Foreign Corrupt Practices Act (FCPA) : A Presentation by KPMG Forensic September 29, 2008

FORENSIC
Foreign Corrupt Practices Act (FCPA)
A Presentation by KPMG Forensic

September 29, 2008
ADVISORY
Media Spotlight
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, 1
a Swiss cooperative. All rights reserved. Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
FCPA Background
Enacted in 1977 in response to scandals

 More than 400 U.S. Companies admitted to paying over $300 million in bribes
 Two objectives: (1) greater transparency in financial reporting; (2) prohibit illicit
payments by U.S. companies to foreign officials
 In addition to anti-bribery, addresses books and records and internal controls
For 20 years, U.S. was only country that criminalized bribery of foreign
government officials
FCPA is now receiving more attention from U.S. and foreign regulators, in
part due to the PATRIOT Act, Sarbanes-Oxley and a series of international
anti-corruption conventions
Aggressive FCPA Enforcement by DOJ and SEC
 Substantial increase in FCPA enforcement proceedings against U.S.

and foreign issuers, subsidiaries, individuals, third-party agents and
intermediaries
 38 Cases Brought in 2007; Over 80 Open Investigations in 2008

 Larger Penalties Imposed – $44 Million Baker Hughes
 Deferred Prosecution and Non-Prosecution Agreements
 Appointment of Independent Monitors
 Increase in Parallel Proceedings among U.S. and foreign law
enforcement officials
FCPA Enforcement continues to be “top priority” for DOJ and SEC
FCPA Enforcement Actions 2003-2007
FCPA ENFORCEMENT ACTIONS 2003-2007
25
20
20 18
15
Total
DOJ
10 8 SEC
7 7
5
5 2 2 3
0
0
2003 2004 2005 2006 2007
Years
FCPA Penalties
Anti-Bribery Financial Reporting
Criminal
Individual Fines up to $250,000 Fines up to $5M
5 years imprisonment 20 years imprisonment
Corporate Fines up to $2M Fines up to $25M

or 2x pecuniary gain or 2x pecuniary gain
Civil
Individual $11,000 per violation $6,500-110,000 per
violation
Corporate $11,000 per violation $60,000-600,000
plus financial reporting
Other FCPA Remedies
Criminal fraud charges, censure

Civil injunctive action
Administrative cease and desist proceedings (C&Ds)
Disgorgement of ill-gotten gains, pre-judgment interest
Other Remedial Measures
 Debarment
 Implementation of FCPA compliance program
 Independent Monitor
 Continuing reporting obligation
 Deferred Prosecution (or Non-Prosecution) Agreements
Deferred and Non-Prosecution Agreements
Lucent Technologies Baker Hughes *

Ingersoll Rand * Aibel Group
Azko Nobel Schnitzer Steel *
York International * Statoil *
Chevron Monsanto
Paradigm BV * Invision *
Textron Micrus Corporation *
Omega Advisors
* Independent Monitor appointed
Foreign Corrupt Practices Act (FCPA)
The Anti-Bribery Provisions

Section 30A, Securities Exchange Act of 1934
The Financial Reporting Provisions

Section 13, Securities Exchange Act of 1934
FCPA – Anti-Bribery Provisions
Prohibited Payments: It is unlawful to pay or offer to pay “anything of

value” to a “foreign official” to influence official action or to secure any
improper business advantage in order to obtain or retain business.
5 elements:
 Who: Applies to any issuer, officer, director, employee or agent of such
issuer
 Payment: Cannot offer, pay or promise to give “anything of value”
 Corrupt Intent: The payer must have a corrupt intent and the payment
must be intended to induce misuse of an official position
 Recipient: To any foreign official or political party
 Business Purpose Test: To influence official action or to secure any
improper advantage in order to “obtain or retain business”
FCPA Anti-Bribery Provisions - Who?
Jurisdiction: Any “issuer,” or any officer, director,

employee or agent of an issuer
 Issuer includes U.S. listed companies

 Also includes foreign companies or foreign affiliates that are themselves listed on
U.S. exchanges
Alternative Jurisdiction: Any United States person

anywhere in the world
 United States person’’ means a national of the United States or any corporation,
partnership, association, joint-stock company, business trust, unincorporated
organization, or sole proprietorship organized under the laws of the United States
or any State, territory, possession, or commonwealth of the United States, or any
political subdivision thereof.
FCPA Anti-Bribery Provisions: Payment
Prohibited Payments: Cannot offer, pay or promise to give

“anything of value”
 Cash
 Services
 Payment of Travel Expenses
 Excessive Entertainment Expenses
 Lavish Gifts
 Favorable Loans
 Charitable Contributions
FCPA: Anti-Bribery Provisions – Recipient
 Definition of “Foreign official”

 Foreign government, including officers and employees
 Political parties, officials or candidates
 Public international organizations (e.g. Red Cross, the World Bank)
 Also includes other persons who intend to pass on the payments or

a portion of the payments to foreign officials or political parties
FCPA Anti-Bribery Provisions: Business Test
Business Purpose Test / Prohibited Activities:
 Influencing any act or decision of a foreign official in his official capacity,

inducing such foreign official to do or omit to do any act in violation of the
lawful duty of such official, or securing any improper advantage; or
 Inducing such foreign official to use his influence with a foreign government
or instrumentality thereof to affect or influence any act or decision of such
government or instrumentality, in order to assist such issuer in obtaining or
retaining business for or with, or directing business to, any person.
Financial Reporting Provisions
Applicable to SEC-registered “Issuers”

 U.S. public companies
 Foreign companies listed on U.S. stock exchanges
Books and Records

 Issuers must maintain books, records and accounts, which in
reasonable detail, accurately reflect the transactions and dispositions of
its assets
Internal Controls
 Issuers must devise and maintain a system of internal accounting
controls to provide reasonable assurance that transactions are
authorized by management and financial statements are in conformity
with GAAP
Exceptions and Affirmative Defenses
Exception for Facilitating Payments in order to secure

Routine Governmental Action
Affirmative Defenses
(1) Payment lawful under foreign law
(2) “Reasonable expenditure” for promotional activities
FCPA – Exception
“Facilitation Payments” for Routine Governmental Action

 Obtaining licenses or permits to do business
 Processing government papers (visas, work orders)
 Providing police protection, mail or cargo service
 Providing telephone service
 “Actions of a similar nature”
Caveats
 Must be ministerial – no discretionary authority
 Cannot affect decision to award new business or to continue existing
business
FCPA – Affirmative Defenses
Payment Lawful Under Foreign Law

 There must be something in the written law or regulations of the foreign
country
 Traditional, customary, not enforced does not qualify
Reasonable Business Expenditure

 To promote a business or product
 Includes trip expenses, tours of company facilities, product
demonstrations and training
 Must be reasonable and bona fide
FCPA - Materiality Irrelevant
 There is no materiality threshold for FCPA

 Any prohibited payment is actionable
 Impact of FCPA non-compliance can have material
negative impact on financial statements, operations
and reputation
 Criminal and civil penalties may be substantial, and may include

disgorgement, restrictions on business with the federal
government, adverse publicity, impact on stock price, and potential
private securities litigation
FCPA “Red Flags”
 Companies with significant overseas operations

 Operations in countries with high risk for bribery (i.e.
Southeast Asia, Middle East)
 Operations in high risk industries (i.e. defense, aircraft, oil,

engineering, construction)
 Acquisitions of foreign subsidiaries

 Joint ventures with foreign government entities
 Foreign consulting/agency relationships
 Large payments to foreign agents relative to local prevailing rates
for services provided
FCPA “Red Flags” (cont.)
 Agent refuses to provide FCPA representations

 Unusual bonuses paid to foreign operational managers
 Unusual payment arrangements to vendors
 Commissions inconsistent with the going rate
 “Public red flags” such as political contributions,
payoffs, bribes, kickbacks or excessive rebates
Transparency International
2007 World Map
Global Corruption Indices:
CPI and BPI
 2007 Transparency International – Corruption Perceptions Index

(CPI)
 Reflects perceived levels of corruption on the “demand” side by government
officials
 Ranks countries on scale of 10 (squeaky clean) to 1 (highly corrupt)

 TI deems 5.0 the borderline figure distinguishing companies that have a
serious corruption problem
 2006 Bribe Payers Index (BPI)

 Reflects perceived levels of corruption on the “supply” side
 Includes 30 top exporting countries
U.S. Enforcement Trends
 Scrutiny of foreign issuers and subsidiaries

 Actions against individuals and third parties agents
 Compliance monitors
 Transactional due diligence
Scrutiny of foreign issuers and
subsidiaries
There has been increased scrutiny of foreign issuers by

US regulatory authorities as well as increased
enforcement activity by foreign regulatory authorities
Statoil
 U.S. v. Statoil ASA, Case No. 06-CR-00960-RJH-1 (S.D.N.Y. October 2006)
Dow Chemical Company

 SEC v. Dow Chemical Company, Lit. Rel No. 20000 (February 13, 2007)
Siemens AG
Actions against 3rd parties and
individuals
There have been a number of recent cases against not

only corporate entities, but also against individuals and
third-party agents
 eg. U.S. v. Sapsizian, Case No. 06-CR-20797 (S.D. Fla. 2006)
DOJ Guidance regarding Payments to Third-Parties

 The FCPA 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. The term "knowing" includes conscious disregard and
deliberate ignorance.
Recent Cases Involving “Agents”
Company by Country Intermediary Recipient Amount of Fines Additional

industry /Location payout (USD) (USD) Remedies
Oil and gas UK Nigerian agent Nigerian customs 2.1 M 24 M DPA

(Foreign official Monitor
Subsidiary)
Oil and gas Norway Offshore international Iranian national 5M 26 M DPA – 3 yr
(Foreign issuer) consultant oil company Monitor
subsidiary
Telecom France Costa Rican Wife of State 2.56 M TBD TBD
(Foreign Issuer) Consulting firm telecom board Complaint
member filed
Agriculture USA Indonesian consultant Indonesian 50 k 5M NPA
government Independent
official Consultant
Defense USA Foreign distributors Foreign 95K 1.1 M NPA – 2 yrs
(Thai, China, government FCPA
Philippines) officials Compliance
Program
Chemicals USA Contractors and Indian 200 K 325 K NPA – 3 yr
unrelated companies government Independent
official / Central Consultant
Insecticides
board member Employees
terminated
Compliance monitors
There has been a trend toward appointing compliance

monitors to review FCPA policies, procedures and internal
controls
Baker Hughes Inc.

 SEC v. Baker Hughes Incorporated and Roy Fearnley, Civil Action No. H-071408
 United States District Court for the Southern District of Texas, LR-20094; AAE
Rel 2602
Vetco Gray Controls, Inc.

 U.S. v. Vetco Gray Controls Inc., Vetco Gray Controls Ltd., Vetco Gray UK Ltd.,
and Aibel Group Ltd., Case No.07-CR-004 (S.D. Tex. 2007)
Transactional due diligence
FCPA due diligence is expected in joint ventures, mergers

and acquisitions involving foreign counterparts
GE merger with InVision

 In Vision Technologies, Inc. Lit. Release No. 19078 (February 14, 2005)
 DOJ Settlement; GE avoided successor liability for InVision’s conduct
Titan Corporation
 SEC v. The Titan Corporation, Civil Action No. 05-0411 (D.DC), Lit. Rel. No.
19107 (March 1, 2005)
 US v. Titan Corporation, Case No. 05cr0314-BEN (S.D. Cal.)
Key Elements –
FCPA Compliance Program
Prevention
• Audit / Compliance Committee Oversight on FCPA Compliance

• Executive and Line Management Responsibilities
• Communication and Training
• Written FCPA Policies and Procedures
 Specific reference in Code of Conduct
 Employee and Third Party Due Diligence
 Transactional Due Diligence
 Political and Charitable Contributions
 Gifts and Entertainment of Foreign Officials
 Facilitating Payments
• Internal Audit, Compliance and Monitoring Functions
Detection
• Hotlines and Whistleblower Mechanisms

• Substantive Testing
• Ongoing Monitoring
Response
• Internal Investigations Protocols

• Remediation Protocols
• Enforcement and Accountability Protocols
• Disclosure Protocols
FCPA Services
FCPA Services
Compliance Services Global Investigations
Global Risk Assessment Bribery Investigations
Development of FCPA Policies and Forensic Accounting

Procedures
Computer Forensics
Internal Controls Review and Testing
Communication and Training

FCPA Due Diligence
FCPA Compliance Monitoring
M&A Transactions
Third-Party Agents
Presenters Details
Pamela J. Parizek, Partner

202-533-5362
pparizek@kpmg.com
Tim Hedley, Partner

212-872-3496
thedley@kpmg.com

Foreign Corrupt Practices Act (FCPA) : A Presentation by KPMG Forensic September 29, 2008

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FORENSIC

Foreign Corrupt Practices Act (FCPA)

A Presentation by KPMG Forensic

Enacted in 1977 in response to scandals

 Substantial increase in FCPA enforcement proceedings against U.S.

 38 Cases Brought in 2007; Over 80 Open Investigations in 2008

FCPA Enforcement continues to be “top priority” for DOJ and SEC

FCPA ENFORCEMENT ACTIONS 2003-2007

Anti-Bribery Financial Reporting

Individual Fines up to $250,000 Fines up to $5M

5 years imprisonment 20 years imprisonment

Corporate Fines up to $2M Fines up to $25M

Criminal fraud charges, censure

Lucent Technologies Baker Hughes *

The Anti-Bribery Provisions

The Financial Reporting Provisions

Prohibited Payments: It is unlawful to pay or offer to pay “anything of

Jurisdiction: Any “issuer,” or any officer, director,

 Issuer includes U.S. listed companies

Alternative Jurisdiction: Any United States person

Prohibited Payments: Cannot offer, pay or promise to give

 Definition of “Foreign official”

 Also includes other persons who intend to pass on the payments or

Business Purpose Test / Prohibited Activities:

 Influencing any act or decision of a foreign official in his official capacity,

Applicable to SEC-registered “Issuers”

Books and Records

Exception for Facilitating Payments in order to secure

“Facilitation Payments” for Routine Governmental Action

Payment Lawful Under Foreign Law

Reasonable Business Expenditure

 There is no materiality threshold for FCPA

 Criminal and civil penalties may be substantial, and may include

 Companies with significant overseas operations

 Operations in high risk industries (i.e. defense, aircraft, oil,

 Acquisitions of foreign subsidiaries

 Agent refuses to provide FCPA representations

 2007 Transparency International – Corruption Perceptions Index

 Ranks countries on scale of 10 (squeaky clean) to 1 (highly corrupt)

 2006 Bribe Payers Index (BPI)

 Scrutiny of foreign issuers and subsidiaries

There has been increased scrutiny of foreign issuers by

Dow Chemical Company

There have been a number of recent cases against not

 eg. U.S. v. Sapsizian, Case No. 06-CR-20797 (S.D. Fla. 2006)

DOJ Guidance regarding Payments to Third-Parties

Company by Country Intermediary Recipient Amount of Fines Additional

Oil and gas UK Nigerian agent Nigerian customs 2.1 M 24 M DPA

There has been a trend toward appointing compliance

Baker Hughes Inc.

Vetco Gray Controls, Inc.

FCPA due diligence is expected in joint ventures, mergers

GE merger with InVision

• Audit / Compliance Committee Oversight on FCPA Compliance

• Hotlines and Whistleblower Mechanisms

• Internal Investigations Protocols

Compliance Services Global Investigations

Global Risk Assessment Bribery Investigations

Development of FCPA Policies and Forensic Accounting

Communication and Training

Pamela J. Parizek, Partner

Tim Hedley, Partner

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