US, UK and Brazilian Anticorruption Laws …/media/files/insights/...39 Offices in 19 Countries FOREIGN CORRUPT PRACTICES ACT (FCPA) Brazil – May, 2013 Rebekah J. Poston Partner

39 Offices in 19 Countries

FOREIGN CORRUPT PRACTICES ACT

(FCPA)

Brazil – May, 2013

Rebekah J. PostonPartner+1 [email protected]

AN OVERVIEW

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UNDERSTANDING THE FCPA

• The FCPA has two components that address international corruption and bribery, they are the:

Anti-bribery provisionsAccounting provisions which address record keeping and internal controls

• The DOJ and SEC enforce the FCPA and broadly construe many of its terms

• Anti-Bribery ProvisionsThe FCPA’s anti-bribery provisions prohibit:

Paying or offering to pay “anything of value”Directly or indirectlyTo a “foreign official,” or to any other person while knowing that all or part of the thing of value will be paid or offered to a foreign officialCorruptlyFor the purpose of influencing the official in some official act or to secure any improper advantageIn order to “obtain or retain business”

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• “Anything of Value”Gifts, meals, entertainment expenditures, travel expensesCommissions, honorariumsReferrals, use of medical equipment or facilitiesLoans, servicesCharitable donationsJobs to Foreign Officials’ childrenRebates and discounts

• “Foreign Official”“[A]ny officer or employee of a foreign government or any department agency or instrumentality thereof ... or any person acting in an official capacity for or on behalf of any such government, department, agency, or instrumentality...”Employees of SOE (all SOE employees are Foreign Officials, regardless of rank or title)One-half (1/2) of corporate FCPA enforcement actions in 2012 involved foreign healthcare providers (doctors, nurses, mid-wives, laboratory personnel) as the Foreign OfficialsJudges, lawyersPolitical parties, candidatesOfficers and employees of a public international organization

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• “Obtain or Retain Business”Improper payment to Foreign Official does not need to lead to a government contractPromotional or other payments made to, or for the benefit of physicians to incentivize referrals, or use certain productsInfluencing a procurement processCircumventing import rulesAvoiding contract terminationPayments to obtain special tax treatmentPayments to obtain government licenses or permitsSecuring an improper advantage over competitorsSteering testing to certain laboratories

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Broad Applicability• The anti-bribery provisions apply to various types of companies

and individuals, including:Issuers (companies registered on national exchanges or that are required to file reports with the SEC)

Domestic Concerns− All U.S. companies and any company that has its principal place of

business in the U.S.− All U.S. nationals, citizens, or residents

Non-U.S. companies and individuals who cause an act in furtherance of a corrupt payment in the U.S. while within U.S. territory

Foreign companies whose ADRs (American Depository Receipts) are traded on a U.S. exchange

Officers, directors, employees, agents and shareholders acting on behalf of all of the above


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• The FCPA does not just prohibit direct transactions. It also prohibits corrupt payments through intermediaries

• It is unlawful to make a payment to a third party, while knowing that all or a portion of the payment will go directly or indirectly to a foreign official

• Third parties are one of the highest risk areas for FCPA violations


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Subsidiaries and Affiliates Consultants

Sales Representatives/

Distributers

Subcontractors Franchises Joint Venture Partners

Agents Lawyers Accountants

Who are the typical intermediaries?


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• FCPA Risks Posed by Partners, Agents, and other Third PartiesU.S. partner can be held liable for corrupt payments made by its other partner(s) on behalf of the JVThe majority of recent enforcement actions have involved improper payments through third partiesNo need for DOJ to prove third party acted on company’s direct orderNo need to prove company actually new the third party engaged in prohibited conductFailure to investigate suspicious circumstances or turning a blind eye can be sufficient to establish knowledge under the FCPA

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• Limited Exception for Certain Meals, Entertainment, and Other Business Courtesies

Payments made for expenses to benefit Foreign Officials directly related to the promotion or demonstration of the company’s products or services or to the negotiation, execution, or performance of a contract

– Travel and expenses relating to visiting a company facility, for training, or for meeting with a legitimate business purpose

– Expenses must be necessary and transparentCosts should be paid for directly to vendors and accurate records kept of all such payments

• Facilitation payments allowedSmall, one-time payment made to a low-level foreign official to expedite a process to which payor is lawfully entitledProhibited by UKBA; OECD Convention; most non-U.S. countries

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• FCPA – Anti-Bribery Provision Penalties:Companies:

– Criminal fines up to $2M per violation– Civil penalties up to $16K per violation– Other civil remedies generally available to SEC (injunctions, cease

and desist orders, accounting/disgorgement)Individuals:

– Criminal fines up to $250K per violation– Imprisonment for up to 5 years– Civil penalties up to $16K per violation – Other civil remedies generally available to SEC

Alternative Fines Act – Allows a criminal fine to be up to twice the gross gain or gross loss

associated with the conduct

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• Books and Records/Internal Controls Provisions Apply To:1. Issuers

2. An officer, director, or employee can also be charged with aiding and abetting or causing a company’s violation of the accounting provisions of the FCPA

3. Foreign subsidiaries, joint ventures or affiliates owned and controlled (more than 50%) by the issuer


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• FCPA – Books & Records Provisions:Record keeping violations normally involve (three) 3 types of offenses:

– Records that simply fail to record improper transactions, e.g., off-the-books transactions such as bribes and kickbacks

– Records that are falsified to disguise aspects of improper transactions– Records that correctly set forth the quantitative aspects of

transactions, but fail to record the qualitative aspects of the transactions that would have revealed their illegality or impropriety, such as the true purpose of particular payments to agents, distributors or customers

• “Good Faith” Defense:An issuer with 50% or less of the voting power of a foreign or domestic firm need only attempt in good faith to use its influence to cause the firm's compliance with the accounting provisions (books and records and internal controls) of the FCPA“Good faith” relevant factors include:

– Issuer’s degree of ownership & control– The laws and practices governing the business operations of the

country in which such firm is located – (See 15 U.S.C §§ 78m(2)-(6) & 78ff; Rules 13B2-1 & 13A-15)

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• FCPA – Books & Records Provisions Penalties:Companies:

– Criminal fine up to $25 million per violation– Civil fine up to $725,000 per violation– Other civil remedies generally available to SEC (injunctions, cease

and desist orders, accounting/disgorgement)Individuals:

– Criminal fine up to $5 million per violation– Up to 20 years imprisonment– Civil fines up to $150,000 per violation and remedies generally

available to SECAlternative Fines Act

– Allows a criminal fine to be up to twice the gross gain or gross loss associated with the conduct

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• Anticorruption is a growth sector of the legal services industry• A handful of companies each reported spending well beyond

$100 million in FCPA-related investigation costs alone pertaining to multinational probes:

Avon ($339.7m in “professional and related fees”; $92.4m FY2012)\Walmart ($157m in fees FY2012)News Corp. ($179m in fees; $191 in costs on related civil settlements) Weatherford ($125m FY 2012)

• Anticorruption is also a growth industry worldwideBrazil, China, France, Germany, India, Italy, Mexico, Russia, UK

– In 2012, all of the above nations either stepped up enforcement of existing anticorruption laws or expanded the scope of their anticorruption laws

– In short, foreign regulators have taken note of the FCPA’s success in deterring criminal conduct and in generating government revenue and are getting in on the act

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THE FCPA’s EXTRATERRITORIAL REACH

• SEC v. Straub (S.D.N.Y. Feb. 8, 2013)Several executives of the Hungarian telecommunications company, Magyar Telekom, are alleged to have actively participated in a scheme to bribe officials of the Macedonian governmentThe purpose was to prevent regulatory changes that would have opened the Macedonian telecom market to Magyar’s competitorsThe executives allegedly directed company officials to disguise the bribes as sham consulting and marketing agreementsThey allegedly made false certifications to the company’s auditors to further conceal the bribesThe federal court found jurisdiction under the FCPA even though none of these executives ever stepped foot in the U.S.Jurisdiction was based on the fact that they “allegedly engaged in conduct that was designed to violate U.S. securities regulations and was thus necessarily directed toward the United States, even if not principally directed there”

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• SEC v. Sharef (S.D.N.Y. Feb. 19, 2013)Case came out two weeks after the Straub caseThe SEC charged a former executive of the German electronics conglomerate, Siemens, with facilitating bribes to the Argentine government to secure business contractsThe executive supposedly encouraged others to make bribes that were ultimately authorized by more senior executives of the companyThere were no allegations that the executive had any involvement in or even knowledge of the company’s alleged falsification of the company’s U.S. securities filingsThe judge found the defendant’s role in the scheme “tangential at best”In distinguishing the Straub case, the judge in Sharef said she found it necessary, as a result of the Straub case, to assert the “need of a limiting principle” on the boundaries of U.S. jurisdiction. Otherwise, she cautioned, the FCPA could reach “every participant in illegal action taken by a foreign company subject to U.S. securities law ... no matter how attenuated their connection with the falsified financial statements”

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• Similarities Between the Two Cases:With Straub, the defendants went too far with their alleged bribery activity and its direct connection to the U.S.With Sharef, it was the government that went too far in trying to police conduct that lacked a direct connection to the U.S.

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FCPA PROSECUTIONS INVOLVING BRAZIL

Biomet, Inc. (2012)Indiana-based global medical device company

• ConductBiomet and four subsidiaries allegedly paid bribes from 2000 to 2008 to doctors employed by public hospitals in Argentina, Brazil, and China in exchange for sales of Biomet’s productsBrazilian doctors were paid 10-20 percent of the value of the medical devices purchased. As early as 2001, Biomet employees were aware of that Biomet’s Brazilian distributor was paying doctors in exchange for purchasing Biomet products

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• Penalties (DOJ)Deferred prosecution agreement$17.8 million criminal penaltyMust implement rigorous internal controls, cooperate with DOJ, and retain compliance monitor for 18 monthsReceived reduction in penalty as a result of cooperation in ongoing investigation of other companies and individuals

• Penalties (SEC)$5.4 million in disgorgement of profits and prejudgment interest

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Eli Lilly and Company (2012)Indiana-based pharmaceutical manufacturer that markets products in over 143 countries

• ConductBetween 1994 and 2009, Eli Lilly’s subsidiaries made improper payments to government officials in China, Brazil, Poland, and Russia to win sales contracts and other business advantagesIn Brazil, Lilly’s Brazilian sub distributed drugs through third-party distributors, granting them a discount depending on the distributor’s anticipated saleIn 2007, it allegedly granted an unusually large discount for to a distributor for two of the distributor’s purchases of a Lilly drug, which the distributor then sold to the government of a Brazilian stateDistributor used portion of purchase price to bribe government officials from the Brazilian state so the state would purchase the productEmployees who authorized the discount allegedly knew of this arrangement

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• Penalties (SEC only)Disgorgement of $13,955,196Prejudgment interest of $6,743,538Penalty of $8.7 millionTotal: $29,398,734Company consented to entry of final judgment permanently enjoining it from violating FCPA’s anti-bribery, books and records, and internal controls provisions

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Universal Leaf Tabacos Ltd. (2010)

• ConductFrom 2000 to 2004, Universal Brazil sold Brazilian-grown tobacco to the Thailand Tobacco Monopoly (“TTM”)Admitted to retaining sales agents in Thailand and collaborating through those agents to apportion tobacco sales to the TTM among two other companies, coordinated sales prices and paid kickbacks to TTM officials to ensure that each company would share in the Thai marketAdmitted it paid approximately US$697,000 in kickbacks to TTMofficialsFalsely characterized payments in company’s books and records as “commissions” paid to sales agents

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• Penalties (DOJ)NPAMust retain independent compliance monitor for minimum of three years to oversee implementation of antibribery and anticorruption compliance program$4.4 million criminal fine

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Nature’s Sunshine Products, Inc., Douglas Faggioli and Craig Huff (2009)

NSP: Utah CorporationDouglas Faggioli: CEOCraig Huff: CFO

• ConductNatures Sunshine Produtos Naturais Ltda. (NSP Brazil), NSP’s wholly-owned Brazilian subsidiary, manufacturer of nutritional and personal care productsSEC alleged NSP Brazil violated FCPA’s antibribery provisions by making payments to customs brokers later passed on to Brazilian customs officials to permit importation of unregistered products into BrazilTo conceal payments, NSP Brazil incorrectly recorded them as “importation advances” in books and records

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SEC alleged NSP failed to make and keep books, records and accounts that provided reasonable assurances that the transactions it had entered into had been accounted for in accordance with GAAPSEC also alleged NSP knowingly failed to devise, implement and maintain a system of internal controls sufficient to ensure customs payments were properly accounted for on its financial statementsSEC further alleged Faggoli and Huff violated the FCPA in connection with Brazilian cash payments, for failing to adequately supervise compliance with its books and records and internal controls provisions

• Penalties (SEC)Civil penalty of $600,000 for NSPCivil penalty of US$25,000 each for Faggioli and Huff

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Tyco International Ltd. (2006)• Conduct

Tyco allegedly engaged in scheme to violate federal securities laws by overstating financial results, smoothing reported earnings, and hiding vast amount of senior executive compensation and a large number of related party transactions from investorsTo this end, Tyco allegedly made payments for foreign officials for the purpose of obtaining or retaining business in violation of the FCPABetween 1996 and 2000, Tyco acquired more than 700 companies to become global and diversified manufacturing and service conglomerateIn 1998, Tyco acquired Earth Tech Brazil even though it knew Earth Tech had made various illegal payments to Brazilian officials to obtain businessAlthough Tyco knew such payments were common in Brazilian business practices, it had no FCPA compliance programInternal controls insufficient to prevent such misconduct at a global level

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• Penalties (SEC)$50 million civil penalty$1 in disgorgement

• Compliance Best Practices According to the DOJ and SECA commitment by senior management and clearly articulated policy against corruptionA Code of Conduct and compliance policies and proceduresOversight, autonomy, and resourcesRisk assessmentTraining and continuing adviceIncentives and disciplinary measuresThird-party due diligence and compliance enforcement measuresA mechanism for confidential reporting and internal investigationsContinuous improvement: periodic testing and reviewFor mergers and acquisitions, pre-acquisition due diligence and post-acquisition integration

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COMPLIANCE

• Compliance is a Cost Center But a Necessary OnePersonnel with responsibility for internal management of FCPA compliance need to be experienced in the relevant areasStaffing should be local as well as central, it cannot be managed completely remotelyAll responsible need to be trainedThe best compliance programs often involve direct reports to the Board or Audit CommitteeIn an M&A, due diligence must consider any potential challenges or problems the new business and its markets may bringIt must include specific FCPA tests and viewsAgents and other third-party contractors must be carefully vetted and required to endorse company FCPA policies and proceduresAgents’ and other third party contractors’ compliance with company’s FCPA policies and procedures should be periodically monitored

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FCPA Resource Guide

• The DOJ and SEC issued their joint FCPA Resource Guide, on November 14, 2012- This was the most significant FCPA development in 2012- The Resource Guide contains 120 pages and 418 endnotes

• The Resource Guide focuses on explaining, including through the use of case examples and hypotheticals, the factors that influence the DOJ/SEC approach to important factual and legal issues, as well as insights into their exercise of prosecutorial discretion in the FCPA context

• Squire Sanders’ in-depth analysis of the Resource Guide is available at: http://anticorrutpionblog.com.

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FCPA Resource Guide

• FCPA Guidance provides a list of factors that companies should consider in determining whether someone is a foreign official:

The foreign state’s extent of ownership of the entity

The foreign state’s degree of control over the entity (including whether key officers and directors of the entity are, or are appointed by, government officials)

The purpose of the entity’s activities

The entity’s obligations and privileges under the foreign state’s law

The exclusive or controlling power vested in the entity to administer its designated functions

The level of financial support by the foreign state

The entity’s provision of services to the jurisdiction’s residents

Whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government

The general perception that the entity is performing official or governmental functions

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FCPA Resource Guide

• FCPA Guidance provides common red flags that an intermediary may be engaging in corrupt conduct:

Excessive or unusually high compensation to third-party agents or consultants

Unreasonably large discounts to third-party distributors

Third-party “consulting agreements” that include only vaguely described services

The third-party consultant is in a different line of business than that for which it has been engaged

The third party is related to or closely associated with the foreign official

The third party became part of the transaction at the express request or insistence of the foreign official

The third party is merely a shell company incorporated in an offshore jurisdiction

The Third party requests payment to offshore bank accounts

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Anticorruption Thought Leadership

• http://www.anticorruptionblog.com

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MIA_4288396v1


THE UK BRIBERY ACT


Robert J. ElvinPartner+44 161 830 5257robert.elvin@squiresanderscom

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Overview of the Bribery Act

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The Main Offences

• Offering, promising or giving a bribe (financial or other advantage) in exchange for improper performance of a relevant function or activity;

• Requesting, agreeing to receive or accepting a bribe (financial or other advantage) in exchange for improper performance of a relevant function or activity;

• Bribing a foreign public official; and

• Failure of a commercial organisation to prevent bribery

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What is improper performance of a relevant function or activity?

• The general offences are committed, in essence, where a party has induced the improper performance of a relevant function or activity

• Relevant function any function of a public nature; any activity connected with a business; any activity performed in the course of a person's employment; or any activity performed by or on behalf of a body of persons (which

can be performed outside UK and have no connection with UK)

• A relevant function or activity is performed improperly if performed in breach of a relevant expectation.

• “Relevant expectation” means:Individuals are expected to act in good faith, impartially, or in accordance with a position of trust within their function and any activities.

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How is a relevant expectation determined?

The Expectation Test –

• “What a reasonable person in the UK would expect in relation to the type of function or activity concerned”

• NB Does not need to be connected with UK.

• NB Local custom and practice ignored unless “written law”

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Bribing a foreign public official

• An offence if:Directly, or through a third party, offer, promise or give any financial or other advantage to the foreign public official or another person at their request or with their assent. intention to influence in their capacity as a public official (in the performance of their functions, any omission to exercise those functions or any use of their position):intention to obtain or retain business or an advantage in the conduct of business.

• Defence if permitted by written local law

• Expectation test does not apply - focus on intention and influence.

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Senior Officers’ Liability

Consent or Connive = Guilt

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Corporate Offence – Failure to Prevent Bribery

• An offence is committed if:

– The defendant is a “relevant commercial organisation” namely:» a UK partnership;» a UK-registered company; or» any overseas company/partnership which “carries on business” in the UK

and

– A bribery offence has been committed by a person who is “associated” with the organisation - namely a person who performs services for or on behalf of that organisation

and

– The bribe was paid with an intention to obtain or retain business or an advantage for the organisation

• DEFENCE - Organisation had adequate procedures in place to prevent bribery

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Guidance on Adequate Procedures

Guidance - http://www.justice.gov.uk/guidance/docs/bribery-act-2010-guidance.pdf

Quick Start Guide - http://www.justice.gov.uk/guidance/docs/bribery-act-2010-quick-start-guide.pdf

Six principles for bribery prevention

1. Proportionate procedures

2. Top level commitment

3. Risk Assessment

4. Due diligence

5. Communication (including training)

6. Monitoring and review

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Penalties

• Commercial organisations – unlimited fine

• Individual – unlimited fine and/or 10 years in prison

• Debarment

• Director Disqualification Orders

• POCA - Confiscation order

• Serious crime prevention orders

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Recent developments

• On the 9 October 2012, the SFO revised its policies on:Facilitation payments;Business expenditure (corporate hospitality); andCorporate self reporting – “The SFO encourages corporate self-reporting and will always listen to what a corporate body has to say about its past conduct: but the SFO offers no guarantee that a prosecution will not follow any such report… The revised policies make it clear that there will be no presumption in favour of civil settlements in any circumstances”.

• Deferred Prosecution Agreements (DPAs)Organisations will publically face up to their wrongdoing, and in return for compliance with certain terms, the prosecutor will defer a criminal prosecution.DPAs will be available in respect of conduct which pre-dates commencement of the scheme.But – where does this fit in the context of the SFO’s recent policy updates?

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Jurisdictional Reach

• The general offences apply to:All UK nationals/residents/commercial organisation (even if they commit bribery outside UK)Non-UK persons if offence occurs in UK

• The corporate offence applies to:Non-UK business carrying on a business or part of a business in the UKFor corporate offence, “Associated Person” means a person who performs services for or on behalf of that organisation. Capacity in which services performed does not matter - can be a director, employee, agent, subsidiary, joint venture or supply chainBrazilian parent potentially liable for action of UK subsidiary as an “associated person” who performs services on behalf of the parent

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Case Studies / Examples

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Conduct Prohibited

• ABC is a chemicals company headquartered in Sao Paulo that mines flourite

• ABC is a Brazil publically traded company that also does business in England

• ABC seeks to sell its flourite to B, a nation in Asia. In order to obtain a contract with B nation, X salesperson, working for ABC, pays a bribe to Y official in B nation

• ABC and its employee X could be prosecuted for bribing a foreign official (Active Bribery) (Bribery Act §§1, 6)

• ABC could be prosecuted for failing to prevent employee X from bribing foreign official Y (Bribery Act, §7)

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Jurisdiction

• Company X (Brazil) is the 100% shareholder in Company X (UK) Ltd. Company X (UK) Ltd enters into a 50/50 joint venture in India with a German company G, creating an Indian company C. The JV agreement has appropriate anti-corruption provisions. Contrary to the agreement and without knowledge of anyone in company X (UK), the JV pays ₤5,000 to a foreign official as compensation for evaluating and reporting a recommendation to superiors on a proposal submitted by the JV for a contract with the Indian Government.

• QuestionsDid C violate the BA?Did Company X (UK) Ltd violate the BA?Did Company X Brazil violate the BA?

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Corporate Hospitality

• The UK subsidiary of a Brazilian company takes its biggest customer plus other customers who meet sales targets along with their partners to the Maldives each year for a 5 day trip which costs the company £3,500 per person.

• Purpose of trips to incentivise sales, meet senior directors and build relationships.

• Could the trips be seen as a bribe?

• What can the Company do to reduce the risk of them being a bribe?

Ensure trips relate to promoting the Company – allow guests to learn more about the business, the products, and improve the way the company does business with each customer.Investigate whether the trips are customary in the industry and gather evidence.Obtain consent from the directors of the customers invited and confirmation from them and also the guests that the trips are not seen as bribes.Ensure everyone involved is aware of the company’s stance against bribery and corruption.Consider not inviting the partners of guests.Demonstrate products

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Third parties

• A UK company enters a new market in an Asian country with very complex customs and import laws.

The company plans to hire a customs consultant to provide required expertise. Customs officials recommend a specific customs broker firm that is run by the customs official’s cousin. This customs broker has been retained by various companies which import products into this country.

The customs official states that the other companies using his cousin’s service have never suffered delays using their import procedures due to failing government inspections.

Is this a risk?

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Conclusion

• UK Bribery Act is tough

• Little enforcement, yet!

• Adequate procedures can save you

• Compliance should be an enabler, not be a barrier to business

International Conventions

International Conventions Signed and Ratified by Brazil

OECD Anti‐Bribery Convention

UN Convention Against Corruption

OAS Inter‐American Convention Against Corruption


OECD Anti-Bribery Convention• All signatories shall take measures to establish that it is a criminal

offence under its law for any person intentionally to offer, promiseor give any undue pecuniary or other advantage to a foreign publicofficial.

• Each Party shall take any measures necessary to establish thatcomplicity in, including incitement, aiding and abetting, orauthorisation of an act of bribery of a foreign public official shall bea criminal offence.


UN Convention Against Corruption

• All State Parties shall promote integrity, honesty and responsibilityamong its public officials, in accordance with the fundamentalprinciples of its legal system.

• Each State Party shall establish measures and systems to facilitatethe reporting by public officials of acts of corruption to appropriateauthorities, when such acts come to their notice in the performanceof their functions.


OAS Inter-American Convention Against Corruption

• The purpose of the Convention is to promote and strengthen thedevelopment by each of the States Parties of the mechanismsneeded to prevent, detect, punish and eradicate corruption in theperformance of public functions and acts of corruption specificallyrelated to such performance.

Brazilian Criminal Code

Active Corruption in an International Business Transaction –Article 337-B of the Decree Law no. 2,848/40

Penalty: Imprisonment from 1 to 8 years and fine

Influence Peddling in an International Business Transaction –Article 337-C of the Decree Law no. 2,848/40

Penalty: Imprisonment from 2 to 5 yearsand fine

Crimes against the Foreign Public Administration

Concerns for Investments in Brazil

The Brazilian legislation in force focus on the bribery and corruption ofgovernmental officials only.

The sanctions currently provided in the Brazilian laws affect the individuals that practice bribery or corruptionacts, even if the individuals were acting on behalf of the company.

Companies are not subject to the provisions of the Brazilian Criminal Code.

Clean Company Bill

Federal Bill no. 6,826/2010 – the “Clean Company” Act

Civil and Administrative Liability only.

Strict Liability.

Company can be held liable for acts of bribery and corruption involvingnational and international public administration, as well as its directorsand officers or any individuals that take part in the illicit act.

The economic group is jointly liable for the bribery acts practiced byother companies of the same group, however, such liability is limited tothe payment of the relevant fine or the full compensation for the damage.

In mergers, the succeeding company is held liable to the limit of theequity transferred.

Severe Sanctions.

The “Clean Company” Bill only provides sanctions for briberyacts.

The Brazilian Laws in force and the “Clean Company” Bill donot provide any requirements in terms of internal control (e.g.books, records).

Clean Company Bill

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Sergio André [email protected]

Paula [email protected]


INTERNATIONAL BUSINESS

TRANSACTIONS

Mergers & Acquisition Considerations


Michele L. ConnellPartner+1 [email protected]

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The Global Business Reality

Example of an International Acquisition or Disposition:

• 17 jurisdictions• Blended asset and stock deal• Regulated product in the US and EU• Thousands of employees; some in unions• Product sold for military applications• Dealers used widely• Long standing manufacturing operations on every continent

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“Compliance with Law” Representation

Compliance with Laws. Except with respect to (a) matters set forth in Schedule 3.10, (b) compliance with Law concerning employee benefit plans and employee matters (as to which certain representations and warranties are made pursuant to Section 3.16and Section 3.17, respectively), and (c) compliance with Environmental Laws (as to which certain representations and warranties are made pursuant to Section 3.18), Seller is not in material violation of, has not been threatened in writing to be charged with, given notice of any violation of, nor, to the knowledge of Seller, under investigation with respect to, any Law relating to the conduct of the Business, or pertaining to the Purchased Assets.

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Compliance and Diligence = Value

• Each of these factors impacts the value of the acquisition in the long-term and the short-term.

• Each of these factors is effected by the seller’s ability to demonstrate compliance with various laws and regulations globally.

• Compliance is a core strategic issue in an international transaction.

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Purchasing FCPA Liability

• Liability of the Target for pre-acquisition FCPA violations (like all liabilities) survive the merger/acquisition

• An acquiring company may be held liable directly – as successor – for the FCPA violations committed by the Target prior to the acquisition

• This includes criminal liability for the prior violations by the Target

Snamprogetti. Saipem was held jointly liable for a $240 million fine for FCPA criminal charges for Snamprogetti conduct that ended in 2004, TWO years prior to Saipem’s acquisition of Snamprogetti

Alliance One. 2010 DOJ brought criminal charges against Alliance One for FCPA violations committed before its acquisition of the Company violating the FCPA

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Purchasing FCPA Liability (continued)

• Whether successor liability will attach depends on the particular facts and on the applicable state, federal and foreign law

2012 DOJ Resources Guide: “[I]f an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer”

• According to the 2012 DOJ Resource Guide:

“The DOJ and the SEC have only taken action against successor companies in limited circumstances, generally in cases involving egregious and sustained violations or where the successor company directly participated in the violations or failed to stop the misconduct from continuing after the acquisition”

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Minimizing Risk through Diligence

• Effective pre-acquisition due diligence can minimize risk of acquiring FCPA liability

Lockheed/Titan. During pre-acquisition FCPA due diligence of Titan, Lockheed discovered potential FCPA violations Lockheed pulled out of the deal

– Ultimately, in 2005, Titan paid a $13 million criminal fine and a civil disgorgement penalty of $15.4 million

Cardinal Health. In June 2002, during pre-acquisition FCPA due diligence of Syncor, Cardinal Health discovered potential FCPA violations. Syncor voluntarily disclosed

– Following Syncor paying a $2.5 million in fines and agreeing to an independent FCPA monitor, Cardinal Health agreed to acquire Syncor, at a reduced price

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Due Diligence Best Practices

• Buyer: Include compliance officer on deal team.• Buyer: Request policies and any waivers.• Buyer: Document the diligence process well.• Buyer: Anticipate that there will be areas for improvement and

history.

• Seller: Put some time and effort into organizing and presenting your compliance policies.

• Seller: Develop protocol to manage privileged communications relating to investigations or remediation.

• Seller: A vigorous compliance program will have breaches from time to time. The buyer will expect that.

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Red Flags and Risk Areas

• No compliance policies• No compliance breaches• No audit process• Customer profiles• Reliance on critical permits or contracts• Connected parties• A large concentration of work with certain intermediaries• Multiple or concentration in high risk jurisdictions• Global implementation of compliance program• Involvement with state owned enterprises

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Diligence Process

• During diligence process:

Focused (based on risk assessment) Target specific diligence

– Obtain sales lists – focused on large sales in high risk countries

– Obtain complete list of third party intermediaries

– Understand purpose and role of each intermediary

– With respect to risk-identified intermediaries, focus on payments made, relationships with government and related parties, documentation

– Does company have audit rights on third parties

– Evaluate Target’s internal controls

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Diligence Process (continued)

Other Areas to Review:

• Periodic training programs

• Ready access to legal advice

• Internal confidential reporting process

• Diligence and inquiry when establishing intermediary relationships

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Purchase Agreement Backstops

• Representations and warranties

• Indemnification

• Carve-out certain risks

• Require remedial action pre-closing

• Adjustments to purchase price

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Structuring the Transaction

FCPA concerns have been identified at the Target:

Can the transaction be structured to avoid liability?

– Carve out a particular division

– Eliminate certain third parties that are high risk

Can sufficient comfort be obtained from representations/indemnification?

If there is not sufficient time, could a “Halliburton” approach work?

Can you price the risk in?

– Escrow funds to cover costs of investigation post-closing, should issues be uncovered later

Report to the Target?

Walk-away?

77

Post Closing Considerations

• FCPA due diligence is only a portion of the compliance process for mergers and acquisitions

• The DOJ and SEC evaluate the following factors in the M&A setting:

Did the acquiring company promptly incorporate the Target with all of its internal controls, including its compliance programDid the acquiring company train the Target’s employeesDid the acquiring company evaluate the Target’s third party relationships under its standardsDid the acquiring company conduct audits of its new business units

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Documents

US, UK and Brazilian Anticorruption Laws …/media/files/insights/...39 Offices in 19 Countries FOREIGN CORRUPT PRACTICES ACT (FCPA) Brazil – May, 2013 Rebekah J. Poston Partner