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Actions speak louder than words

October 29th, 2013
in Anti-Corruption / FCPA |

 

Practical steps your company can take to demonstrate a culture of zero tolerance to bribery and corruption.

 

 

C5′s 2nd Annual Compliance & Economic Crime in Financial Institutions Conference

August 23rd, 2012
in Anti-Corruption / FCPA, Financial Services, Legal Conferences, Regulatory Compliance and Trade, Russia and CIS |

When: Thursday, October 04 to Friday, October 05, 2012

Where: Mariott Tverskaya Hotel, Moscow, Russia

Compliance and Economic Crimes in Financial Institutions is the 2nd Russian edition forum in the series of original and most consistently well-attended anti-corruption, global economic sanctions and fraud events organised by C5. These events have been the number one choice for practitioners in Europe and the US for over the past 15+ years with the CIS summit on Anti-Corruption is becoming more and more popular in the region as well.

Countless opportunities for money laundering, fraud and other illicit financial activities are on the rise as a result of increasing globalisation and the proliferation of new technologies and communication platforms. In response, regulatory frameworks are developing and financial institutions and other organisations are becoming subject to AML, CTF regulations and Economic Sanctions, globally responsible for their operations and their clients’ transactional activities. Russian financial institutions must also demonstrate a strict and continued commitment to compliance with the latest standards of AML and counter-terrorism financing, anti-corruption and anti-tax evasion.

Implementing an effective risk-based compliance programme is your first defence. However, it is also apparent that while many companies signal intent to comply and spend a great deal of time and money investing in compliance programmes, breaches may still occur. Participation in this conference will give you an opportunity to discuss recent developments, benchmark your practices and learn from pioneering case studies.

  • How to Ensure your Compliance Infrastructure is Meeting the Complex and Constantly Changing Regulatory Priorities
  • Applying a Risk Based Approach to Assessing Compliance Risk; Building a Watertight Compliance Programme
  • Extraterritorial Reach of the FCPA and the UK Bribery Act: Understanding the Implications for Russian Business, and How to Incorporate into your Compliance Programme
  • Foreign Account Tax Compliance Act: How to Build an Effective System of Compliance Procedures in Russia
  • How Leading Banks are Implementing Know Your Customer (KYC) Principles to Manage AML-CTF Risk
  • Practical Recommendations for Uncovering Anti-Money Laundering Schemes
  • Understanding the Specifics of Compliance Controls in Financial Markets; How to Probe Weak Spots to Improve your Company’s Compliance
  • How to Ensure Effective Collaboration and Timely Information Exchange between Financial Institutions to Prevent Financial Crime
  • The Best Practices of Building Anti-Insider System within Russian Bank
  • Methods of Identifying Operations with Signs of Insider Dealing and Market Abuse

For more details please download the BROCHURE

C5′s 2nd Forum on Anti-Corruption – Southern Africa

August 3rd, 2012
in Anti-Corruption / FCPA, Legal Conferences, Regulatory Compliance and Trade |

When: Tuesday, September 18 to Wednesday, September 19, 2012

Where: Radisson Blu Hotel Waterfront, Cape Town, South Africa

 

Attend C5’s Second Anti-Corruption – Southern Africa conference to benchmark your regional and global compliance procedures to avoid crippling international anti-corruption investigations and fines.

UK giant GlaxoSmithKline has been hit with a £1.9 billion penalty after admitting to the ‘biggest healthcare fraud in history’. It handed out cash as well as everything from Madonna concert tickets to pheasant-hunting trips to doctors and other health care professionals to prescribe various GSK drugs to underage patients. As part of the settlement, GSK agreed to be monitored by government officials for five years.

The pharmaceutical industry is one of the most highly regulated and monitored sectors in the world. Pharmaceutical companies operating in the Southern African region need to take extra precautions to ensure that relationships between sales and business development representatives and healthcare professionals remains clear and transparent in a region characterized by expectations of hospitality and gifts. The Southern Africa pharmaceutical community needs to act now to ensure their internal anti-corruption compliance systems are up to scratch to meet all requirements under the US Foreign Corrupt Practices Act, the UK Bribery Act and local anti-corruption laws. The complex and sometimes conflicting US and UK laws have far-reaching extraterritorial scope meaning any company operating in the Southern region could be examined by foreign authorities.

C5’s Second Forum on Anti-Corruption – Southern Africa Edition offers you a unique opportunity hear from and share practical insight with seasoned chief compliance officers and general counsels from the pharmaceutical and other industries who are responsible for compliance in this region.

Learn from some of the largest and most successful companies in the world as to how they achieve the following steps:

You and your colleagues have a special opportunity to hear from your counterparts in some of the world’s largest and most successful companies as to how they structure their compliance procedures, paying particular attention to cultural and business realities in the Southern Africa region.  You will pick up new tools to be able to lead your company through the following key steps to full compliance:

  • Step 1: Building a Culture of Compliance whilst Adhering to Varying Local Customs: How to Promote and Demonstrate an Organisational Commitment from Top to Bottom.
  • Step 2: Designing, Implementing and Maintaining a Regional and Sector Specific Anti-Corruption Compliance Programme.
  • Step 3: Creating your Gifts, Hospitality, Sponsorship and Charitable Donations Policy Factoring in Local Customs and Expectations and International Anti-Corruption Standards.
  • Step 4: Tailoring Training Programmes for Employees, Third Parties and Other Stakeholders.
  • Step 5: Establishing a Trustworthy Whistleblower Policy in line with Evolving Local and International Compliance Requirements.
  • Step 6: Maintaining Adequate Accounting Records and Documentary Evidence to Facilitate Greater Organisational Transparency.

For more details please download the BROCHURE

Strengthening Your Compliance Program in China through Employment Building Blocks – From Onboarding to Termination

December 11th, 2011
in Anti-Corruption / FCPA, Expert Guest Blog Entries, Regulatory Compliance and Trade |

Expert Article by Ananda Martin & Lesli Ligorner

For multinational corporations operating in the People’s Republic of China (“PRC”), employment considerations play a key role in the design of a robust anti-corruption compliance program. From onboarding to termination, having the right contractual protections and corporate policies in place can greatly reduce the risk of corruption-related issues and increase the ability to investigate and discipline employees who run afoul of the company’s code of conduct.

Getting it Right at the Beginning: Considerations for Onboarding

Because China does not recognize at-will employment arrangements, disciplining and terminating employees can be especially challenging. It is therefore crucial that PRC-based employers build contractual provisions into employment agreements that give them maximum flexibility in the event that an employee becomes involved in a corruption-related matter. From a contractual perspective, this means setting forth clear grounds for termination for violations of anti-corruption law under both PRC and international law. It also means providing Chinese language versions of all key employment documents, including the employment agreement, the employee handbook and the code of conduct or other documents outlining the company’s anticorruption policies. From a policy standpoint, the “tone at the top” – and in the middle – must send a clear message that bribery is inconsistent with company culture and must be supported by protocols and written materials such as an employee handbook that sets clear guidelines with respect to high risk expenditures such as gifts, travel and entertainment. Intake procedures for new employees should ensure that employees have a working knowledge of company policies and know whom to turn to with questions or concerns.

Getting it Right in the Middle: Monitoring and Internal Investigations

Some companies stop there, but a truly robust compliance program includes ongoing training, monitoring and strategic “stress testing” of sensitive areas such as relationships with third parties and government officials. Accounting, legal and human resources departments should work together to formulate coordinated approaches to perennial China challenges such as business expense reimbursements and handling of official invoices or fapiao.

In the event that an internal investigation becomes necessary, companies must be careful to comply with PRC rules governing employee data privacy. Best practices include building prospective language into employment agreements that permit an employer to search, copy and transmit employee communications on company computers and other electronic devices. Employers should also consider providing employees with company-issued cell phones and personal digital assistants to ensure that they can access all relevant data on those devices.

Getting it Right at the End: Considerations for Termination

As previously mentioned, China lacks the concept of at-will employment and imposes a number of obligations and restrictions on the employment relationship. Chief among these is the requirement that, in the event of an employment dispute, both parties submit to mandatory arbitration whose outcome, in practice, is heavily weighted in favor of employees. Many employers seek to avoid this process through a negotiated settlement. If allegations of bribery are driving the termination, management should consider the potential for misuse (or the appearance of misuse) of severance payments.

If arbitration is unavoidable, many employers will want to keep the content of such proceedings confidential. A pre-negotiated confidentiality agreement or similar language in the employment agreement is much easier to secure at the beginning of the employment relationship than at the end. Employers should be prepared for retaliation from employees slated for termination and have in place solid whistleblower protocols to investigate any allegations that arise from disgruntled workers.

Through proactive planning at the intersection of employment and anti-corruption law, PRC- based multinationals can bolster their compliance program and mitigate some of the risks attendant to doing business in this challenging environment.

For more information about the topics discussed in this [Client Alert], please listen to K. Lesli Ligorner’s talk on “Strengthening Your China Compliance Program through Employment Building Blocks: From Onboarding to Termination,” presented on September 9, 2011 as part of the American Bar Association International Anticorruption Committee’s programming.

Thomas Fox

March 25th, 2011
in Anti-Corruption / FCPA, Expert Guest Blog Entries, Regulatory Compliance and Trade |

Biography

Anti-corruption and FCPA Expert ArticlesThomas Fox has practiced law in Houston for 25 years. He is now assisting companies with FCPA compliance, Risk Management and international transactions. He was most recently the General Counsel at Drilling Controls, Inc., a worldwide oilfield manufacturing and service company.  He was previously Division Counsel with Halliburton Energy Services, Inc. where he supported Halliburton’s software division and its downhole division, which included the logging, directional drilling and drill bit business units.

Tom attended undergraduate school at the University of Texas, graduate school at Michigan State University and law school at the University of Michigan.

Tom writes and speaks nationally and internationally on a wide variety of topics, ranging from FCPA compliance, indemnities and other forms of risk management for a worldwide energy practice, tax issues faced by multi-national US companies, insurance coverage issues and protection of trade secrets.

You can subscribe to his blog at http://tfoxlaw.wordpress.com/ or visit his website for more info at http://www.tfoxlaw.com/home

Expert Articles

Contact Thomas Fox

Phone: 1-832-744-0264 (US), +44 (0) 23-92006548 (UK)

Email: tfox@tfoxlaw.com

@Tfoxlaw

How Does the FCPA Apply to Your Business?

January 24th, 2011
in Anti-Corruption / FCPA, Expert Guest Blog Entries, Regulatory Compliance and Trade |

Expert Article by Thomas Fox

How Does the FCPA Apply to Your Business?

One question that I often hear about the application of the Foreign Corrupt Practices Act (FCPA) is something along the lines of the following: “I am not in the international energy business, I am in the restaurant, retail, banking, or (fill in the blank) business. And yes my company has international operations but we don’t transact business with foreign governments. Why do I need to worry about the FCPA?”

The answer to this oft-asked question is laid out in a new resource for the FCPA practitioner. It is a book entitled “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives” authored by Aaron Murphy. It is a welcome addition to the growing literature on the FCPA, which, as noted by Mr. Murphy’s title, is designed to be a practical resource. Aaron is a partner in the Los Angeles office of Latham & Watkins, who practices in the White Collar and Government Investigations Group and in his introduction states that this book is primarily for managers and “the most common problems areas where managers get themselves into FCPA trouble.”

One chapter is entitled “You Do More With the Government Than You Think”. In this chapter Aaron gives several examples of how any US company doing business overseas will come into contact with a foreign governmental official and, thereby, create a possible FCPA liability. These interactions include some of the following examples

  • Interactions with Customs Officials. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a Customs Official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high, if a large volume of goods are being imported into a foreign country.
  • Interaction with Tax Officials. While noting that interacting with international tax authorities can present problems similar to those with customs officials, Murphy observes that the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for VAT purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market
  • Licensing and Permits. Your company is a retail seller of clothes and cosmetics and you do not understand how the FCPA applies to your foreign sales operations? Every physical location that you sell your goods in will require some type of license to operate your business. It could require multiple license such as a national license, state license and local municipal license, additionally you will need a building permit if you intend to build out or modify your retail stores.
  • Work Permits and Visas. If your company does any business overseas it will have to send someone from the home office to operate in-country at some point. In the post-9/11 world this probably means that, at a minimum, your company will have to obtain a visa for each employee who enters the foreign country and perhaps a work permit as well. The visa process can start in the United States with a trip to foreign government consulate or even the embassy and at that point you are dealing with a foreign governmental official. The work permit process can also begin in the United States but often may continue in the foreign country.
  • Inspections and Certifications. We recently wrote about franchising overseas and the impact of the FCPA on such businesses. Consider the Tex-Mex restaurant chain which desires to take this cuisine across the world. In any city in the world there will be some type of certification process to enable to the business to set up and start operating and then there will be the need for ongoing inspections for sanitary conditions. Such inspections may be rare but if there is “slime in the ice machine” it may be grounds to close the restaurant
  • Bid and Tender Process. Your company is one of the worlds best at designing and constructing LNG facilities. You have assisted a foreign government to draft the specifications for the world’s largest, most technologically advanced LNG facility. During this specification development phase, your company has paid for all meals delivered during meetings and flown certain officials from the National Energy Company to the US to work on these specifications. Now the specifications go out to bid for the construction phase and your company is the successful bidder. Has your company violated the FCPA? According to Murphy, “Telling the difference is tough”.

These examples are not an exclusive list. Murphy also notes that in some foreign jurisdictions, the bribery of judges may be prevalent or even standard in both civil and criminal litigation. The clear message that Murphy brings is that anytime a US company conducts business outside the US it impacts the FCPA. But in addition to his warnings, Murphy lays the steps he believes can assist a company to keep it from running afoul of the FCPA. We welcome Aaron’s work as a new and valuable resource for the FCPA compliance practitioner. We applaud his work in this area.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2011

Franchising and the FCPA

January 19th, 2011
in Anti-Corruption / FCPA, Expert Guest Blog Entries |

The American Conference Institute would like to thank Thomas Fox for his expert guest article contribution. Thomas will be attending ACI’s FCPA Houston and will be blogging and tweeting about  his experience at the event. Don’t forget to follow Thomas and the American Conference Institute on Twitter via @Tfoxlaw and @anticorruption1, respectively.

Franchising and the FCPA

The Foreign Corrupt Practices Act (FCPA) applies to all US companies and individuals which conduct business overseas. FPCA practitioners recognize there are two components: (1) the anti-bribery component, handled by the Department of Justice (DOJ) and (2) the books and records components, handled by the Securities and Exchange Commission (SEC). None of this is new information and indeed, has been present it the FCPA since it was enacted in 1977. This breadth and scope of the FCPA make it mandatory that any business or person which conducts business overseas does so in compliance with the FCPA. One of the lessons learned from 2010 is that a business not traditionally thought of as high risk for FCPA compliance can still run afoul of the FCPA. In October, CB Richard Ellis, a global real estate firm, disclosed possible FCPA violations in China. As reported by the FCPA Blog, the Company reported in a SEC filing that its employees made payments for entertainment and gifts to Chinese government officials, which were discovered during an internal investigation. This blog will look at the franchising industry and explore its possible FCPA exposure.

The franchising model has been in vogue for many years. It has been a successful model in the US and now many corporations are looking at overseas expansion opportunities. Franchise law has become well developed across the US, with many states developing laws to protect the rights and obligations of both parties in a franchise agreement. According to an International Franchise Association survey nearly 1,600 franchise systems in 2008, “nearly two-thirds (61 percent) of respondents currently franchise or operate in non-U.S. markets and three-fourths (74 percent) plan to begin international expansion efforts or accelerate their current ventures immediately.”

There are no reported FCPA enforcement actions regarding franchisors. However, the factors in a franchise relationship would appear to lead to clear FCPA responsibility of the franchisor for its overseas franchisee’s actions. Additionally, court interpretation of the FCPA has held that it is applicable where conduct, violative of the Act, is used to “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage. As almost everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. Nevertheless many US companies view franchisors as different from other types of more direct sales representatives, such as company sales representatives, agents, resellers or even joint venture partners, for the purposes of FCPA liability. However, the DOJ takes the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, joint venture partners and distributors. It does not take too great a leap of imagination to see that a franchise relationship could be contained within this interpretation. It does not take too many legal steps to see that a franchisee’s actions can impute FCPA liability to a US franchisor.

There are other factors, unique to the franchise relationship, which would point towards FCPA liability of the US franchisor. A US franchisor’s intent and the degree of control it exercises over its overseas franchisees’ operations are factors the DOJ/SEC might consider in determining whether to pursue an FCPA case against a franchisor for bribes made by one of its foreign franchisees. It is always in the financial interest of a US franchisor for its franchisees to be successful businesses. Additionally, most US franchisors require its overseas franchisee’s to use the same company name for branding.

How would all of this play out for a franchisor? As a franchisor moves into foreign markets there could well be the temptation to “grease the skids” and make payments or offer gifts to government officials, or their family members, to get the permits or permissions necessary to open and operate. In many countries, bribery is a common way of getting business done, and there can be tremendous pressure from local agents or franchisee candidates to follow regional customs and use bribes to become or remain competitive. Even if it is not the US franchisor’s own employees which engage in the FCPA violations, the US franchisor will still face the risk of an enforcement action if the franchisee’s employees engage in such conduct.

Most franchisors have thorough financial vetting requirements before allowing any person or business to become a franchisee. However, how many of these same business  perform FCPA compliance due diligence on their prospective overseas franchises? How many US franchisors have FCPA compliance training programs? How many evaluate, on an ongoing basis, the FCPA compliance and program of their overseas franchisees? How many US franchisors have a compliance hotline or other reporting mechanism for any compliance violations made against their franchisees?

If you are a US franchisor, looking to expand overseas, one of the first things you should do is to perform a FCPA risk assessment and then use that risk assessment to implement a full FCPA compliance program within your company going forward. If you are a US franchisor which has international franchises but which has not previously reviewed your FCPA requirements, you should do so as soon as possible. If not, your FCPA exposure may be unlimited….

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

Legal Conferences

What’s in a Name Under the FCPA

November 17th, 2010
in Anti-Corruption / FCPA, Expert Guest Blog Entries |

What is in a name? The terms agent, reseller and distributor are sometimes used interchangeably in the business world. However in the legal world they usually have distinct definitions. An agent can be generally defined as is a person who is authorized to act on behalf of another to create a legal relationship with a Third Party. An agent can also be a person who makes introductions and generally facilitates relationships between the seller of goods or services and end-using buyer. Such an agent usually receives some type of percentage of the final sale as his commission. An in-country national agent is often required in most Middle East and Far East countries. A reseller can be generally defined as a company or individual that sells goods to an end-using buyer. A reseller does not take title and thereby own the goods; the reseller is usually a conduit from the seller to the end-using buyer. A reseller usually receives a flat commission for his services, usually between 5-10% of the final purchase price. This format is often used in the software and hardware industries. A distributor can be generally defined as a company or individual which purchases a product from an original equipment manufacturer (OEM) and then independently sells that product to an end user. A distributor takes title, physical possession and owns the products. The distributor then sells the product again to an end-using purchaser. The distributor usually receives the product at some discount from the OEM and then is free to set his price at any amount above what he paid for the product. A distributor is often used by the US manufacturing industry to act as a sales force outside the US.

The landscape of the Foreign Corrupt Practices Act (FCPA) is littered with cases involving both agents and resellers are they are the most clearly acting as representatives of the companies whose goods or services they sell for in foreign countries. However many US businesses believe that the legal differences between agents/resellers and distributors insulate them from FCPA liability should the conduct of the distributor violate the Act. They believe that as the distributor takes title and physical possession of the product, the legal risk of ownership has shifted to the distributor. If the goods are damaged or destroyed, the loss will be the distributor’s not the US business which manufactured the product. Under this same analysis, many US companies believe that the FCPA risk has also shifted from the US company to the foreign distributor. However such belief is sorely miss-placed.

As almost everyone knows, the FCPA prohibits payments to foreign officials to obtain or retain business or secure an improper business advantage. But many US companies view distributors as different from other types of sales representatives such as company sales representatives, agents, resellers or even joint venture partners, for the purposes of FCPA liability. However the Department of Justice (DOJ) takes the position that a US company’s FCPA responsibilities extend to the conduct of a wide range of third parties, including the aforementioned company sales representatives, agents, resellers, joint venture partners but also distributors. No U.S. company can ignore signs that its distributors may be violating the FCPA. Company management cannot engage in conscious avoidance to the activities of a distributor that the company has put into a business position favorable to engaging in FCPA violations. Court interpretation of the FCPA has held that it is applicable where conduct violative of the Act is used to “to obtain or retain business or secure an improper business advantage” which can cover almost any kind of advantage, including indirect monetary advantage even as nebulous as reputational advantage.

This scenario played out in China from 1997 to 2005 through AGA Medical Corporation. The Minnesota-based firm manufactured products used to treat congenital heart defects. To boost is China sales, AGA worked through its Chinese distributor. AGA sold products at a discounted rate to its Chinese distributor. This distributor then took some of the difference between his price from the equipment manufacturer AGA and the price he sold the equipment to Chinese hospitals to and paid corrupt payments to Chinese doctors to have them direct their government-owned hospitals to purchase AGA’s products. Its sales in China for the period were about $13.5 million. The Chinese distributor was found to have paid bribes in China of at least $460,000 to doctors in government-owned hospitals and patent-office officials. In 2008, AGA agreed to pay a $2 million criminal penalty and enter into a deferred prosecution agreement with the Department of Justice to settle Foreign Corrupt Practices Act violations.

The same game was played by a Volvo subsidiary, Volvo Construction Equipment International (“VCEI”) when it used a Tunisian distributor to facilitate additional sales of its products to Iraq. VCEI reduced its prices to enable the distributor to make the illegal payments based on bogus after-sales service fees. Volvo’s 2008 settlement with the SEC included an agreement permanently enjoining it from future violations of Sections, ordering it to disgorge $7,299,208 in profits plus $1,303,441 in pre-judgment interest, and to pay a civil penalty of $4,000,000. In addition to this fine imposed by the SEC, Volvo also paid a $7,000,000 penalty pursuant to a deferred prosecution agreement with the DOJ.

So what is in a name? Do we simply look to Shakespeare and his immortal words, “”What’s in a name? That which we call a rose; By any other name would smell as sweet.” Unfortunately I do not think the answer is quite so ethereal. It is more down to earth. If it walks like a duck and quacks like a duck, it probably is a duck. If you have a distributor, it must be subjected to the same FCPA scrutiny and management as an agent, reseller or joint venture partner.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal adviser. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2010

How To Risk-Base Supply Chain Vendors Under The FCPA

November 17th, 2010
in Anti-Corruption / FCPA, Expert Guest Blog Entries, Regulatory Compliance and Trade |

What are the methods to assess the risks of your Supply Chain vendors? Other than perhaps financial due diligence, such as through Dun & Bradstreet or quality control through your QHSE group, the Supply Chain probably does not command your Compliance Department attention as do other types of third party business partners such as agents, distributors and joint venture partners. This may be coming to an end as most Compliance Professionals recognize that third parties which supply goods or services to a company should be scrutinized similarly to other third party business partners. In the recently released Deferred Prosecution Agreement with Panalpina and six other oil-field service companies, the Department of Justice specifically noted that regarding business partners, such as Supply Chain vendors, a company should, ”it should institute appropriate due diligence” so as to help ensure compliance with the FCPA.

However to initiate “appropriate due diligence” a company must first rate the compliance risk of any third party, such as a Supply Chain vendor. The risk rating will inform the level of due diligence required. There are several methods that could be used to assess risk in the area of supply chain and vendors. The approach suggested by the UK’s Financial Services Authority (FSA) in its settlement of the enforcement action against the insurance giant AON would refer “to an internationally accepted corruption perceptions index” such as is available through Transparency International or other recognized authority. The approach suggested by the Department of Justice, in Release Opinion 08-02 would provide categories of “High Risk, Medium Risk and Low Risk”. Finally, writing in the FCPA Blog, Scott Moritz of Daylight Forensic & Advisory LLC has suggested an approach that incorporates a variety of risk-assessment tools, including, “the strategic use of information technology, tracking and sorting the critical elements”.

This commentary proposes an approach which would incorporate all three of the above cited analogous compliance areas into one risk-based assessment program for supply chain vendors. Based upon the assessed risk, an appropriate level of due diligence would then be required. The categories suggested are as follows:

1. High Risk Suppliers;

2. Low Risk Suppliers;

3. Nominal Risk Suppliers; and

4. Suppliers of General Goods and Products

A.        High-Risk Suppliers

A High-Risk Supplier is defined as a supplier which presents a higher level of compliance risk because of the presence of one or more of the following factors:

1. It is based in or supplies goods/services from a high risk country;

2. It has a reputation in the business community for questionable business practices or ethics; or

3. It has been convicted of, or is alleged to have been involved in, illegal conduct and has failed to undertake effective remedial actions.

B.        Low-Risk Suppliers

A Low-Risk Supplier is defined as an individual or private entity located in a Low-Risk Country which:

1. Supplies goods or services in a Low-Risk Country;

2. Is based in a low risk country where the goods or services are delivered, it has no involvement with any foreign government, government entity, or Government Official; or

3. Is subject to the US FCPA and/or Sarbanes-Oxley compliance

C.        Minimal-Risk Suppliers

A Minimal-Risk Supplier is an individual or entity which provides goods or services that are non-specific to a particular job or assignment and the value of each transaction is USD $10,000 or less. These types of vendors include office and industrial suppliers, equipment leasing companies and such entities which supply such routinely used services.

D.        Suppliers of General Goods and Products

A Supplier of General Goods and Products is an individual or entity which provides goods or services that are widely available to the general public and do not fall under the definition of Minimal-Risk Supplier. These types of vendors include transportation, food services and educational services providers.

This proposed rating is but one method to allow a company to assess its risks involving its Supply Chain vendors. As has been noted in both the Consultative Guidance to the United Kingdom Bribery Act and in the Panalpina settlements, both documents list the risk rating as a key component of a best practices anti-corruption and anti-bribery compliance program. A company need not engage in full due diligence for all Supply Chain vendors. However it must implement and follow a system to rate each vendor for that vendor’s FCPA compliance risk and evaluate and manage that relationship accordingly

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

Proposed Reforms to the FCPA: the Compliance Defense and Respondeat Superior

November 8th, 2010
in Anti-Corruption / FCPA, Expert Guest Blog Entries, Regulatory Compliance and Trade |

Guest blog posting provided by: Thomas Fox

In a Whitepaper entitled “Restoring Balance-Proposed Amendments to the Foreign Corrupt Practices Act”, authors Andrew Wiessman and Alixandra Smith, writing on behalf of the US Chamber Institute for Legal Reform who recently proposed amending the Foreign Corrupt Practices Act (FCPA), argue that the time is ripe to amend the FCPA to make the statute more equitable and its requirements clearer. They propose five (5) amendments to the FCPA which they argue would serve to improve the Act. This post will discuss, in greater specificity, their first proposal: to create a compliance defense available to a company if it has an adequate compliance program, similar to the “adequate procedures” defense available under the UK Bribery Act.

Under this suggestion the authors believe that companies will increase their compliance with the FCPA because they will now have a greater incentive to do so. They envision a defense similar to the “adequate procedures” defense available under the UK Bribery Act where companies will be protected if a rogue employee engages in corruption and bribery despite a company’s diligence in pursuing a FCPA compliance program; and lastly “it will give corporations some measure of protection from aggressive or misinformed prosecutors, who can exploit the power imbalance inherent in the current FCPA statute—which permits indictment of a corporation even for the acts of a single, low-level rogue employee—to force corporations into deferred prosecution agreements.”

The authors set out the recently released UK Bribery Act Consultative Guidance as one basis of this proposed compliance defense. This Guidance listed 6 Principles of an effective anti-bribery and anti-corruption program which are:

1.         Risk Assessment – knowing and keeping up to date with the bribery risks you face in your sector and market.

2.         Top Level Commitment – this concerns establishing a culture across the organization in which bribery is unacceptable.

3.         Due Diligence – knowing who you do business with; knowing why, when and to whom you are releasing funds; seeking reciprocal anti-bribery agreements; and being in a position to feel confident that business relationships are transparent and ethical.

4.         Clear, Practical and Accessible Policies and Procedures – this concerns applying them to everyone you employ and business partners under your effective control.

5.         Effective Implementation – going beyond ‘paper compliance’ to embedding anti-bribery in your organization’s internal controls, recruitment and remuneration policies, operations, communications and training on practical business issues.

6.         Monitoring and Review – auditing and financial controls that are sensitive to bribery and are transparent, considering how regularly you need to review your policies and procedures, and whether external verification would help.

The authors also discuss the Italian Anti-Bribery Bill, which was enacted in 2001. The statute provides a defense under which a business may avoid liability if it can demonstrate that, before employees of the company engaged in a bribery or corruption, the company had (1) adopted and implemented a model of organization, management and control designed to prevent that crime, (2) engaged an autonomous body to supervise and approve the model, and (3) the autonomous body adequately exercised its duties. Further, to determine whether the compliance program was effectively designed, the Italian law required consideration of the following factors:

1.         Management of Resources – whether financial resources were managed in a way that discouraged the prohibited conduct.

2.         Provision of Information to Management – whether the compliance program required officers and employees to supply the persons responsible for monitoring the compliance program with the necessary information to ensure their compliance with it.

3.         Disciplinary Measures – where there measures in the compliance program which punished those employees who violated the program.

The authors note that while concepts from both of the above laws are embedded within the US Sentencing Guidelines, they are considered at a very different phase of the criminal process than in the US. Under both the UK and Italian laws, these factors are considered during the liability phase of an anti-bribery or anti-corruption proceeding. In the US, the factors of the adequacy of a compliance program are considered by the Department of Justice (DOJ) in deciding if a corporation “should have a slight reduction in its culpability score when sentencing it for FCPA or other violations.” The authors believe that the adoption of such a compliance defense will not only increase compliance with the FCPA by providing businesses with an incentive to deter, identify and self-report potential and existing violations, but will also protect corporations from employees who commit crimes despite a corporation’s diligence.

The authors go on to state that the institution of a compliance defense will bring enforcement of the FCPA in line with US Supreme Court precedent, which has recognized that it is appropriate and fair to limit the legal doctrine of respondeat superior liability where a company can demonstrate that it took specific steps to prevent the offending employee’s actions. In the employment context involving punitive damages, the authors cite to the case of Kolstad v. American Dental Ass’n, 527 U.S. 526 (1999) for the proposition that, “an employer may not be vicariously liable for the discriminatory employment decisions of managerial agents where these decisions are contrary to the employer’s ‘good-faith efforts to comply with Title VII.’” The authors believe that this holding was motivated by a concern that the existing standard was “dissuading employers from implementing programs or policies to” comply with Title VII for fear that such programs would bring to light violations for which a company would ultimately be liable, no matter what steps it had undertaken to prevent such violations. From this Title VII case involving punitive damages, the authors extrapolate that businesses may similarly be dissuaded from instituting a rigorous FCPA compliance program for fear that the return on such an investment will be only to expose the company to increased liability and will do little to actually protect the company. A FCPA compliance defense will help blunt this.

Other commentators have noted that the doctrine of respondeat superior puts a company a great disadvantage in any FCPA enforcement proceeding. In a blog post entitled, “Quiz Time Answer”, the FCPA Professor explained:

Individual FCPA defendants tend to work for companies. Under respondeat superior theories of liability, the company is going to have a very difficult time “distancing” itself from its employees conduct.

The FCPA Blog went further, opining that the doctrine of respondeat superior “does more harm than good” and that corporations are “defenseless once employees are found to have committed [FCPA] violations” in an enforcement action because of the doctrine of respondeat superior. In a blog post entitled, “Naked Corporate Defendants”, the FCPA Blog said:

Sure, it produces a 100% corporate “conviction” rate in FCPA cases, which must go down well at the Justice Department. But, it probably doesn’t deter illegal behavior or encourage better compliance programs. And it puts overwhelming pressure on organizations to resolve threatened criminal cases. Because of the catastrophic effects of any potential conviction, companies have to settle with the government. So they rush into agreements that may require them to waive the attorney–client privilege, hand over employees’ private documents and data, cut off support for their legal defense, and fire those who don’t cooperate with government investigations.

This pressure to settle and avoid the fate of Arthur Anderson is often on the minds of many corporate General Counsel’s and other corporate officers. The FCPA Professor, in the same blog post cited above, noted that “corporate FCPA enforcement actions tend to be resolved through a non-prosecution agreement, a deferred prosecution agreement, or a plea. Entering into one of these resolution vehicles is often easier, more cost efficient, and more certain than actually mounting a legal defense based on the FCPA’s statutory elements. Further, because these resolution vehicles are subject to little or no judicial scrutiny and are entered into the context of the DOJ possessing certain “carrots” and “sticks” they do not necessarily reflect the triumph of one party’s legal position over the other.”

Many corporations are faced with a true Hobson’s Choice during a FCPA enforcement action. Simply put, they do not believe that they can face the prospect of a guilty verdict after trial to a judge or jury. While there is the example of Aibel Group Ltd., which pled guilty to a FCPA charge during the pendency of its Deferred Prosecution Agreement and survived; the example of Arthur Anderson is the one which is foremost in the minds of all corporate officers. The provision of a compliance defense as suggested by authors Wiessmann and Smith may provide companies with a mechanism to actually defend themselves from a FCPA enforcement action. However, it is not clear at all what the DOJ position will be on this issue.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2010

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