we are not going away — indeed, our efforts to fight foreign bribery are more robust than ever. By redoubling our commitment to bring to justice those individuals who bribe for business, we are sending an unmistakable message to corporate 0 10 20 30 40 50 45 35 25 15 5 2005 2006 2007 2008 2009 2010 2011 2012 2013 DOJ SEC6 Hogan Lovells executives around the world — if you engage in corrupt conduct, you should be prepared to face very real consequences, including jail time.” 6 The DOJ’s pursuit of criminal charges against executives demonstrates the agency’s continued commitment to an enforcement model that favors incentivizing self-disclosure by corporations while aggressively prosecuting individual violators. Executives of BizJet International Sales and Support Inc. (5 April) Charges were unsealed in April against four former executives of BizJet International Sales and Support Inc. (BizJet), the U.S.-based subsidiary of Lufthansa Technik AG, which provides aircraft maintenance, repair, and overhaul (MRO) services. The BizJet execs are charged with FCPA violations for their alleged participation in a scheme to pay bribes to government officials in Latin America. According to the charging documents, Bernd Kowalewski, former president and chief executive officer, Peter DuBois, former vice president of sales and marketing, Neal Uhl, former vice president of finance, and Jald Jensen, a former sales manager, paid bribes to Mexican, Brazilian, and Panamanian officials in exchange for those officials’ assistance in securing contracts for BizJet to perform MRO services. Kowalewski and Jensen were charged by indictment filed in U.S. District Court for the Northern District of 6 Raman, supra n.1. Oklahoma in 2012 with violating the FCPA, money laundering, and related conspiracy charges. The two defendants remain at large abroad. DuBois and Uhl pleaded guilty in 2012 and their pleas were unsealed in 2013. Both defendants were sentenced by U.S. District Judge Gregory K. Frizzell in the Northern District of Oklahoma. DuBois’ sentence was reduced from a sentencing guidelines range of 108 to 120 months in prison to probation and eight months home detention based on his cooperation in the government’s investigation. Uhl’s sentence was similarly reduced for cooperation from a guidelines range of 60 months in prison to probation and eight months home detention. The company, BizJet, entered into a deferred prosecution agreement (DPA) in 2012 to settle charges related to its corrupt conduct and the actions of its employees. Executives of Alstom SA (16 April) Charges were brought against one current and three former executives of the U.S. subsidiary of Alstom SA, a French power and transportation company, for their alleged participation in a scheme to pay bribes to foreign government officials. Frederic Pierucci, a current company executive, was arrested and indicted for FCPA and money laundering violations and related conspiracy charges. David Rothschild, a former vice president of sales, pleaded guilty in 2012 to one count of conspiracy to violate the FCPA. Another Alstom executive, William Pomponi, was charged as a codefendant in a superseding indictment filed by the DOJ in 2013. Pomponi was the vice president of regional sales at Alstom Connecticut. Subsequently, Lawrence Hoskins, a former senior vice president for the Asia region, was charged in a second superseding indictment for his alleged participation in the scheme. Pierucci, Rothschild, Pomponi, and Hoskins, together with others, allegedly used two outside consultants to bribe high-ranking foreign officials in Indonesia in exchange for lucrative contracts to provide power-related services for Indonesian citizens (called the Tarahan Project). The defendants and their co-conspirators were successful in securing the Tarahan Project in May 2005 and subsequently made payments to the consultants for the alleged purpose of bribing the Indonesian officials. Employees of Direct Access Partners LLC (7 May) Ernesto Lujan, a managing partner of Direct Access Partners (DAP), a New York broker-dealer, was arrested Global Bribery and Corruption Review 2013 7 on FCPA charges arising from a conspiracy to pay bribes to Maria De Los Angeles Gonzalez De Hernandez, a senior official in Venezuela’s state economic development bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES). Lujan, among others, allegedly arranged the bribe payments at BANDES in exchange for Hernandez directing BANDES’ financial trading business to DAP. In 2013, Hernandez, along with DAP employees Tomas Alberto Clarke Bethancourt and Jose Alejandro Hurtado, were arrested for substantive and conspiracy FCPA bribery, Travel Act, and money laundering charges relating to this bribery scheme. According to the charging documents, the DAP employees paid Hernandez at least US$5 million in kickbacks between 2008 and 2010 in return for her directing more than US$60 million of business to DAP. The DOJ alleges that much of this trading activity, including round-trip trades of bank bonds that DAP bought from BANDES and then sold back on the same day, was conducted solely to generate business for DAP and provided no discernible benefit to BANDES. The DAP employees allegedly pocketed millions of dollars in commissions from these trades, and the money was allegedly funneled through a complex web of Swiss and Panamanian bank accounts. The DOJ has additionally filed a civil forfeiture complaint against a number of these accounts and real estate properties allegedly purchased with the corrupt proceeds. The SEC also filed non-FCPA fraud charges against the DAP employees listed above, along with two others, including Hurtado’s wife, Haydee Leticia Pabon. Former CFO of Digi International, Inc. (2 July) The SEC agreed to settle civil FCPA claims filed in federal court in Minnesota against Subramanian Krishnan, the former chief financial officer of Digi International, Inc., a Minnesota-based wireless solutions company. The complaint had alleged that Krishnan violated books and records requirements and evaded internal controls to pay for unauthorized travel and entertainment expenses. Specifically, the SEC alleged that Krishnan allowed Digi employees in its Hong Kong office to be reimbursed for expenses, including hotel and entertainment expenses, without approval by the chief executive officer and in violation of company policy. Krishnan allegedly approved cash payments in the Hong Kong office that were not documented or explained. The complaint did not specify how employees used the funds, and the SEC later acknowledged that there was no underlying bribery violation, which highlights the agency’s use of the FCPA to pursue even pure recordkeeping cases. In the face of the announcement by Chair Mary Jo White that the SEC might require factual admissions even in a civil settlement, Krishnan settled without admitting or denying the allegations. He also consented to a judgment prohibiting him from serving as an officer or director of any issuer and from practicing as an accountant for a period of five years. The judgment included a US$60,000 civil penalty. Former executive at Maxwell Technologies, Inc. (15 October) Alan Riedo, a citizen of Switzerland and former vice president and general manager of Maxwell Technologies, Inc. (Maxwell), was indicted for FCPA violations for his role in an alleged scheme to bribe Chinese officials in exchange for lucrative contracts. Maxwell is a manufacturer of energy storage and power-delivery products in several countries, including China. Maxwell S.A. is a wholly owned subsidiary of Maxwell that manufactured and sold high-voltage/ high-tension capacitors. Riedo, together with others identified in the indictment as co-conspirators, allegedly conspired to bribe Chinese officials at Pinggao Group Co. Ltd., Xi-an XD High Voltage Apparatus Co. Ltd., and New Northeast Electric Shenyang HV Switchgear Co. Ltd., which are state-owned and state-controlled electric-utility infrastructure agencies of the Chinese government. The alleged bribes were paid in exchange for the officials’ assistance in securing contracts for the sale of Maxwell’s high-voltage capacitor products to stateowned manufacturers of electrical-utility infrastructure, and in obtaining and retaining business, prestige, and increased compensation for Riedo, Maxwell, Maxwell S.A., and others. Riedo’s employment by Maxwell was terminated in 2009. He is currently considered a fugitive and a warrant for his arrest has been issued. Maxwell previously resolved parallel DOJ and SEC FCPA enforcement actions concerning its business conduct in China by agreeing to pay approximately US$14 million in 2011. 8 Hogan Lovells SEC cracks down on travel and entertainment expenses At the American Conference Institute’s 30th International Conference on the Foreign Corrupt Practices Act, 7 DOJ FCPA Unit Deputy Chief Charles E. Duross and SEC FCPA Unit Chief Kara N. Brockmeyer discussed their agencies’ respective pipelines of cases. Duross said that the DOJ has approximately 150 open FCPA investigations, a figure that has remained roughly constant for the past several years. Brockmeyer stated that two-thirds or more of her team’s cases involve allegations that potential improper payments have been routed to foreign officials through intermediaries. She also noted that travel and entertainment issues continue to be the subject of enforcement actions, citing both the Diebold and Stryker settlements discussed below. Koninklijke Philips Electronics N.V. (5 April) Koninklijke Philips Electronics N.V. (Philips) is a Netherlands-based healthcare and lighting company. Since at least 1999, Philips has participated in public tenders to sell medical equipment to Polish healthcare facilities. From 1999 through 2007, in at least 30 transactions, employees of Philips’ Polish subsidiary Philips Polska sp. z o.o. (Philips Poland), allegedly made improper payments to public officials of Polish healthcare facilities, including hospital directors, in order to increase the likelihood that Philips would be awarded these contracts. Under the FCPA, healthcare professionals such as hospital directors in state-run systems like Poland’s are considered “foreign officials.” The alleged improper payments generally amounted to 3 to 8% of the contracts’ net value. These improper payments were falsely characterized and accounted for in Philips’ books and records as legitimate expenses and were at times supported by false documentation created by Philips Poland employees and/or third parties. In finding that Philips violated Section 13(b)(2)(B) of the Securities Exchange Act, the SEC emphasized Philips’ failure to implement an FCPA compliance and training program that was “commensurate with the extent of its international operations.” However, no civil penalty was imposed by the SEC, based upon Philips’ 7 Charles E. Duross, Deputy Chief, Criminal Division, U.S. Department of Justice, and Kara N. Brockmeyer, FCPA Unit Chief, U.S. Securities and Exchange Commission, Remarks at the American Conference Institute’s Foreign Corrupt Practices Act Conference (19 Nov. 2013), http://www.fcpablog.com/blog/2013/11/20/duross-brockmeyer-talkabout-fcpa-investigations-remediation.html#. cooperation in the SEC investigation and related enforcement action. Philips was ordered to cease and desist, disgorge US$3.12 million, and pay US$1.39 million in prejudgment interest. The Polish authorities have brought a case against former Philips employees and 16 hospital directors accused of paying or receiving bribes. A trial in Polish court is ongoing. Diebold Inc. (22 October) Diebold Inc., an Ohio-based manufacturer of ATMs and bank security systems, agreed to pay a US$25.2 million penalty to the DOJ and US$48 million to the SEC to resolve allegations that it violated the FCPA by bribing government officials in China and Indonesia and falsifying records in Russia in order to obtain and retain contracts to provide ATMs to state-owned and private banks in those countries. In its settlement with the SEC, Diebold also agreed to pay approximately US$22.97 million in disgorgement and prejudgment interest. Diebold entered into a DPA with the DOJ, and in addition to the monetary penalty, it agreed to implement rigorous internal controls, cooperate fully with the department, and retain a compliance monitor for at least 18 months. According to court documents, Diebold provided cash, gifts, and non-business travel to employees of state-owned Chinese banks. Diebold executives and employees attempted to disguise the payments and benefits through various means, including by making payments through third parties designated by the banks and by inaccurately recording leisure trips for bank employees as training. In Russia, Diebold allegedly entered into false contracts for services that the distributor was not performing. The distributor then used the money from Diebold to pay bribes to employees of Diebold’s privately owned bank customers in Russia to obtain and retain contracts with those customers. The criminal information alleges that, in doing so, Diebold knowingly falsified its books and records. Stryker Corporation (25 October) The SEC charged a Michigan-based medical technology company with violating the FCPA when subsidiaries in five different countries bribed doctors, healthcare professionals, and other governmentemployed officials in order to obtain or retain business. According to the SEC’s order, between August 2003 and February 2008, Stryker subsidiaries in Argentina, Greece, Mexico, Poland, and Romania made illicit Global Bribery and Corruption Review 2013 9 payments to public healthcare officials, including doctors and heath administrators, at various stateowned hospitals, universities, and health agencies. Descriptions varied from a charitable donation to consulting and service contracts, travel expenses, and commissions. Stryker made approximately US$7.5 million in illicit profits as a result of the improper payments. Over the course of these years, Stryker is said to have routinely mischaracterized the payments on their corporate books and records as legitimate consulting services and contracts, travel expenses, charitable donations, or commissions. Stryker agreed to pay more than US$13.2 million to settle the SEC’s charges. Big oil, mining, and couture: broadening cross-border enforcement In addition to the stepped-up prosecutions of individuals, recent enforcement actions against oil and gas, mining, and fashion companies highlight another important shift in the anti-corruption realm — the development of stronger anti-bribery enforcement programs in foreign countries, the continuing and encouraging rise in cross-border cooperation, and the increasing efforts of foreign law enforcement authorities to hold perpetrators accountable. The Total case, as described below, represents the first coordinated action by U.S. and French law enforcement in a foreign bribery case. As a result of the cross-border collaboration, Total faces criminal consequences across two continents. This unprecedented, joint action by U.S. and French authorities reflects the United States’ renewed commitment to work closely with its foreign counterparts to enforce bribery laws across the globe. The Parker Drilling and Ralph Lauren cases also highlight the DOJ’s and the SEC’s offers of resolutions short of a guilty plea — such as DPAs and NPAs — and reduced monetary penalties in certain cases. SEC Co-Director of Enforcement Andrew J. Ceresney has noted, “The answer is simple — if we find the violations on our own, the consequences will surely be worse than if you had self-reported the conduct.” Frederic Cilins (15 April) Frederic Cilins, a French citizen, was arrested and indicted on five counts of obstruction of justice for allegedly impeding an investigation into whether an unnamed mining company 8 paid bribes to win lucrative mining rights in the Republic of Guinea. A criminal complaint was filed in the Southern District of New York charging Cilins with obstructing an ongoing federal grand jury investigation concerning potential violations of the FCPA and laws proscribing money laundering. In March 2013, investigators began working with the former wife of a now-deceased Guinean government official suspected of receiving bribes in exchange for the award of the relevant mining concessions. The official’s wife revealed that while her husband was in office, both were visited by several individuals from the unnamed company, including Cilins. During the meetings, these individuals offered bribes to the wife and various other government officials to secure valuable mining rights in Guinea. Through a series of recorded conversations, investigators learned that Cilins contacted the official’s wife and allegedly offered to pay her approximately US$1 million in exchange for documents demonstrating the corruption, which he intended to destroy. Cilins pleaded not guilty to all charges and is being held without bail. His trial is set for March 2014. Parker Drilling Company (16 April) Parker Drilling Company (Parker) is a publicly listed drilling services company headquartered in Houston, 8 The Financial Times reported on 19 April 2013 that the “unnamed company” involved in the U.S. corruption probe into obtaining mining rights in Guinea is a subsidiary of the Beny Steinmetz Group (BSG). BSG is a privately owned company managed by Israeli diamond tycoon Beny Steinmetz and operates in several different industries worldwide, including natural resources, real estate, capital markets, and the diamond business, available at http://www.ft.com/cms/s/0/198b9ea6-a8e8-11e2-a096-00144feabdc0. html#axzz2n6q3Vl4b.10 Hogan Lovells Texas. Parker agreed to pay a penalty of US$11.76 million to resolve FCPA charges alleging that it paid a Nigerian agent to corruptly influence decisions of the Nigerian government about Parker’s adherence to Nigerian customs and tax laws. According to the criminal information, in 2001 and 2002, Panalpina World Transport Limited (Panalpina Nigeria) helped Parker avoid certain costs associated with Nigeria’s Customs & Excise Management Act of 1958. In late 2002, Nigeria formed a government commission (the TI Panel) to examine whether Nigeria’s Customs Service had collected certain duties and tariffs that Nigeria was due. The TI Panel found that Parker had violated Nigeria’s customs laws and assessed a fine of US$3.8 million against the company in May 2004. During these proceedings, Parker allegedly retained a Nigerian agent to act as a consultant and meet with, or plan meetings with, various Nigerian officials. Parker paid US$1.25 million to this Nigerian agent, who reported spending a portion of the money on various things, including entertaining government officials. According to court documents, two senior executives at the time reviewed and approved the agent’s invoices, knowing that the invoices arbitrarily attributed portions of the money that Parker transferred to the agent to various fees and expenses. The funds were mostly funneled through Parker’s outside counsel. Following the Nigerian agent’s work, the company received an unexplained US$3.05 million reduction of a previously assessed customs fine, and the company was permitted to nationalize and sell its Nigerian rigs. In settling the allegations, the DOJ agreed to defer prosecution of Parker for three years. Parker agreed, among other things, to implement an enhanced compliance program and internal controls capable of preventing and detecting FCPA violations, to report periodically to the DOJ concerning its compliance efforts, and to cooperate with ongoing investigations. It also reached a settlement with the SEC in a parallel civil action and agreed to pay US$4.09 million in disgorgement and prejudgment interest. Ralph Lauren Corporation (22 April) Ralph Lauren Corporation (RLC), headquartered in New York, designs, markets, and distributes apparel, accessories, and other products around the world. RLC agreed to pay the DOJ a penalty of US$882,000 to resolve allegations that it violated the FCPA. As part of the DOJ’s NPA, RLC admitted that its Argentine subsidiary (RLC Argentina) paid bribes and gifts, through an agent, to Argentine customs officials from 2005 to 2009 to assist in improperly obtaining paperwork necessary for its products to clear customs, permit clearance of items without the necessary paperwork, permit clearance of prohibited goods, and avoid inspection of products by Argentine customs officials. In addition, the general manager of RLC Argentina directly provided or authorized provision of several gifts to three Argentine government officials to improperly secure the importation of the corporation’s products into Argentina. During this time, RLC did not have an anti-corruption program in place and did not provide anti-corruption training or oversight to its Argentine subsidiary. Upon discovery of the bribes, RLC ceased all operations in Argentina. In the parallel civil action, RLC entered into an NPA with the SEC and agreed to pay US$734,845 in disgorgement and prejudgment interest. The NPA is the first that the SEC has entered involving FCPA misconduct. 9 Total S.A. (29 May) Oil giant Total S.A. paid US$398 million to the DOJ and SEC to resolve FCPA charges. In a DPA, the company admitted paying bribes to gain access to oil and gas 9 NPAs are part of the SEC Enforcement Division’s Cooperation Initiative, which rewards cooperation in SEC investigations. “When they found a problem, Ralph Lauren Corporation did the right thing by immediately reporting it to the SEC and providing exceptional assistance in our investigation,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “The NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC.” Press Release, U.S. Securities and Exchange Commission, SEC Announces Non-Prosecution Agreement With Ralph Lauren Corporation Involving FCPA Misconduct (22 April 2013).Global Bribery and Corruption Review 2013 11 fields in Iran. The settlement was the fourth biggest in FCPA history, and the investigation was the first coordinated action by French and U.S. law enforcement in a major foreign bribery case. According to the settlement agreements, between 1995 and 2004, Total utilized intermediaries to make approximately US$60 million in improper payments to the chairman of a wholly owned subsidiary of the National Iranian Oil Company to obtain the rights to develop two significant oil and gas fields in Iran. Total allegedly mischaracterized the unlawful payments as business development expenses paid through what purported to be legitimate consulting agreements with the intermediaries. The DOJ resolution took the form of a three-count criminal information charging conspiracy to violate the FCPA’s anti-bribery provision as well as substantive books-and-records and internal controls violations. The information will be stayed during the three-year term of the DPA. The SEC settlement consists of an administrative cease-and-desist order alleging violations of the FCPA’s anti-bribery, books-andrecords, and internal controls provisions. Total is required by both settlements to retain, for a threeyear period, an independent compliance monitor. This case represents a cooperative effort by both French and U.S. law enforcement to hold a company liable for its corrupt foreign activities. In an unrelated matter, a French court in July 2013 acquitted Total and its chief executive officer of corruption and embezzlement in a case arising from the United Nations-sponsored Oil-for-Food Programme in Iraq. The Paris court also dismissed corruption charges against the 18 other defendants in the case, including a former minister and a former French ambassador. Weatherford International Limited (26 November) Three subsidiaries of Weatherford International Limited (Weatherford), a Swiss oil services company, have agreed to plead guilty to anti-bribery provisions of the FCPA and other violations. The total amount of fines and penalties for the FCPA violations was US$152.6 million. The company was also hit with another US$100 million in fines and penalties for trade sanctions, bringing its total amount paid to US$252.6 million. Weatherford admitted to failing to establish an effective system of internal accounting controls designed to detect and prevent corruption, including FCPA violations. As a result, employees of certain of Weatherford’s wholly owned subsidiaries in Africa and the Middle East were able to engage in corrupt conduct over the course of many years, including both bribery of foreign officials and fraudulent misuse of the United Nations’ Oil-for-Food Programme. In a related matter, the SEC filed a settlement in which Weatherford International consented to the entry of a permanent injunction against FCPA violations and agreed to pay US$65.61 million in disgorgement, prejudgment interest, and civil penalties. Weatherford International also agreed to comply with certain undertakings regarding its FCPA compliance program, including the retention of an independent corporate compliance monitor. The settlements concluded one of the longest running open FCPA investigations, and Weatherford took over the number nine spot on the list of top 10 FCPA penalties of all time. Other cases Bilfinger SE (9 December) Germany-based Bilfinger SE, an engineering and services company in the energy sector, agreed to pay a US$32 million penalty to resolve charges that it violated the FCPA by bribing government officials in Nigeria. The DOJ filed a three-count criminal information in U.S. District Court for the Southern District of Texas charging Bilfinger with bribing government officials of Nigeria to obtain and retain contracts related to the Eastern Gas Gathering System (EGGS) project, which was valued at approximately US$387 million. According to court documents, from late 2003 through June 2005, Bilfinger conspired with Willbros Group Inc. 10 and others to make corrupt payments totaling more than US$6 million to Nigerian government officials to assist in obtaining and retaining contracts related to the EGGS project. Bilfinger and Willbros formed a joint venture to bid on the EGGS project and inflated the price of the joint venture’s bid 10 On 3 May 2013, Paul G. Novak, a former consultant for Willbros International Inc., was sentenced for his role in the scheme to bribe government and political party officials in Nigeria. Novak was sentenced to 15 months in prison, US$1 million in fines, and two years of supervised release after pleading guilty to one count of conspiracy to violate the FCPA and one count of a substantive FCPA violation. In 2008, Willbros Group Inc. and Willbros International Inc. paid US$22 million in an FCPA settlement with the DOJ to resolve similar allegations. Kenneth Tillery was also charged with Novak but allegedly remains a fugitive. Two former Willbros employees have already been imprisoned for their roles in the scheme. In 2006, Jim Brown, a former executive, pleaded guilty to one count of conspiracy to violate the FCPA and was sentenced in 2010 to 12 months in prison. And Jason Steph, a former executive, also pleaded guilty to one count of conspiracy to violate the FCPA.by 3% to cover the cost of paying bribes to Nigerian officials. As part of the conspiracy, Bilfinger employees bribed Nigerian officials with cash that Bilfinger employees sent from Germany to Nigeria. When Willbros employees encountered difficulty obtaining enough money to make their share of the bribe payments, Bilfinger loaned them US$1 million with the express purpose of paying bribes to the Nigerian officials. Bilfinger entered into a DPA with the DOJ for three years. In addition to the monetary penalty, Bilfinger agreed to implement rigorous internal controls, continue cooperating fully with the department, and retain an independent corporate compliance monitor for at least 18 months. The agreement acknowledges Bilfinger’s cooperation with the department and its remediation efforts. Archer-Daniels-Midlands Company (20 December) Alfred C. Toepfer International Ukraine Ltd. (ACTI), the Ukraine subsidiary of the global food processor ArcherDaniels-Midland Company (ADM), pleaded guilty to violating the FCPA by bribing Ukrainian government officials through vendors in exchange for value-added tax (VAT) refunds. ACTI paid a criminal fine of US$17.8 million to the DOJ. The parent, ADM, signed an NPA with the DOJ, admitting it failed to have adequate internal controls needed to prevent bribery in Ukraine and through a joint venture in Venezuela. The charging documents alleged that from 2002 to 2008, ACTI and another ADM subsidiary in Europe paid third-party vendors US$22 million to pass as bribes to Ukrainian government officials for VAT refunds. In return, the ADM companies received US$100 million in VAT refunds. ADM also paid US$36.5 million in disgorgement and prejudgment interest to resolve civil charges brought by the SEC. The DOJ and SEC said they took into account ADM’s cooperation and “significant remedial measures, including selfreporting, implementing a comprehensive new compliance program, and terminating employees involved in the misconduct.” Proposed FCPA reform and changes The House of Representatives and Senate each have been working on a bill to appropriate Fiscal Year 2014 funding for certain Department of Defense military construction projects. On 4 June 2013, Rep. Alan Grayson (D-FL) offered an amendment (House 1 SIEMENS, GERMANY | 2008 US$800 MILLION PENALTY 2 KBR/ HALLIBURTON, US | 2009 US$579 MILLION PENALTY 3 BAE SYSTEMS, UK | 2010 US$400 MILLION PENALTY 4 ENI S.P.A./SNAMPROGETTI NETHERLANDS B.V., ITALY, NETHERLANDS | 2010 5US$365 MILLION PENALTY TECHNIP S.A., FRANCE | 2010 US$338 MILLION PENALTY TOTAL S.A., FRANCE | 2013 US$398 MILLION PENALTY 6 JGC CORPORATION, GERMANY | 2008 7US$218.8 MILLION PENALTY DAIMLER AG, GERMANY | 2010 8US$185 MILLION PENALTY WEATHERFORD INTERNATIONAL SWITZERLAND | 2013 US$152.6 MILLION PENALTY ALCATEL–LUCENT FRANCE | 2010 10US$137 MILLION PENALTY 9 FCPA Penalties 2008-2013 12 Hogan LovellsGlobal Bribery and Corruption Review 2013 13 Amendment 89) to the House version of the bill (H.R. 2216) that would prevent funds allocated under the bill from being used for contracts with companies that, within the preceding three years, have been “convicted or had a civil judgment rendered against them” for, among other things, bribery. The amendment also applies to companies whose principals have had a conviction or civil judgment rendered against them within the preceding three years. The bill, including Rep. Grayson’s amendment, has passed the House and is now before the Senate. In the wake of cases where federal judges are increasingly questioning the merits of proposed settlements submitted by the SEC and defendants for approval, SEC Chair Mary Jo White announced on 18 June 2013 11 that the commission intends to scale back its use of the “neither admit nor deny” policy in “certain cases.” This announcement expands upon changes made to the SEC’s “neither admit nor deny” policy in early 2012, which limited the policy’s use in certain cases involving criminal wrongdoing. Prior to the 2012 SEC policy changes, a “defendant could be found guilty of criminal conduct and, at the same time, settle parallel SEC charges while neither admitting nor denying civil liability.” In early 2012, Robert Khuzami, then-Director of the SEC’s Division of Enforcement, announced that, when settling cases in which the defendant has admitted to violations of criminal law in related criminal proceedings, the SEC would no longer allow the defendant to neither admit nor deny wrongdoing. As judicial review continues to inject uncertainty into the once perfunctory settlement approval process, the use of administrative proceedings to resolve FCPA violations may become a preferred forum for SEC settlements. 2014: What’s to come? In light of the clear commitment to robust FCPA enforcement by the DOJ and the SEC, we expect 11 SEC Chair Mary Jo White announced that the SEC will cease its blanket policy allowing defendants to settle SEC cases without admitting to wrongdoing. Mary Jo White, Chair, SEC, Remarks at Council of Institutional Investors (26 Sept.), http: //www. sec.gov/News/Speech/Detail/Speech/1370539841202. Acknowledging that the no admit/deny language is an effective tool at encouraging defendants to settle, she identified situations where the SEC will require an admission in the interest of public accountability, specifically where: (1) the misconduct harmed large numbers of investors or placed them at risk of serious harm; (2) an admission might safeguard against risks posed by the defendant; (3) the defendant engaged in egregious intentional misconduct; and (4) the defendant engaged in unlawful obstruction of the investigation. The SEC Enforcement Division will continue to discuss with the commissioners cases where admission could be in the public interest. The change in policy only adds to the SEC’s leverage over defendants; now the SEC may be unwilling to negotiate over an admission of wrongdoing and could force defendants to go to trial. Only time will tell whether the SEC is willing to take a hard line where admissions become an inevitable cost of resolving a case. enforcement activity, both by U.S. and foreign authorities, to be on the rise in the coming months. The entry of the Chinese government and other emerging foreign enforcement authorities into the international fight against corruption and bribery is truly a game changer. The GlaxoSmithKline PLC (GSK) bribery and corruption investigation described in Section Five of this review (Spotlight on China: 2013 — the year of the raid) will be the number one development this year in anti-corruption compliance because it is likely to demonstrate that international companies operating in China have an important risk to consider: being investigated by foreign authorities likely could lead to prosecution by U.S. regulators, and vice versa. Similarly, the Total case stands as a stark reminder of two basic truths for multinational corporations: first, unaddressed FCPA violations can prove extremely costly; and second, legal regimes in different countries can result in duplicative or overlapping exposures for those accused of violating anti-corruption laws. It is clear that foreign companies are now on notice: doing business the old-fashioned way will no longer be tolerated. Also of note is the continued effort to increase the scope of the FCPA to foreign nationals with few, if any, ties to the United States. As we discuss in Section Two (The long arm of the law: risks to foreign nationals under the FCPA), two recent decisions of the Southern District of New York, Steffen and Straub, interpreting the jurisdictional reach of the FCPA leave a murky explanation of how far the DOJ and SEC can stretch to reach foreign nationals. Additionally, the Straub opinion has broad implications regarding statute of limitations defenses for individuals located outside of the United States, essentially giving prosecutors unlimited time in charging individuals residing overseas. Both DOJ and SEC officials continually emphasized throughout the year that self-reporting is particularly relevant to the government’s determination of the kind of disposition it will seek in settlement. Thus, the most effective way to avoid aggressive prosecution is to undertake robust compliance measures well before issues arise, and, when violations do occur, to quickly gather information necessary to make an informed decision about whether to self-report and remediate any compliance deficiencies. nThe long arm of the law: risks to foreign nationals under the FCPA United States authorities have long sought to expand the jurisdictional and substantive scope of the FCPA. In 2013, two conflicting decisions out of the Southern District of New York demonstrated both the significant risk and the tremendous uncertainty facing foreign nationals in terms of the jurisdictional scope of the act. Contributions by Stuart M. Altman and Natalie T. Sinicrope16 Hogan Lovells In Securities and Exchange Commission v. Elk Straub, 12 Judge Richard Sullivan rejected a foreign defendant’s challenge to personal jurisdiction under the FCPA, finding that even somewhat attenuated connections to the United States can suffice to create personal jurisdiction. Straub and his co-defendants were executives of Hungarian telecom company Magyar Telekom Plc (a controlling interest in which was owned by Duetsche Telekom). The SEC alleged that in 2005, Magyar entered into a scheme whereby bribes were paid through a Greek intermediary in an attempt to win certain telecommunication services contracts being bid out by the Macedonian government. In an effort to win support of a minority political party, Magyar paid cash bribes and allowed a party designee to control a newly constructed mobile telecommunication system in a neighboring country. Straub and others set forth the details of their plans in written protocols that were preserved by the intermediary. Straub challenged the court’s jurisdiction, claiming that he was not otherwise subject to personal jurisdiction in the United States and that no part of the bribery scheme involved the United States. The court rejected the challenge, finding that Magyar’s American Depository Receipts (ADRs) were traded in the United States and Straub had signed management representation letters that were submitted to Magyar’s U.S. auditors in connection with financial statements the company filed with the SEC. These representations included statements that Magyar had made available all relevant financial records and that no executive of the company was aware of any violations or possible violations of law. Two co-defendants had their jurisdictional challenge rejected, with the court finding that they had signed management subrepresentation 12 Securities and Exchange Commission v. Elk Straub, et al., 921 F. Supp. 2d 244 (S.D.N.Y. 2013) at http://www.law.yale.edu/documents/pdf/cbl/SEC_v_Straub_ (S_D_N_Y__Feb__8_2013)_(Sullivan_J_).pdf. letters for the relevant period falsely certifying compliance with law. The court noted that the defendants had consistently set the bribery payments to government officials just below thresholds that would have required board approval under internal controls and guidelines. The court also rejected the statute of limitations defense asserted by Straub, finding that under the catch-all statute contained in 18 U.S.C. § 2462, the statute on the SEC’s claims did not began to run until Straub was physically present in the United States for purposes of service, even if he could have been served while overseas. Eleven days after the Straub decision, Judge Shira Scheindin issued an opinion in Securities and Exchange Commission v. Sharef et al. 13 dismissing FCPA charges against Herbert Steffen, a former Siemens executive. The complaint alleged that Steffen, a German citizen, along with six other former company executives, orchestrated a bribery scheme that paid millions of dollars to top government officials in Argentina to retain a US$1 billion government contract to produce national identity cards for Argentine citizens. Specifically, the SEC claims that Uriel Sharef, a managing board member, recruited Steffen “to facilitate the payment of bribes” to officials in Argentina because of his longstanding connections in Argentina, which he acquired during his tenure as CEO at the company’s Argentine subsidiary. The SEC claims that Steffen met several times with Bernd Regendantz, who became the chief financial officer of Siemens Business Services (SBS) in February 2002, and pressured Regendantz to authorize bribes from SBS to Argentine officials. Regendantz ultimately authorized the bribes after seeking authorization from his superiors. Despite these efforts, the contract was canceled. In connection with these payments, Regendantz signed quarterly and annual certifications pursuant to the Sarbanes-Oxley Act, falsely representing the financial statements of SBS, and presented them to the company’s auditors. Steffen asked the court to dismiss the complaint against him because the court lacked personal jurisdiction over him as a foreign national and because the complaint was untimely. 13 Securities and Exchange Commission v. Uriel Sharef, et al., 924 F. Supp. 2d 539 (S.D.N.Y. 2013) at http://www.law.yale.edu/documents/pdf/cbl/US_SEC_v_Sharef_ Opinion.pdf.Global Bribery and Corruption Review 2013 17 The SEC’s claim that personal jurisdiction existed was premised on Steffen’s alleged role in encouraging Regendantz to authorize bribes to Argentine officials that ultimately resulted in falsified SEC filings. Judge Scheindlin found that while Steffen’s actions may have been related to the alleged false filings, his involvement was far “too attenuated” from the resulting harm to establish the minimum contacts sufficient to confer jurisdiction. The complaint alleged that Steffen was brought into the scheme based solely on his connections with Argentine officials. While he allegedly “urged” and “pressured” Regendantz to make certain bribes, Regendantz only agreed to make the bribes following receipt of instructions from company senior management. Thus, the court found that Steffen’s alleged role in the scheme was “tangential at best.” Apparently attempting to reconcile Straub, Judge Scheindlin noted that the minimum contacts test is undoubtedly satisfied when foreign national defendants signed or directly manipulated financial statements relied upon by U.S. investors to cover up illegal actions directed entirely at a foreign jurisdiction. Here, however, she found that the allegations against Steffen fell far short of the requirement that he followed a course of conduct directed at the United States absent any alleged role in the cover up or in preparing the false financial statements. Judge Scheindlin urged courts to use caution when exercising jurisdiction over foreign defendants based on the effect of their conduct on SEC filings. “If this Court were to hold that Steffen’s support for the bribery scheme satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless.” The court reasoned that otherwise every participant in illegal action taken by a foreign company subject to U.S. securities laws would be subject to jurisdiction no matter how attenuated their connection with the falsified financial statements. 14 These apparently conflicting decisions create uncertainty for officers and directors of foreign corporate entities. Foreign nationals are not automatically covered by the FCPA even though the company they work for might be a U.S. entity or subject to jurisdiction because of security listings. 14 Because Judge Scheindlin concluded, as an initial threshold matter, that personal jurisdiction over Steffen exceeded the limits of due process, she did not address Steffen’s other challenges, including the statute of limitations issues. However, that may be small comfort now. Although not necessarily controlling, Straub will likely be relied on by the government to bolster its broad view — as expressed in the recent FCPA Resource Guide — of jurisdiction over wholly foreign activities and individuals. To the extent that the government can show there was any reason to believe that the putative defendant acted with an expectation that there would be an impact on the securities market, or can show a cover-up of a scheme that would have impacted the capital markets, it is likely to push for jurisdiction. Defendants in this situation will look to Steffen to argue their lack of ties to securities filings or market considerations. This is still an area of law where the case law is very sparse and there is a lack of guidance from the appellate level. While the two opinions are hard to reconcile, we think it is important for our international clients to understand that the exercise of personal jurisdiction over a foreign national is a fact-specific question, one that will be determined on a case-bycase basis, and one where the government is likely to reach as far as the courts will allow. Additionally, the Straub opinion has broad implications regarding statute of limitations defenses for individuals located outside of the United States. Under Judge Sullivan’s opinion, foreign nationals lack any protection from stale and outdated lawsuits simply because they reside overseas, even if the SEC could have served them under international law. This is an important element of risk to consider. nUnited Kingdom: another year of growing pains Contributions by Michael Roberts and Alex Hohl20 Hogan Lovells A tough year for the SFO ... By any measure, 2013 was not an easy year for the Serious Fraud Office (SFO), the United Kingdom’s lead prosecutor for serious corruption offenses. The SFO has continued to deal with the fallout of its investigation into the collapse of the Icelandic bank, Kaupthing, and two major clients of that bank, Robert and Vincent Tchenguiz. Following their arrest in March 2011, the Tchenguiz brothers commenced judicial review proceedings against the SFO, culminating in a ruling in July 2012 that the SFO had withheld crucial information when obtaining search warrants. The Tchenguiz brothers and their companies subsequently brought civil claims for damages well in excess of £100 million against the SFO, alleging that the SFO placed undue reliance on Grant Thornton (the firm of Kaupthing’s liquidators, Stephen Akers and Mark McDonald), throwing into question the SFO’s ability to dedicate sufficient internal resources to complex investigations. The Tchenguiz brothers’ claims are due to be tried in October 2014. The SFO was further troubled by the revelation that former Director Richard Alderman agreed to severance packages for three former senior staff members without obtaining the necessary Cabinet Office or Treasury approval. This led to a report 15 in July 2013 by the Parliamentary Public Accounts Committee in which it said that the SFO had been “undermined” by “a catalogue of errors and poor judgement” by Alderman, who had shown “a disregard for the proper use of taxpayers’ money.” However, the Public Accounts Committee welcomed the work by David Green QC, the SFO’s current director and Alderman’s successor, to “strengthen SFO governance and board-level decision-making.” In August 2013, the SFO announced the accidental loss of data from its closed investigation into BAE Systems. According to a press release, 16 in the course of returning material to the party who had supplied it, the SFO had sent out materials (consisting of 32,000 pages of documents, 81 audio tapes, and electronic media) that had been obtained from other sources. 15 http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/360/360. pdf 16 http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2013/ statement-on-data-loss-incident.aspx Finally, in December 2013, one of the SFO’s most high-profile prosecutions collapsed. British-Canadian businessman Victor Dahdaleh stood accused of eight counts of corruption (under the UK’s pre-Bribery Act legislation), conspiracy, and money laundering in connection with bribes of £38 million he had allegedly paid to a member of the Bahraini royal family to win contracts worth over US$3 billion from Bahrain’s national aluminum company, Alba. The prosecution came to an abrupt end when a key prosecution witness, Bruce Hall, who had earlier pleaded guilty to conspiracy to corrupt, gave evidence that was markedly different from that previously given to the SFO. Counsel for the SFO then said it would present no evidence against Dahdaleh, leaving the judge to instruct the jury to return verdicts of not guilty on all eight charges. 17 … but a stronger future awaits (perhaps) However, there are signs that the SFO will face the future with a more clearly defined mission and new tools with which to achieve it. 2014 will see the introduction of a powerful new tool to the SFO’s armory in the form of DPAs. The creation of the United Kingdom’s National Crime Agency (NCA) also will prove highly significant for the SFO’s future. This new body, which started work in October 2013, will take the lead in coordinating the United Kingdom’s response to serious and organized crime that cuts across regional and international borders. The NCA will be both a police force in its own right as well as a coordinator of the United Kingdom’s existing regional police forces, with power to compel those police forces (and the SFO) to provide assistance to it where necessary. 17 In sharp contrast to the collapsed SFO prosecution, the US SEC announced an agreement with Alcoa Inc. on 9 January 2013 in relation to broadly the same issues and providing for a payment of US$384 million.Global Bribery and Corruption Review 2013 21 Significantly, the NCA’s Economic Crime Command will have responsibility for overseeing the UK’s law enforcement response to fraud, bribery, and corruption. While the precise relationship between the NCA and SFO remains to be seen, the SFO director will have a role in determining the NCA’s strategic priorities, and each agency has a statutory obligation to share intelligence with the other (and with other UK law enforcement agencies). In addition, it is expected that the SFO will remain “the lead agency for investigating large and complex cases of corporate bribery and corruption, and enforcing the Bribery Act in respect of overseas corruption by British businesses.” 18 More new tools may be added to the arsenal. According to a strategy paper published by the Home Office in October 2013, 19 the Home Office, together with the Ministry of Justice and Department for Business, Innovation and Skills, will “consider the case for incentivising whistleblowing” by providing financial rewards to those reporting cases of fraud, bribery, and corruption to the authorities. If introduced, however, such incentives are unlikely to go as far as those available under the Dodd-Frank Act in the United States. The creation of the NCA, the introduction of DPAs, and (if set up) a whistleblower incentive scheme should allow the SFO to free itself from less complex investigations and provide the SFO with the intelligence, support, and tools needed to deal with the most complex and significant cases. This ties in with Green’s own vision of the SFO’s role as “investigators and prosecutors of the topmost tier of serious and complex fraud, bribery, and 18 https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/248645/Serious_and_Organised_Crime_Strategy.pdf 19 https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/248645/Serious_and_Organised_Crime_Strategy.pdf corruption.” 20 Green endeavors to emphasize that the SFO’s responsibility should be to focus only on the most challenging cases that require the SFO’s specialist skills. Deferred prosecution agreements DPAs are deals voluntarily entered into between a corporation and a prosecutor whereby the former avoids prosecution subject to the fulfillment of various conditions. They have, to date, been off the cards for UK prosecutors. Attempts by Alderman to reach such deals through the use of civil settlements under money laundering legislation were strongly criticized by the courts as interfering with their constitutional role in sentencing. However, following a consultation by the Ministry of Justice in 2012, legislation to permit DPAs (in the form of Schedule 17 of the Crime and Courts Act 2013) was passed by Parliament in April 2013 and is expected to come into force in the first half of 2014. The legislation envisages a multistage process. First, prosecutors will decide whether to offer a DPA to a company (or partnership) that is under investigation. (Individuals will not be able to enter into DPAs.) A dedicated Code of Practice will assist prosecutors in making this decision. The Director of Public Prosecutions and the Director of the SFO consulted on a draft of that Code of Practice between June and September 2013. After preliminary negotiations between prosecutors and the company, the second stage will be a preliminary hearing (generally in private) before a judge, who will give an indication of whether he or she considers that a DPA is appropriate in principle. If the judge rejects the DPA, the company may be prosecuted. If the judge gives approval in principle, the third stage will be the negotiation of the DPA’s substantive terms. The DPA will set out a number of conditions, which will vary from case to case but will generally include a combination of a financial penalty, reparation to victims, and obligations on the organization to implement a compliance program. Finally, the agreed terms of the DPA will be subject to the consideration and approval of a judge, generally at a public hearing. 20 http://www.sfo.gov.uk/about-us/our-views/director’s-speeches/speeches-2013/ cambridge-symposium-2013.aspx22 Hogan Lovells Thereafter, the organization’s compliance with the DPA will be monitored. In the event of suspected breach or non-compliance, the prosecution will have to apply to a court to determine whether there has been a breach and, if so, what the consequences should be. The options include reconsidering and amending the DPA’s terms or a revival of the prosecution. If, however, the terms of the DPA are fulfilled and it expires according to its terms, the charges against the company will be withdrawn entirely. As noted above, a draft of the Code of Practice that will guide the decision of prosecutors to offer a DPA was published in June 2013. The draft Code of Practice emphasizes that it “is a matter for the prosecutor’s discretion” as to whether a DPA is appropriate. However, before proceeding with a DPA, a prosecutor must be satisfied of two matters: first, that there is sufficient evidence to convict, or “at least a reasonable suspicion that the commercial organisation has committed the offence, and there are reasonable grounds for believing that a continued investigation would provide further evidence within a reasonable period of time;” and second, that there are public interest factors against prosecution that clearly outweigh those weighing in favor of prosecution. In relation to the latter, factors that will be taken into account include whether the defendant has an adequate compliance program in place; whether it has been “genuinely” proactive since discovering the misconduct; whether the misconduct was an isolated incident; whether the conduct was part of the established business practice of the company; and whether the misconduct was reported promptly to the authorities. It is worth noting that the need for prompt self-reporting has also been emphasized by Green, who has said that “[c]ommon sense suggests an initial report of suspected criminality should be made to the SFO as soon as it is discovered. This surely protects the company against the SFO finding out by other means whilst the company investigates further. The corporation can then investigate in depth and report Global Bribery and Corruption Review 2013 23 back to the SFO.” 21 It is notable that Green expects the initial approach to the SFO to be made early, even before a detailed investigation has been undertaken. It remains to be seen whether the introduction of DPAs will fulfill their intended rationale of incentivizing companies to self-report on the basis that they can predict with greater certainty what the consequences of “coming clean” will be. Much will depend on the degree to which the courts become actively involved in reviewing the decision of prosecutors to opt for a DPA rather than a prosecution, and also the degree to which the courts seek to amend the terms of DPAs. Sentencing guidelines for companies On 27 June 2013, the Sentencing Council published a consultation 22 on the appropriate sentencing guidelines for fraud, bribery, and money laundering offenses. The draft sentencing guidelines are the first in the United Kingdom to cover bribery offenses, and they set out the principles that are proposed to govern the sentencing of both individuals and companies (the latter modeled in large part on the sentencing guidelines for corporations produced by the United States Sentencing Commission). In relation to corporations, the Sentencing Council suggests that fines “must be substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law. Whether the fine would have the impact of putting the offender out of business will be relevant; in some bad cases this will be an acceptable consequence.” The Sentencing Council proposes that the starting point in assessing the appropriate fine for corporations will normally be the gross profit from the contract obtained, retained, or sought as a result of bribery. That figure will then be multiplied by a factor reflecting the culpability of the company. It is interesting to note that the factors indicating a high degree of culpability include the fact that the company has made “no effort to put effective [anti-bribery] systems in place.” Companies will be given credit if “[s]ome effort [has been] made to put bribery prevention measures in place,” even if those 21 http://www.sfo.gov.uk/about-us/our-views/director’s-speeches/pinsent-masonsand-legal-week-regulatory-reform-and-enforcement-conference-.aspx 22 http://sentencingcouncil.judiciary.gov.uk/docs/Fraud_Consultation_-_web.pdf measures are insufficient to provide the company with a complete “adequate procedures” defense under the Bribery Act. Amongst the responses to the consultation, perhaps the most notable is that of the House of Commons’ Justice Committee. 23 The Justice Committee suggested that a better starting point in assessing the level of fines for corporations would be a percentage of turnover, profit, or revenue, adding the comment that “[t]he precise percentage figure used as a starting point for sentencing needs to be sufficiently high to supplement the primary deterrent factor of the risk of being detected.” The consultation ended on 4 October 2013. The finalized sentencing guidelines are due to be published in the first half of 2014. Recent investigations and prosecutions The first prosecution by the SFO under the Bribery Act began in 2013. (Three previous prosecutions — of a cab driver, a court clerk, and a student — were brought by the Crown Prosecution Service.) On 14 August 2013, the SFO announced that it was charging three individuals with Bribery Act offenses in connection with the promotion and sale of so-called “biofuel” investments. Although widely publicized, this prosecution is not, in and of itself, a sign that the Bribery Act has teeth. The case essentially involved investment fraud, where the principal charges were of conspiracy to commit fraud by false representation and to furnish false information. It also did not involve the prosecution of a corporation and consequently will not 23 http://www.publications.parliament.uk/pa/cm201314/cmselect/cmjust/804/804.pdfshed any light on how section 7 of the Bribery Act (Failure of a Commercial Organisation to Prevent Bribery) will be interpreted. However, the SFO has repeatedly indicated that it has other investigations underway. In a speech he gave in September 2013, 24 Green said that the SFO had eight Bribery Act projects under development. Furthermore, in October 2013, the SFO announced 25 that it had charged a printing company (Smith & Ouzman Limited), two of its directors, an employee, and an agent with offenses under the pre-Bribery Act legislation. The defendants are alleged to have made corrupt payments totaling in excess of £400,000 between November 2006 and December 2010 in Mauritania, Ghana, Somaliland, and Kenya. Case law: a principal’s consent On 5 December 2013, the Court of Appeal handed down judgment in R v. J, V, B and S, 26 a case widely heralded as providing guidance on the relevance of a principal’s consent in cases involving alleged bribery of a commercial agent. Specifically, the case concerned the interpretation of section 1 of the Prevention of Corruption Act 1906 (the 1906 Act). The 1906 Act, along with a patchwork of common law offenses and other statutory provisions, constitutes the UK’s antibribery laws applicable to conduct prior to 1 July 2011. The defendants in the case were prosecuted for giving money to the employees of a foreign country’s tax authorities in exchange for those agents showing favor to a company regarding the level of tax payable by that company. In R v. J, the judge ruled that the prosecution needed to show that the agents of the tax authorities did not have the consent of the tax authorities (as their employer or principal) to receive the money. The Court of Appeal, overturning that decision, found that the prosecution only needed to show that a payment had been made “corruptly,” not that the principal did not know of the payment or give his informed consent. The Court of Appeal further held that the word “corruptly” did not necessarily imply that a payment had to be made secretly. 24 http://www.sfo.gov.uk/about-us/our-views/director’s-speeches/speeches-2013/ cambridge-symposium-2013.aspx 25 http://www.sfo.gov.uk/press-room/latest-press-releases/press-releases-2013/ printing-company-corruption-charges.aspx 26 http://www.bailii.org/ew/cases/EWCA/Crim/2013/2287.html At first blush, the decision in R v. J seems surprising. One might be left with the impression that a bribery offense can be committed by paying an employee to do something within the course of his employment even if his employer is aware of, and even consents to, the payment. In reality, however, the case involved a more technical question regarding the elements of the offense that prosecutors must prove. The Court of Appeal said explicitly that, in considering whether a payment had in fact been made “corruptly,” there might well be cases where the jury would need to consider evidence as to the principal’s knowledge and consent, evidence that could be “highly material.” What R v. J means is that the prosecution does not have to prove a negative (i.e., that there was no 24 Hogan LovellsGlobal Bribery and Corruption Review 2013 25 knowledge or consent by the principal) provided that there is sufficient evidence on the basis of which the jury can decide that a payment was made corruptly. FCA activity The Financial Conduct Authority (FCA), successor to the Financial Services Authority (FSA), has also been active in the anti-bribery sphere over the past year. In October 2013, it published a thematic review of anti-money laundering and anti-bribery and corruption systems and controls in asset management and platform firms. That review follows a previous thematic review in March 2012 that considered anti-corruption systems and controls in 15 investment banks. In its latest thematic review, the FCA assessed 22 firms, including wealth and asset managers and fund administrators. Findings included that “[m]ost firms failed to demonstrate adequate systems and controls for assessing bribery and corruption risks in relation to dealing with and monitoring third-party relationships, such as relationships with agents or introducers.” While most firms had anti-bribery training initiatives in place, the FCA said that its findings “call[ed] into question the effectiveness of this training” and that firms needed to “develop more ‘tailored’ training material focusing on risks specific to their business.” The review also re-emphasized the importance of senior management taking responsibility for managing bribery and corruption risks (a common theme both in the Ministry of Justice’s guidance on adequate procedures under the Bribery Act 27 and the FCA’s own publication entitled Financial Crime: a Guide for Firms 28 ). On 19 December 2013, the FCA imposed a financial penalty of £1.88 million on JLT Specialty Limited (JLT). According to the FCA, JLT, an insurance broker and risk management service provider, failed to conduct proper due diligence before entering into relationships with partners in other countries who helped JLT to secure new business. The FCA reduced the level of JLT’s fine by 30% as a result of JLT’s agreement to settle at an early stage. The FCA’s director of enforcement, Tracey McDermott, commented, “Bribery and corruption from overseas payments is an issue we expect all firms to do everything they can to tackle. Firms cannot be complacent about their controls — when we take enforcement action, we expect the industry to sit up and take notice.” This enforcement action against JLT, like previous enforcement actions by the FSA against insurance brokers AON and Willis, followed on from an earlier thematic review of the insurance broking industry. Given the FCA’s findings, it would not be surprising if the latest thematic review of asset management firms (and indeed the previous review in relation to investment banks) also leads to enforcement actions. n 27 https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/181762/bribery-act-2010-guidance.pdf 28 http://fshandbook.info/FS/html/handbook/FC/link/PDF26 Hogan LovellsGlobal Bribery and Corruption Review 2013 27 With the 2014 World Cup and the 2016 Olympics both around the corner, Brazil passed an anti-corruption law in 2013 that its legislature had been debating for nearly four years. Popularly called the “Clean Companies Law,” it was signed into law by President Dilma Rousseff, effective at the end of January 2014. The bill passed by the Brazilian Congress has several major features. First, it imposes direct civil liability on corporations for the bribery of local and foreign public officials, as well as making them liable under the theory of respondeat superior for the acts of their directors, officers, employees, and agents. As a civil law country, Brazil’s constitution precludes it from imposing criminal liability on legal persons for anything other than environmental crimes, but the Clean Companies Law, while providing civil penalties, is a strict liability statute without any intent requirement. Second, the law covers both the domestic and foreign actions of Brazilian companies, including Brazilian subsidiaries of foreign parent companies. It also creates jurisdiction for actions within Brazil of nonBrazilian companies that have an office, branch, or other type of representation in Brazil. Third, the law provides for significant administrative and judicial sanctions. Brazil’s anti-corruption authorities can impose fines from 1 to 20% of a company’s revenues in Brazil, or if revenues are too difficult to determine, up to a maximum of R$60 million (or approximately US$26 million). In either case, the fine is limited to the value of the contract or contracts at issue. In addition, in a judicial action, the company could be debarred from public tenders for one to five years, have existing contracts with public entities terminated, face seizure and confiscation of its assets and gains, and be placed in compulsory dissolution as a legal entity. Finally, the draft legislation contains a significant carrot for cooperation: a cartel-style leniency agreement for being the first company to turn itself in. If the legal entity is the first to come forward and confess its participation in the unlawful conduct, ceases its involvement, agrees to fully cooperate, and helps the authorities find other parties involved in the conduct, the fines can be reduced up to two-thirds, and all other sanctions — exclusive of forfeiture and restitution — can be waived. The Brazilian government is using both carrots and sticks to promote the law. Hamilton Cruz, the director of integrity for Brazil’s Office of the Comptroller General, told Thompson Reuters in an interview that “companies are worried about the sanctions, which is a very important part of the law. But we have explained that if you pay bribes and tell the government, we will give recognition to companies that behave well.” In the interview, Cruz sought to manage expectations that Brazil would quickly start prosecuting companies under the new law, but he also pointed out that the law has already led to more cooperation between Brazil and other countries, such as the United States and United Kingdom. For example, it has been widely reported that Brazil and the United States are cooperating in the investigation of Embraer for alleged bribes to secure deals for commercial and defense aircraft in Argentina and the Dominican Republic. Brazil also has recently stepped up its domestic enforcement, pursuing a case involving a subsidiary of Brookfield Asset Management for alleged payments for permits for residential and commercial development. Expect more to come as Brazil takes its place in the world spotlight over the next few years. n Spotlight on Brazil: new anti-corruption legislation in 2013 Contributions by Peter S. SpivackSpotlight on China: 2013 – the year of the raid Contributions by Eugene Chen2013 was a busy year for anti-corruption in the People’s Republic of China (PRC). In early 2013, new senior leadership was appointed for the first time in 10 years, with Xi Jinping assuming the position of China’s president and Li Keqiang as premier. The new administration immediately identified anti-corruption as a priority initiative. Since then, China has been in the news nearly every week. While 2013 saw few legislative developments, a number of key judicial interpretations and administrative regulations were promulgated to clarify various anti-bribery provisions of the Criminal Law, address self-reporting of bribe offenses, and increase transparency of bribery prosecutions to the public. Even more newsworthy, however, has been the aggressive campaign of anti-corruption enforcement actions, including high-profile prosecutions of senior government officials, as well as the highly publicized and unprecedented criminal prosecution of GSK for commercial bribery. Whether this administration can or will sustain its attack on corruption in 2014 and the coming years is unclear. Equally unclear is whether the government will turn its attention from multinational targets to its own domestic industry. But having seen the impact of the now-departed “Year of the Raid,” any company would be well advised to take a close look at exactly how it is doing business in China. Interpretations and regulations 2013 was a light year for major legislative developments in the anti-corruption space. Several judicial interpretations and administrative regulations, however, are worth noting. Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law for Handling Criminal Bribery Cases (Interpretation) On 26 December 2012, the Supreme People’s Court and the Supreme People’s Procuratorate jointly promulgated this Interpretation, which became effective as of 1 January 2013. The Interpretation clarifies various provisions under the PRC Criminal Law, including defining a “significantly severe” bribery offense as one where bribes are paid to government officials in the areas of food safety, drugs, product safety, or environmental protection. Of greater note, the Interpretation also clarifies the conditions of leniency for a bribe offense under the Criminal Law, identifying a pre-prosecution confession that leads to the discovery of other crimes as an example of a basis for reducing or eliminating penalties altogether. This clarification should be of particular interest to our many clients who inquire about the obligation or benefit of self-reporting bribe offenses to the Chinese authorities. The Interpretation now makes clear that, in principle, there should be some degree of leniency awarded for self-reporting. Yet, in the absence of any publicly-reported cases of self-reporting, the degree of leniency the authorities may offer remains completely unclear. Provisions of the Supreme People’s Procuratorate on File Inquiry of Bribery Cases (Provisions) The Supreme People’s Procuratorate issued the Provisions on 6 February 2013, effective as of the same date. The Provisions are aimed at giving transparency to anti-bribery cases. Pursuant to the Provisions, the People’s Procuratorate is meant to build a “bribery case file bank” that will provide bribery case information to the public throughout the country. Each procuratorate office is meant to compile information regarding criminal bribery cases that have been confirmed by the courts in a judgment or ruling and add such information to the file bank. Note, however, that civil/administrative commercial bribery cases likely do not come within the scope of the Provisions, as they are typically not administered by the People’s Procuratorate. Opinion of the General Office of the State Counsel on Consolidating National Essential Drug System and Basic Healthcare Services (Opinion) This Opinion was promulgated on 10 February 2013, effective as of the same date. While the Opinion’s focus is not anti-bribery, it does specify that a company found to have offered bribes to any procurement organizations, healthcare institutions, or individuals shall be named on a record, with such records being made public on a regular basis. Furthermore, if a pharmaceutical company is criminally convicted or punished under administrative regulations for 30 Hogan Lovellscommercial bribery conduct, the company will be barred from participating in any bidding process for drug products within two years. The Opinion is weak on details, failing to specify any implementing agency or standards for its provisions, but the consequences could be significant, particularly to the life sciences industry, which is already facing unprecedented attack as described below. Major enforcement actions Public official bribery: Bo Xilai The year 2013 saw a number of major criminal investigations or prosecutions of government officials, including Jiang Jiemin, the head of the State-owned Assets Supervision and Administration Commission (SASAC), a body that oversees 117 state-owned companies, and Zhou Yongkang, former head of the Central Political and Legislative Committee of the Communist Party of China (CPC), who is widely regarded as one of the most powerful politicians in China. However, no case riveted the press, both domestic and international, as did the criminal prosecution of Bo Xilai. Bo himself is a “princeling,” the son of Bo Yibo, one of the founding elders of the CPC. Following in his father’s footsteps, Bo Xilai rose to prominence in the party and was widely seen as a candidate for the Politburo of the Central Committee of the CPC. In early 2012, Bo’s political career collapsed in the midst of a scandal that drew the world’s attention. Bo’s top lieutenant and police chief, Wang Lijun sought asylum in the U.S. Consulate in Chongqing. Thereafter, a flurry of news came out associating Bo and his now ex-wife Gu Kailai with the death of Neil Heywood, a British national. Each report was more sordid than the previous, with allegations of affairs, poisonings, cover-ups, and corruption. Bo was stripped of all of his offices and prosecuted before the Jinan Intermediate People’s Court for bribery, corruption, and abuse of power. In September 2013, Bo was sentenced to life imprisonment and forced to forfeit all personal property. Notably, Bo was offered an unprecedented public trial, with state central media coverage of full trial minutes. It has been widely commented that the entire trial was a carefully orchestrated campaign to discredit Bo politically and highlight the party’s campaign against corruption. Commercial bribery: GlaxoSmithKline In July 2013, the life sciences industry in China was shocked when Chinese police raided and arrested dozens of senior managers of GSK in three different cities across China. The GSK case was unprecedented for several reasons. Prior to the GSK case, almost all commercial bribery cases in China were brought as civil/administrative cases by the Administration for Industry and Commerce, rather than as criminal cases. Second, the GSK prosecution exposed a well-known but rarely discussed practice of using travel agencies and other third parties to create bribery slush funds. Third, as part of their investigation, the police detained not only the general manager of GSK’s China subsidiary but also the company’s in-house counsel. Moreover, the police also detained a British private investigator and his American partner who had worked on matters for pharmaceutical companies including GSK. The government’s case, largely tried in the media, alleges that GSK China used Chinese travel agencies to create slush funds in order to pay bribes to GSK customers and healthcare professionals and kickbacks to GSK’s China management team. The authorities have alleged a systemic and pervasive bribery program, and according to the official Xinhua news agency, GSK’s alleged bribery of doctors “was coordinated by the British company and was not the work of individual employees.” While the case is still pending, the press and commentators have speculated that GSK may ultimately receive criminal fines of up to RMB20 billion (approximately US$3.2 billion) and that senior officials of the company may receive personal criminal sentences. At the same time, many legal commentators have questioned whether the GSK case is the beginning of a sustained anti-corruption campaign or whether it is a single case meant to scare the industry into good behavior. Whether the government will pursue domestic enterprises and the healthcare professionals who received bribes as aggressively as it has pursued GSK remains to be seen in 2014. n Global Bribery and Corruption Review 2013 3132 Hogan Lovells 2013 developments from across the globe France Contributions by Thomas Rouhette and Christelle Coslin (in Hogan Lovells’ Paris office) In its 2012 annual report published in July 2013, the French anti-corruption agency, the Service Central de Prévention de la Corruption (Central Office for the Prevention of Corruption, or SCPC), issued several significant recommendations following a thorough analysis of the risks faced by French companies in relation to corruption issues. In particular, SCPC called for the enactment under French law of an obligation for companies to implement an anti-corruption program. SCPC is an interministerial agency that is part of the French government and formally attached to the French Ministry of Justice. Its main role is to collect and use, for prevention purposes, information regarding corruption-related offenses. SCPC has no investigation or enforcement power and cannot levy any sanction against any entity or individual. SCPC reports that, in 2012, 193 new corruption cases were investigated by French Public Prosecutors, just 29.5% of which led to a prosecution. However, no final sentences were issued with respect to the corruption of foreign officials. Indeed, on only one occasion has a corporation been held criminally liable for such an offense: In 2012, a major French group was sentenced to a fine of €500,000 for corruption of foreign officials. Even that decision, however, is the subject of an appeal. Hence, SCPC believes that the sanctions for corruption in France are not dissuasive enough and lack effectiveness in practice. Accordingly, SCPC recommends increasing the sanctions incurred for corruption-related offenses. In addition, SCPC has studied the anti-corruption systems put in place by the 40 most important companies listed on the Paris Stock Exchange. Although some companies have already implemented such a program, which is encouraging, many smaller companies have not yet done so. Furthermore, SCPC acknowledges that, for French businesses, complying with the various international and national anticorruption laws and guidelines that may apply to or affect them could still be a challenge. In this respect, SCPC dedicates an entire section in its 2012 report to the requirements of the U.S. FCPA and the UK Bribery Act. SCPC underlines the extraterritorial dimension of both acts and the significance of the potential penalties. SCPC also highlights that, under the Bribery Act, a corporation’s criminal liability is in practice likely to turn on whether it has implemented an adequate anti-corruption compliance program, something that also will be relevant to sentencing under the FCPA. SCPC therefore urges French businesses to implement anti-corruption compliance programs in order to limit their exposure to corruption risks. Moreover, SCPC recommends that compliance procedures should be based on the requirements of the strictest anti-corruption laws, i.e. the FCPA and Bribery Act, as well as applicable French law. SCPC also has recommended amending the French Blocking Statute, 29 which is rarely invoked by French companies even though this legislation criminalizes the communication of information or documents for the purposes of foreign proceedings where this is done outside the scope of the Hague Evidence Convention. 30 SCPC believes that French companies fear being subject to sanctions from foreign authorities if they do not disclose the requested information and that they worry that non-cooperation with these authorities might damage their business reputations. SCPC notes that, in 2011, an innovative procedure was put in place between the French and U.S. authorities whereby SCPC acted as an intermediary to ensure that documents being requested by the U.S. authorities were genuinely relevant for the purposes of the U.S. proceedings and did not adversely affect the interests protected by the French Blocking Statute. Citing that precedent, SCPC suggests that the French Blocking Statute should be amended in order for it to routinely act as an intermediary between U.S. authorities (such as the DOJ and the SEC) and the French companies in all corruption cases. Finally, SCPC’s 2012 report echoes some of the recommendations and criticisms put forward by the Organization for Economic Cooperation and Development (OECD) during its recent review of the situation of corruption in France at the end of 2012. Its recommendations, or at least some of them, could be perceived by French legislators as possible worthwhile solutions. 29 Resulting from French Law no. 68-678 of 26 July 1968, relating to the Communication of Economic, Commercial, Industrial, Financial or Technical Documents and Information to Foreign Individuals or Legal Entities, as modified by French Law no. 80-538 dated 16 July 1980. 30 The Hague Evidence Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters.Global Bribery and Corruption Review 2013 33 2013 developments from across the globe Germany Contributions by Dr. Juergen Johannes Witte and Julia Beckehoff (in Hogan Lovells’ Dusseldorf office) According to Transparency International’s annual Corruption Perceptions Index, Germany moved up one place in 2013 from 13th to 12th out of 177 countries. Despite this respectable position, there are still inadequacies in Germany’s legal framework and enforcement system. Germany is one of the few parties to the OECD Anti-Bribery Convention that has not ratified the United Nations Convention against Corruption (UNCAC). It also has failed to ratify the two Council of Europe conventions on corruption. In addition, a register of companies that have been engaged in corrupt practices does not exist in Germany, despite a number of draft bills proposing the establishment of such a register. There have recently been calls by legislators for the introduction of stricter domestic anti-corruption legislation. In a move commended by Transparency International, the Minister of Justice of North RhineWestphalia (NRW), Thomas Kutchaty, has proposed that an Act of Corporate Criminal Liability” 31 be introduced in Parliament. Under current German criminal law, only individuals can be prosecuted. Most provisions relating to corruption offenses and their relevant penalties are laid out in the German Criminal Code (Strafgesetzbuch). By contrast, companies may only be punished with administrative fines under the German Act of Regulatory Offenses (Ordnungswidrigkeitengesetz) for a corrupt act committed by their representatives or employees. Following an amendment to the law in 2013, the maximum corporate fine has been increased from €1 million to €10 million. In addition, such acts can lead to 31 Gesetz zur Einführung der strafrechtlichen Verantwortlichkeit von Unternehmen und sonstigen Verbänden.confiscation or disgorgement of the economic advantage to the company gained through bribery. The draft bill from NRW now suggests that companies and other legal entities should be found criminally liable for misconduct of persons with managerial responsibility, and also if the corporation’s management fails to fulfill its monitoring obligations. It remains to be seen whether this proposal will become binding law in the near future. In the meantime, and despite limitations of the criminal law, Germany’s strong track record of prosecuting foreign bribery has continued. In its April 2013 report, the OECD lauded Germany for its cooperation with other countries and the steady increase in Germany’s enforcement of laws against foreign bribery, which has resulted in a significant number of prosecutions of individuals and the imposition of administrative fines on corporations. There is a general trend among German companies to place greater value on the implementation of effective compliance mechanisms. This has been prompted by the self-reporting of corruption offenses in recent years by a number of leading German companies including Siemens, Daimler, and Thyssen-Krupp, as well as by credit institutions and banks. One example is the zero-tolerance program of Daimler, which has established a strict code of conduct comprising more than 1,400 rules to be followed by all Daimler employees and managers. Hungary Contributions by Dr. László Partos (in Hogan Lovells’ associated Budapest office) In October 2013, the Hungarian Parliament adopted a new whistleblower act 32 to promote whistleblowing and protect whistleblowers. It entered into force on 1 January 2014 and repealed the previous whistleblower law that had been in force since 2010. Despite the apparent legislative intent of increasing trust in public and private companies, the new whistleblower act has been widely criticized by professionals and bodies such as Transparency International for failing to offer adequate protection for whistleblowers from dismissal, harassment, or 32 Act CLXV of 2013 on Complaints and Public Service Announcements. other types of retaliation. While the act aims to encourage companies to implement compliance programs and mechanisms through which to handle whistleblower disclosures, it simultaneously obliges compliance officers to inform the targets of such disclosures, which is likely to hinder any related investigation and also may compromise the individual whistleblower. India Contributions by Manjula Chawla and Abhishek Bhalla (of Phoenix Legal in Delhi) Ranked 94th out of 177 countries in Transparency International’s annual Corruption Perceptions Index 2013, India has had to grapple with corruption for a long time. According to a World Bank estimate, 0.5% of India’s gross domestic product is lost due to corruption every year. The issue has picked up steam in the last two years with a number of high-profile cases of corruption, including the 2G scam (involving the undercharging of mobile telecommunications companies for frequency allocation licenses) that led to the arrest of the former telecoms minister and significant embarrassment for the government. This forced the government to introduce several legislative reforms to tackle corruption. India ratified the UNCAC in May 2011. To meet its obligations under the convention, the government introduced the Prevention of Corruption (Amendment) Bill, 2013 (the 2013 Bill) in parliament. The bill seeks to amend the Prevention of Corruption Act, 1988, India’s principal anti-corruption law, to bring it in line with current international practices. Key features of the 2013 Bill include: a more comprehensive definition of bribery covering, for example, passive bribery and bribes through intermediaries; punishment for bribery committed 34 Hogan Lovellsby commercial organizations; and the confiscation of the proceeds of bribery by attachment and forfeiture of property. In addition, the Companies Act 2013, passed by India’s parliament this year, provides, inter alia, for the establishment of a “vigil mechanism” by listed companies to enable directors and employees to report wrongdoings and for the protection of whistleblowers. These provisions of the Companies Act, 2013 are yet to come in force. Another key anti-corruption bill pending in parliament is the Lokpal and Lokayuktas Bill 2011 for setting up the institution of an ombudsman (called a lokpal for the central government and a lokayukta for the regional states) as a constitutional body for dealing with complaints on corruption against public functionaries. This bill has been the subject of heated debate for the last two years after prominent anti-corruption activist Anna Hazare took up the cause. Other pending anti-corruption legislation includes: ● the Whistleblowers Protection Bill 2011, which seeks to establish a mechanism to receive complaints relating to acts of corruption, cause an inquiry into such disclosures, and provide adequate safeguards against victimization of whistleblowers; ● the Prevention of Bribery of Foreign Public Officials and Officials of Public International Organisations Bill 2011, which seeks to criminalize acts of foreign bribery involving foreign public officials; and ● the Public Procurement Bill 2012, which seeks to regulate procurement by government and public sector enterprises to ensure transparency and accountability. Indonesia Contributions by Cornel B. Juniarto (of Hermawan Juniarto in Jakarta, in association with Hogan Lovells) Corruption has been a major issue for Indonesia’s economy for decades, with the lack of accountability, transparency, democratic institutions, and a free press during the Suharto era all being contributing factors. After the fall of Suharto in 1998, the need to combat corruption has been increasingly recognized, especially with the establishment of the Corruption Eradication Commission (KPK) in 2003. The KPK is an independent state body that discharges its duties and responsibilities free from interference by any other powers 33 and has the mandate to conduct eradication of corruption in a professional, intensive, and sustained manner. According to statistics published by the KPK, 342 cases have been investigated since 2004. 2013 saw an increase in the number of corruption cases handled, with 59 cases investigated by October 2013, compared to 48 in the previous year. 34 There was also an increase in the number of cases categorized as grand corruption. One major case related to the development of a sport facility in Hambalang and involved former members of Parliament, and another involved a police general. Finally, in October 2013, the KPK arrested the chief justice of Indonesia’s Constitutional Court, who was accused of taking a bribe to issue a favorable verdict in an election dispute. These cases are a clear sign of the KPK‘s seriousness in handling cases in an uncompromising fashion. Nevertheless, Indonesia still has a long way to go in eradicating corruption, and it will take greater coordination among law enforcement agencies to achieve that goal. Italy Contributions by Francesca Rolla (in Hogan Lovells’ Milan office) After a lengthy approval process, the Italian Chamber of Deputies passed a long-awaited anti-corruption law on 31 October 2012, the Anti-Corruption Act (no. 190/2012), which subsequently came into force on 28 33 See Article 3 of Law No. 30 of 2002. 34 For further information, acch.kpk.go.id/statistik. Accessed on 22 November 2013. Global Bribery and Corruption Review 2013 3536 Hogan Lovells November 2012. The Anti-Corruption Act introduces three new corruption-related offenses that are relevant for the private sector. First, induced bribery 35 concerns an offense by a public official (or other person charged with a public service) who induces a private party to give or promise money or any other advantage by abusing his or her powers or office. The private party who is unlawfully induced to give or promise that money or other advantage also commits an offense. Second, private bribery 36 has been extended to cover additional individuals. Previously, Article 2635 of the Civil Code was limited to offenses committed by managers, directors, and other executives responsible for the preparation of the company’s accounts, as well as statutory auditors and liquidators, who, “following the giving or promise of a benefit, act, or omit to act, in breach of the duties relating to their office” and thereby cause damage to the company. This was punishable with imprisonment of up to three years (doubled in the event of listed companies). The same penalty applied to the individual(s) giving or promising the benefit, but Article 2635 did not apply to cases involving more junior employees including, for example, purchase managers (notwithstanding their involvement in higher risk activities such as the selection of suppliers). Article 2635 now has been extended to cover individuals who do not have managerial functions. It has been suggested by some commentators that the extended article may now be sufficiently broad to catch third parties who are not employees of the company but who nevertheless work under the direction or supervision of the company. Among other changes, the offense can now be prosecuted even if the victim does not request prosecution. Third, illicit trafficking of influence 37 has been established as a new offense. It involves taking advantage of a relationship with a public official (or a person entrusted with a public service) in order to “mediate” the official acting improperly in relation to his office and thereby secure compensation (either in 35 Induzione indebita a dare o promettere utilità, Article 319-quater, Criminal Code. 36 Corruzione tra privati, Article 2635, Civil Code. 37 Article 346-bis, Criminal Code. the form of money or another economic advantage). It is also an offense for a person to give or promise money or other advantage in exchange for such “mediation.” The crime is punished with one to three years of imprisonment. The first two crimes are also relevant for the purposes of Legislative Decree 231 of 8 June 2001, which provides that companies operating in Italy may be held liable, fined, and subject to restraining or confiscation orders if certain offenses (including corruption, bribery, fraud, and money laundering) are committed or attempted, in the interests of the company, and no adequate measures had been adopted by the company to prevent such crimes from being committed. The company’s liability is in addition to the criminal liability of the individuals who committed the offense. The Anti-Corruption Act has also established a National Anti-Corruption Authority 38 tasked with approving the National Anti-Corruption Plan, which it did on 23 September 2013. 39 Each public administration must now approve its own anti-corruption plan, based on the National Anti-Corruption Plan, and appoint a compliance officer responsible for corruption prevention. These legislative reforms will not transform the Italian anti-corruption landscape on their own. As the Group of States against Corruption within the Council of Europe said in the 2013 addendum to its compliance report on Italy, it is now important that the Italian authorities “keep up the momentum of the reform, to ensure that integrity and anti-corruption plans are designed and implemented both at central and local level, and look ahead at risky and emerging areas in order to ensure the effectiveness of the anti-corruption fight at all times.” Japan Contributions by Patric McGonigal and Rosemary Villar (in Hogan Lovells’ Tokyo office) Following the publication in February 2012 of the OECD’s damning report on Japan’s enforcement 38 Commissione Nazionale per la Valutazione, la Trasparenza e l’Integrità delle Amministrazioni Pubbliche. 39 www.civit.it/?p=9760Global Bribery and Corruption Review 2013 37 record for bribery offenses, the latter part of 2013 saw indications that Japanese authorities are stepping up their efforts to enforce anti-bribery and corruption regulations. On the domestic front, a Deutsche Securities employee was arrested in December 2013 for suspected bribery of a former employee at Mitsui & Co’s pension fund, on whom thousands of dollars had been spent for entertainment. Under Japanese law, pension fund executives are considered public officers. The arrest is part of a broader effort by Japanese authorities to combat bribery and corruption in Japan’s public-private pension sector. By way of further example, in October 2013, a former pensions investment manager was convicted of accepting bribes from the hedge fund KTOs Capital Partners. Japan’s Financial Services Authority (FSA) also has issued a business improvement order to Deutsche Securities in connection with the provision of entertainment and gifts to pension fund officials. The FSA has asked Deutsche Securities, which is the first brokerage to be reprimanded in Japan for client entertainment offenses, to implement preventative measures and to provide reports as to the effectiveness of these measures. In October 2013, the FSA previously announced an investigation into the country’s three largest banks (Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group Inc.) over possible connections to yakuza organized crime networks following the recent acknowledgment by Mizuho that it had provided loans to parties linked to the yakuza. These developments indicate a growing focus by Japan’s authorities on combatting bribery and corruption. Nonetheless, despite the signs of increased activity against domestic infringements of anti-bribery and corruption laws, it appears that enforcement of Japan’s foreign bribery laws remains infrequent. Although a former senior executive of Futaba Industrial Co. was arrested in September 2013 on suspicion of contravening the Unfair Corruption Prevention Act by paying bribes to local government officials in China, it was just the fourth time that charges have been brought under Japan’s foreign bribery laws, which came into force in 1999. Middle East Contributions by Richard Kiddell (in Hogan Lovells’ Dubai office) The continued drive for political transparency in the Gulf Cooperation Council States (GCC) and the Middle East in general as a result of the Arab Spring has seen anti-bribery and anti-corruption legislation fast-tracked in 2013. In the United Arab Emirates, the State Audit Institution, the federal anti-corruption watchdog, announced in January 2013 that it was aiming to publish a federal anti-corruption law in the UAE, although it had not yet done so at the time of publication of this review. The new law is intended to meet the UAE’s promise to implement the UNCAC, which it ratified in 2006, and is particularly aimed at curbing cases of misconduct involving public funds. 38 Hogan Lovells Notwithstanding the recent and continuing political crisis in Bahrain, the Bahraini government continues to pursue its aim to further enhance Bahrain’s position as a business and financial hub in the Middle East by 2030. Bahrain recently introduced law no. 01/2013 (Law 1/2013) that expands the penal code issued by law no. 15/1976 (the Bahraini Penal Code) to address anti-corruption and bribery in the private sector. Prior to the introduction of Law 1/2013, the Bahraini Penal Code addressed bribery and corruption only in the context of government activity (as is commonly the position throughout the GCC). While the provisions of Law 1/2013 appear to be stricter than the corresponding provisions of the Bahraini Penal Code, precedents have not yet been set as to enforcement. It is worth noting, however, that Bahrain has, both before and after the political crisis, held many government officials accused of corrupt acts to a high level of scrutiny. With regard to Saudi Arabia, the National AntiCorruption Commission (NACC) continues to bolster its presence in the kingdom. The NACC has specific investigative powers in connection with any public works or public contracts. The NACC has been actively involved in arranging seminars across various industries to educate parties in relation to anti-corruption and bribery matters in the kingdom. In October 2013, the NACC also urged the Ministries of Education and Higher Education to introduce anti-corruption as a subject in school and university curricula. In Kuwait, the Kuwaiti Government Performance Follow-Up Apparatus (GPFA) has recently expressed its keenness on implementing and observing the UNCAC. This statement came during the GPFA’s meeting with the Kuwaiti Anti-Corruption Authority. The meeting is considered a sign of the proactive Kuwaiti approach and the first step toward the preparation of relevant draft legislation. Russia Contributions by Alexei Dudko and Anton Smirnov (in Hogan Lovells’ Moscow office) There were two important developments in Russian anti-corruption regulation in 2013.Global Bribery and Corruption Review 2013 39 First, effective 1 January 2013, the Federal Law dated 25.12.2008 No. 273-FZ “On Countering Corruption” was amended by the introduction of Article 13.3, which establishes an obligation for companies to develop and apply measures to prevent corruption. Under the amendment, such measures include: ● the designation of departments and officials responsible for implementation of preventive measures for corruption and other offenses; ● the company’s cooperation with law enforcement bodies; ● the development and introduction into practice of standards and procedures aimed to ensure the company conducts its affairs in good faith; ● the adoption of a code of ethics and work conduct for the company’s employees; ● the prevention and settlement of conflicts of interest; and ● the prevention of unofficial accounting and usage of forged documents. Currently, there is no official guidance as to what shall be considered due compliance with these measures. Furthermore, the current regulation does not directly provide for leniency or release from liability on the basis of compliance with the prescribed measures. At the same time, in the absence of a bribe, there is no liability for a company simply for not taking the relevant measures (e.g. not having the required policies in place). Some measures from the above list are already in practice in many foreign and some major Russian companies. So, for example, the creation of a compliance department or appointment of a compliance officer corresponds to the requirement of designating “departments and officials responsible for the implementation of preventive measures for corruption and other offenses.” The requirement that is most difficult to interpret is a “company’s cooperation with law enforcement bodies.” Russian legislation already requires companies to cooperate with law enforcement bodies in inspections, investigations, and the like. However, it is unclear how a company ought to cooperate with law enforcement bodies in the absence of such circumstances. It would seem reasonable to interpret this requirement as meaning that companies should draw up internal policies governing cooperation in specified situations and appointing the persons who will be responsible. The second important development came on 9 July 2013, when the Russian Supreme Court issued the practice guiding Resolution No. 24 “On Court Practice on Cases of Bribery and Other Corruption Offenses” (Resolution), which replaced the resolution adopted in 2000. In amending and clarifying many legal aspects, the Resolution demonstrates a tighter approach of the Russian superior court in relation to both public and private bribery. Notable clarifications include: ● confirmation that there is liability for bribery for general patronage or connivance, i.e. bribes not paid in exchange for specific actions/inaction, but rather “just in case” (Resolution para. 5); ● recognition that the official’s actions (omissions) in favor of the bribe-payer do not need to be conditional upon the bribe — all that matters is the connection between the actions and the bribe, such that a “thank you” bribe not promised in advance is still criminally punishable (Resolution para. 9); and ● clarification that, if assets or services are provided not to the official or his relatives, but knowingly to other entities, and the official or his relatives do not derive proprietary benefits from the bribes, this may not be considered a bribe. So, for example, it is not bribery if a state institution is sponsored in exchange for the head of that institution taking action in favor of the sponsors, provided that he and his relatives are not personally enriched. Singapore Contributions by Jonathan Leach and Edward Foyle (in Hogan Lovells’ Singapore office) In June 2013, it was reported that an assistant director of Singapore’s Corrupt Practices Investigation Bureau (CPIB) 4 0 had been charged under Singapore’s anticorruption laws with misappropriating US$1.34 million of government funds and with forgery. This was a headline case in a country that prides itself on being 40 The CPIB derives its power from the Singapore Prevention of Corruption Act (the Act), the principal anti-corruption legislation in Singapore. The Act was enacted in 1960. The CPIB has wide powers of investigation and arrest. The CPIB and the Act are still widely regarded as being effective at deterring corruption in Singapore.widely perceived as one of the least corrupt in the world, and it has prompted a review of the supervisory procedures in place for all government agencies. Two other high-profile public sector cases have concerned sex for favors. On 31 May 2013, the former head of the Singapore Civil Defence Force (SCDF) was convicted of corruptly obtaining sexual gratification from a female employee of a vendor seeking to do business with the SCDF and was sentenced to six months imprisonment. In a separate case, a law professor at the state-funded National University of Singapore was charged with six counts of corruption, including obtaining sexual favors and accepting monetary gifts from one of his law students. On 28 May 2013, he was convicted and sentenced to five months imprisonment. There also have been decisive steps taken by the Singapore authorities to combat international matchfixing, including the widely publicized arrests in September 2013 of Dan Tan Seet Eng and 13 of his associates, all Singaporean nationals. Tan is alleged to head the world’s largest soccer match-fixing syndicate, purportedly responsible for rigging 680 local, league, and international matches, including two World Cup qualifiers. The CPIB and Singapore police are reported to be working closely with Interpol in their continuing investigations. Spain Contributions by Jose Luis Huerta and Ignacio Sánchez (in Hogan Lovells’ Madrid office) 2013 has been an important year for anti-corruption developments in Spain. Not only did the level of enforcement activity increase by comparison to previous years but the Council of Ministers approved a long-awaited bill to reform the Criminal Code. The bill, currently in draft form, likely will come into force in mid-2014. Among other things, the draft bill aims to clear up uncertainty regarding both the need for, and the content of anti-bribery compliance programs. Under the current law, compliance programs are not mandatory and there is no official guidance on the form they should take or the benefit there may be for companies that implement them. The draft bill establishes a positive duty on companies to design and implement “organization and management models” and to roll out appropriate “surveillance and monitoring measures.” The former makes it mandatory to appoint a compliance officer or to establish a compliance committee (although in smaller companies, entitled to file abbreviated accounts, this function can be performed by the management body). As regards the preventative measures that are required, the draft bill envisages, among other things, a risk assessment exercise, the establishment of a code of ethics or corporate conduct, appropriate financial controls, internal reporting, and appropriate disciplinary action in relation to any breach of these measures. In addition, the compliance program must be reviewed periodically and, if appropriate, updated as necessary. The most significant amendment to the Criminal Code is the introduction of a controversial new offense. The draft bill makes it an offense, punishable by imprisonment, for any legal representative, de facto or de jure director of a legal person or company, organization, or other entity if: (i) there is unlawful conduct, (ii) such conduct would have been avoided or, at least, severely restricted if proper diligence had been exercised, and (iii) the individual failed to adopt the required measures of surveillance or monitoring to prevent the unlawful conduct. As a result, directors and other representatives of a company are potentially exposed to personal criminal liability not only if they 40 Hogan LovellsGlobal Bribery and Corruption Review 2013 41 are personally involved in bribery but also if they fail to prevent others within the organization from paying bribes (provided that such offenses would have been prevented if the company had implemented a proper compliance program). Vietnam Contributions by Christian Schaefer (in Hogan Lovells’ Ho Chi Minh City office) Vietnam’s economy has grown at an average rate of 7 to 8% per year over the last decade, making it one of the fastest growing emerging countries in Southeast Asia. That growth has, however, been accompanied by corruption, which remains an endemic problem that is present in every sector of the economy and continues to inhibit sustained economic growth. Law No.55/2005/QH11 on anti-corruption (2005 Law) which has been amended twice since its adoption, 41 is the main legal instrument regulating the prevention, detection, and treatment of corruption cases. The 2005 Law also designates the state agencies, organizations, units, and individuals who have responsibility for preventing and fighting against corruption. There are 41 Law on Anti-Corruption 2005 was amended by Law No. 01/2007/QH12 and Law No. 27/2012/QH13. A consolidated version of these laws named Consolidated Laws on Anti-corruption No.10/VBHN-VPQH was adopted by the Office of the National Assembly on 12 December 2012. http://congbao.chinhphu.vn/noi-dung-van-ban-so-10_VBHNVPQH-(9875) several enforcement decrees and other guidelines to the 2005 Law that have strengthened the legal mechanisms available on this subject. On 6 November 2013, the Council of Judges of the People’s Supreme Court adopted Resolution No. 01/2013/NQ-HĐTP on the availability of probation pursuant to Article 60 of the Vietnam Criminal Code. 42 According to this resolution, from 25 December 2013, criminals who face more severe punishments, including those who have committed crimes involving abuse of their position, are not entitled to probation. This provision is expected to serve as an additional deterrent and reflects a stricter approach to corruption in Vietnam. One noteworthy high-profile case that came to trial at the end of 2013 involves Duong Chi Dung, the former chairman of Vietnam National Shipping Lines, a state economic giant that is facing bankruptcy. It is alleged that Dung is responsible for losses of almost VND367 billion (approximately US$17 million) of state assets. In another case heard in 2013, Huynh Thi Huyen Nhu, head of the Dien Bien Phu Transaction Office of the Ho Chi Minh branch of the Vietnam Joint Stock Commercial Bank for Industry and Trade, together with a number of accomplices, stood trial for using their position and authority to illegally misappropriate about VND4 trillion (approximately US$188 million) from nine enterprises, four banks, and three individuals. Overall, the perception is that the enforcement of anti-corruption measures in Vietnam is improving thanks to the increasing involvement of public media and civil society. Nevertheless, prosecutions are still only scratching the surface of the problem. Of 43 corruption cases involving 128 defendants whose files were handled in 2013, the provincial people’s courts heard 27 cases involving 66 defendants, sent back 11 cases (involving 46 defendants) to the People’s Procuracy for additional investigation, and postponed five cases (involving 16 defendants) for later hearings. 4 3 n 42 http://www.chinhphu.vn/portal/page/portal/chinhphu/hethongvanban?class_id=2&_ page=1&mode=detail&document_id=170765 43 http://noichinh.vn/cong-tac-phong-chong-tham-nhung/201312/ha-noi-ket-qua-congtac-phong-chong-tham-nhung-nam-2013-293220/42 Hogan LovellsDoing business in Latin America: using contract terms to protect your company Misconduct alleged to have occurred in Latin America has been the focus of a growing number of corporate FCPA investigations and dispositions. Many of these cases have involved actions by related third parties, such as agents, local sales representatives, resellers, and distributors. Under the FCPA and many local laws in Latin America, companies can be held liable for the illicit acts of their third-party agents where those acts are committed in the company’s interest or for its benefit. To minimize FCPA risk while operating in Latin America, it is important to exercise due diligence in selecting any third party. It also is important to include meaningful compliance clauses in agreements to control the relationship or provide an exit strategy if the third party creates too much risk or, worse, violates the FCPA and/or other laws. Contribution provided by Oliver J. Armas and Luis Enrique Graham44 Hogan Lovells Many companies simply take their standard third-party contracts and use them as is in their Latin American transactions. But even contracts that are deemed to be state of the art and adopt generally recognized best practices may not work throughout the various jurisdictions in Latin America. The legal regimes of each country are unique, and certain contract provisions may be easily enforceable in one country in Latin America but not in others. In addition, many countries in Latin America have laws that protect local third parties and thus make it difficult to obtain information from them or terminate contracts. We present five compliance-related contract clauses that companies operating in Latin America should seriously consider inserting into their contracts with third parties. The provisions below should be generally enforceable throughout Latin America. But it is still important to have local counsel review the overall enforceability of these proposed clauses and thirdparty contracts, generally. Compliance with local anti-corruption laws If a company needs to enforce its contract with a local agent, it may need to bring an action before a local court (or before an arbitral tribunal with non-U.S. arbitrators). These local tribunals probably will only be familiar with local anti-corruption laws. Therefore, in order to make enforceability easier, in addition to the standard representations and warranties that the third party has not violated and will comply with the FCPA, it is important to obtain such representations and commitments with respect to local anti-corruption laws and regulations, including any laws implementing or in furtherance of the: ● OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions; ● Organization of American States Inter-American Convention Against Corruption; and ● UNCAC. Obligation to maintain accurate records and affirmatively report certain information Local agents/third parties in Latin America often keep little documentation about the activities they carry out for companies. This makes it challenging for a foreign company that has to conduct an investigation into the third party’s actions. It is thus advisable to require local agents to accurately document in their books and records all transactions and information related directly or indirectly to their engagement and to keep such documentation for at least five years.Global Bribery and Corruption Review 2013 45 In addition, because it is often difficult to get reliable information from public files in Latin America (including from courts), third parties should be obligated to promptly report any court or administrative actions that contain allegations of fraud or corruption and related matters (including actions related to the third party’s shareholders, directors, officers, and employees). For example, in Latin America, it is common for competitors to file challenges to the winners of public bids. Many of these challenges raise questions about the procurement process that often contain explicit or implicit references to corruption or bid rigging by the local agent. Audit rights clauses When an audit rights clause is not properly drafted, disputes can arise relating to the scope of the audit and the selection of auditors (among other disputes). Without a detailed clause, a company might end up having access to only tax or accounting books, which can be of limited value. A properly drafted audits rights clause should include language that grants access to: ● emails related to the subject of the contract; ● employee expense reports; ● the third party’s employees so they can be interviewed, if necessary; and ● subpoenas or requests for information that the third party may receive from enforcement or related agencies. In addition, companies should expressly state in their contract that they have the right, based on their own criteria, to select the entity that will conduct the audit. Use of subcontractors FCPA risks can be heightened if a local third party engages subcontractors to carry out its activities unbeknownst to the company. This is fairly common, for example, when a distributor is granted a large territory to cover under the contract. It is often easier for that distributor to subcontract than to invest in expanding its overhead to properly cover the extra territory. To adequately protect themselves, companies doing business in Latin America should include contract provisions that prohibit third parties from engaging or using subcontractors for activities described in the contract without prior and express written authorization by the company. Contract termination Companies often include provisions that allow them to terminate the contract if the third party violates the FCPA or other anti-corruption laws. But if the clause is not properly drafted, it could lead to years (sometimes more than a decade) of local litigation. For example, in certain countries in Latin America, a court might require a final adjudicated decision on whether an actual violation has occurred. Under many circumstances, that may be impossible to obtain. It is thus advisable for companies to include contract clauses that allow them to terminate the agreement immediately, at their sole discretion: ● if they have reason to believe that the third party has violated the FCPA or other anti-corruption laws (or other compliance provisions of the contract); or ● if the company finds out that the related representations and warranties are inaccurate or incomplete AND that any licenses or registrations obtained on behalf of the company be immediately transferred to the company (or, if preferable, cancelled or voided altogether). A word of caution, however: Even if a company includes language that gives it discretion to terminate the contract, a third party may still commence local litigation claiming wrongful termination. And in some countries in Latin America, if the third party is deemed to be a “commercial agent” (as that term is defined in local legislation), it may be granted extra protection that may make it nearly impossible to quickly terminate a contractual relationship and/or transfer rights back to the company. Therefore, it is particularly important to have local counsel review the enforceability and practical impact of any contract termination clause with a third party. While there is no way to guarantee a risk-free transaction in Latin America (or elsewhere), use of these five provisions in your contracts should help to reduce the risk of finding yourself in an untenable commercial relationship with a potential bad actor. n