Understanding Bribery Foreign Corrupt Practices Act U K

Understanding Bribery: Foreign Corrupt Practices Act & U. K. Bribery Act Jennifer Sawayda Program Specialist Anderson School of Management University of New Mexico Albuquerque, NM 1

Disclaimer: Not Legal Device • Much of this material has been derived from Corpedia and the Department of Justice. • This presentation is NOT legal advice. • Anyone determining that they need legal advice or representation should seek counsel from an attorney or law firm. 2

What is Bribery? • Bribery is the offering of payments or other incentives to gain illicit advantages. • In business bribery is used to influence an organization or individual to provide preferential treatment. • Bribery is therefore considered to be unfair because it interrupts the competitive process. • The difference between bribery and gifts can be a grey area in business. 3

What is the U. S. FCPA? • The Foreign Corrupt Practices Act makes it illegal for individuals, firms, or third parties with operations in the United States to offer payments (bribes) to government officials to secure or retain business. • To be found liable, the Department of Justice must find that the bribe was willful or intentional. 4

What is the U. K. Bribery Act? • The U. K. Bribery Act has made it illegal to pay bribes to both public and private individuals or enterprises. It applies to any company that has a business presence in the U. K. , whether or not the firm is a foreign company. • Bribes between private businesspeople are illegal under the U. K. Bribery Act. • Companies can be held liable even if they didn’t have explicit knowledge of the crime. 5

Complying with the Laws… …is not as easy as it may appear! • While bribery is considered unacceptable in countries such as the U. S. or U. K. , in many countries it is an established way of doing business. – This can limit business opportunities in certain countries. 6

10 Countries Most Likely to Use Bribery in Business 1. 2. 3. 4. 5. Russia China Mexico Indonesia United Arab Emirates 6. Argentina 7. Saudi Arabia 8. Turkey 9. India 10. Taiwan Source: Associated Press. “The 10 Countries Most Likely to Use Bribery in Business. ” Huffington Post. November 2, 2011. http: //www. huffingtonpost. com/2011/11/02/bribery-business-countries-most-likely_n_1071452. html#slide=449030. Retrieved November 30, 2012. 7

Facilitation Payments • Under the Foreign Corrupt Practices Act, small facilitation payments are allowed to expedite transactions. • However, the 2010 U. K. Bribery Law does not allow for facilitation payments. The U. K. Bribery Law is similar to the FCPA, but many consider it to be even more extensive. 8

What is the Difference Between Bribes and Gifts? • In Japan, it is customary to bring small gifts to meetings. So what is the difference between a bribe and a gift? • Is a coffee mug a gift or a bribe? What about tickets to the Super Bowl? Much of this depends upon how valuable the gift or entertainment is. • Many companies’ codes of conduct will specify a certain amount that a company official cannot exceed to prevent the appearance of bribery. • Nike’s Code of Conduct forbids acceptance of gifts or entertainment with a value of $200 or more. 9

A Brief History of the FCPA • The FCPA was instituted in 1977 after the Watergate scandal. An SEC investigation revealed that more 400 companies were involved in bribing foreign government officials to secure business. • Companies were also falsifying documents to hide bribes. • The FCPA made such payments illegal. Subsequent years would see the introduction of many amendments to the FCPA. 10

Hypothetical Scenario #1 • Pierre is a French citizen working for an American firm. In order to secure business in Mexico, Pierre authorized the payment of thousands of dollars to certain government officials. Although Pierre knows this violates the provisions of the FCPA, he believes this law only applies to American citizens. Is Pierre subject to the FCPA? 11

Answer Yes! – Under the FCPA it is illegal to provide payments to gain an illicit business advantage among foreign citizens employed by or acting as agents for the United States. Pierre is violating the FCPA. 12

Real Life Scenario • Siemens is a German engineering firm. An investigation has revealed that Siemens paid bribes to foreign officials across the globe, including Bangladesh and Argentina. If it didn’t pay bribes to anyone in the United States, can Siemens be penalized for violating the FCPA since it is a foreign company? 13

Answer It can, and was! – While not all foreign companies may be subject to penalties under the FCPA, foreign companies can still be found liable for various reasons: • It is a U. S. subsidiary • It has a class of securities registered under Section 12 of the Securities and Exchange Commission Act • The bribe was performed within the U. S. 14

The Case of Siemens • Siemens owned American Depository Receipts traded on the New York Stock Exchange. • It was therefore subject to the FCPA. • The company was fined $800 million for bribing foreign officials, the largest bribery fine recorded to date. 15

Other Corporate Bribery Scandals • Avon: A global bribery scandal cost the firm more than $250 million in legal expenses and the ouster of CEO Andrea Jung. • Johnson & Johnson: Paid $70 million to settle claims by the SEC and Department of Justice that it had bribed doctors in Europe and offered kickbacks in Iraq. • IBM: Paid $10 million to settle claims that it had given cash and gifts to officials in China and South Korea in exchange for contracts. • Monsanto: Fined $1. 5 million for paying a bribe to an Indonesian official. • Wal-Mart: Accused of paying significant bribes to Mexican officials to win contracts for building stores. 16

What is A Bribe Under the FCPA? • It can be anything of significant value used to influence firms to create or retain business. This can include the following: – Money – Gifts or Entertainment – Improper Travel 17

Can This Be Seen As A Bribe? • Your company agrees to pay for a foreign government official to fly to your Los Angeles-based company to discuss legitimate business opportunities. The tickets are expensive. Is this a bribe? – Most likely no. It involves a legitimate business activity. • The foreign official decides he would like to take an extended vacation in Los Angeles. He also wants to take his extended family along and wants you to foot the bill for the entire family. Could this be construed as a bribe if your firm agrees? – It certainly could be. Under the FCPA, this could be seen as trying to influence the foreign official’s business decision. 18

Hypothetical Scenario #2 • A government official of a small country in the Caribbean wants your company to donate $5 million to a chosen charity in his country for orphan children before he’ll consent to do business with you. The official will not receive any of the money. Since the money is going to a good cause, is it considered to be a bribe under the FCPA? 19

Answer Yes! – Charitable contributions of value used to influence a business decision is a violation of the FCPA. Just because a bribe is not paid directly to a foreign official does not mean the company offering the bribe is safe from prosecution. – New guidance on the FCPA seeks to close loopholes regarding indirect inducements. 20

Bribery in Other Countries • Even countries where bribery is seen to be more acceptable have recently begun to crack down on the practice • A Japanese national received a three-year prison sentence in Indonesia for bribing a judge to rule in favor of his company in a dispute. • A Chinese Mobile executive was sentenced to death (with the possibility for life imprisonment) for accepting more than $2. 5 million in bribes. • Brazil has been debating whether to accept an anti-bribery bill that would make it illegal to bribe domestic and foreign officials. 21

Who is A Foreign Official? • An employee or officer of a foreign government. • An agency or department of an public international organization. • Any official acting in official capacity of or on behalf of a foreign government or public international organization. • Is this a bribe? – A company provides payments to the board members of a foreign private company. One of the board members has some government duties. Does this violate the FCPA? Possibly. • Companies must be especially careful when dealing with countries in which many of the organizations are state-owned (e. g. Russia, China). 22

Why Have A Compliance Program? • Often a company can have fines for misconduct reduced if it can prove that it had an effective compliance program in place to prevent bribery. • When determining whether the company has an effective compliance program, the following approach can be used: – Is the program designed well? – Was it applied in good faith? – Does it work? 23

What Regulatory Authorities Look for to Determine Effectiveness – – – – – Tone at the top Code of Conduct Oversight and Resources Risk Assessment Training Incentives and Disciplinary Measures Third Party Due Diligence Confidential Reporting Periodic Testing 24

Tone at the Top • An ethics and compliance officer can do little without support from top management and the board of directors. • Often the most toxic corporate cultures have a disinterested or unethical tone at the top. • Top managers set the tone for the entire organization. They act as role models for employees. • Top managers should communicate the firm’s ethical values and expectations to all the different levels of the company. 25

Code of Conduct • A code of conduct should not only describe the firm’s ethical expectations of employees, but it should also express the firm’s ethical values and goals. • An effective code of conduct has comprehensive content, is communicated to all levels of the organization, and has support from both immediate and higher-level managers. • A global code of supplier conduct is important for multinationals to develop because of differing cultural values and beliefs. 26

Dedicated Resources • There must be someone in charge of the ethics program that has authority (part of the “C-Suite” of executives) and who can discuss matters with the CEO and board members. • Companies should know their risks and dedicate more resources (time, money, etc. ) to high-risk areas. 27

Risk Assessment • Understand the ethical risk areas in your organization. • Adapt the program to address the specific risks of your organization. • Target resources at the highest ethical risk areas. • Gain employee feedback to understand how ethical they believe the corporate culture is and whether they feel as if they would report misconduct. – An employee culture survey can determine how employees view the ethical culture of the organization. 28

Training • Training communicates the firm’s ethical values and expectations. • It also prepares employees for some of the most common ethical risks they are likely to face. • Incorporate finance and audit teams into FCPA training development as they will have good knowledge of specific company risks. • Develop different FCPA training for different employees and third parties based upon their risks. – A “one-size-fits-all” is generally not considered to be effective. 29

Incentives and Disciplinary Measures • Disciplinary measures must be enforced; otherwise, the code of ethics is little more than “window-dressing. ” • Incentives for ethical conduct have rarely been discussed but could be a great way to promote an ethical corporate culture. • The FCPA Guidelines recommend: – Incorporating ethics and compliance into employee performance evaluations – Incorporating ethics and compliance into promotion decisions – Providing rewards for those who make the “right” decision 30

Third Party Due Diligence • Implement training for third parties such as suppliers. • Separate suppliers into high, medium, and low risk areas and tailor supplier training accordingly. • Using metrics to analyze the “risks” of certain countries can help determine the riskiness of suppliers and third parties. 31

Confidential Reporting and Internal Investigations • Establish confidential reporting mechanisms such as hotlines to reassure employees they will not be punished for reporting. • Research has shown that reporting to supervisors and through hotlines is indicative of a more ethical corporate culture. • Follow up on reports with internal investigations. • WARNING! Just because the company is not receiving any calls through the hotline does not necessarily mean that employees are not observing misconduct. • This is why it’s vital to investigate potential issues and know what is going on within the organization. 32

Periodic Testing and Review • Ethics and compliance is never static. The ethics program should be periodically reviewed to determine its effectiveness. • Activities such as supplier audits can be particularly important for third parties operating in different countries. • The bigger the company’s global operations, the more likely an FCPA violation may occur if proper oversight is not provided. 33

Conclusions • The costs of FCPA compliance might be expensive depending upon the organization’s size and operations. • But the costs of fines and legal fees for a violation is even greater! • Know bribery laws of other countries. – The U. K. bribery law applies to any company that has operations in the U. K. , whether or not the violation occurred in the country. – As a result of the more stringent U. K. bribery laws, many companies are placing provisions in their codes of conduct to discourage all forms of bribery. – The U. K. law is also more lenient on companies who are seen to have effective ethics and compliance programs in place. • Your best bet: Avoid bribery altogether with an effective compliance program. 34