U.S. Foreign Corrupt Practices Act (FCPA) attorney Matteson Ellis gave this speech in Spanish on June 11, 2012, in Panama City, Panama, to 50 attorneys from throughout the Americas at the 2012 Partners Summit hosted by Kellogg’s Latin America. It is reprinted in English below with the permission of Kellogg’s Latin America. You can find the speech here [1]in Spanish.
Introduction
Thank you Kellogg’s Latin America for the opportunity to address your local lawyers, both internal and external, from throughout the region on such an important issue – their role in international anti-corruption compliance. I will discuss recent enforcement trends in Latin America, the basics of the U.S. Foreign Corrupt Practices Act (FCPA), and the specific things you can do in the area of compliance to add greater value to your multinational clients. You might be a specialist in employment, litigation, anti-trust, customs, criminal, or environmental law – it does not matter. You still have an important role to play.
As background, the intersection between anti-corruption issues and Latin America is a personal interest of mine. When I first moved to Buenos Aires, Argentina in 1998, almost fifteen years ago, corruption was the issue of the day. Carlos Menem was President. He had just presided over years of IMF-supported privatizations that left the politicians wealthy and the state coffers empty. I remember constant images in the media of the President driving around in red Ferraris with wealthy businesspeople. The upcoming Presidential election between Fernando de la Rua and Eduardo Duhalde was focused on corruption as a main theme.
One of the first big FCPA cases had hit – IBM’s subsidiary in Argentina had won a $250 million contract from Banco de la Nación in Argentina to modernize its computer systems. It came to light that, as part of the contract, IBM Argentina had paid $4.5 million to executives of Banco de la Nación. The U.S. Securities and Exchange Commission (SEC) eventually settled that case with parent company IBM in the United States, even though U.S. authorities were unable to show that the parent company had any actual knowledge of the bribery. It had simply failed to ensure that the Argentine subsidiary’s books and records were accurate. As a result, the parent IBM paid a $300,000 civil penalty, lost a reported $500,000 more of Argentine business, and was subject to a Cease and Desist Order.
Emergence of Compliance
Looking back at that time, what is most interesting to me now is not that corruption was so prevalent. It is that the concept of anti-corruption compliance as we know it today practically did not exist. I was working at the time for the Legal Department at General Motors de Argentina. Inside our offices, there was never any talk of compliance. This was not limited to GM either. No company in those days had the elaborate compliance practices that have become minimal expectations today. I am talking about anti-corruption policies, personnel that only work on compliance, periodic anti-corruption trainings, specific procedures for conducting and documenting due diligence of third parties, hotlines, compliance audits, risk assessments, acquisition due diligence, whistleblower policies, compliance committees, procedures for gifts, entertainment, travel, and charitable donations. Back then, there were no speeches like the one I am giving to you right now.
Today, the reality is that these types of things have become the norm. My law firm just conducted a survey [2]in partnership with Miller & Chevalier Chartered and a dozen law firms throughout Latin America in which we polled almost 450 businesspeople who work in the region. The results show strikingly that 93% of respondents from multinational companies say that their companies are now taken steps to protect against corruption risk. Ninety-three percent … almost every multi-national company surveyed. Even local and regional companies appear to be waking up to compliance. Three in every four (75%) said they have taken steps to protect from corruption risk, though the actual measures are much more limited. Only 35% have conducted anti-corruption training, compared to 75% of multinationals. Only 20% employ full-time compliance personnel, compared to 56% of multi-nationals.
The Stakes
Why has this significant shift occurred? Just ask Wal-Mart, Bridgestone, Tyson Foods, and Lufthansa in Mexico; Alcatel and Aon Corporation in Costa Rica; Ball Corporation and Biomet in Argentina; Panalpina and Nature’s Sunshine in Brazil; Willbros in Bolivia and Ecuador; BizJet in Panama; Siemens in Venezuela; Latin Node in Honduras; Terra Communications in Haiti; and companies like Embraer and Avon operating throughout the region. These companies have all experienced enforcement in just the last few years. And this is only the list of investigations we know about.
It is just too risky for companies subject to the FCPA, UK Bribery Act, and other foreign bribery laws to ignore compliance these days. Multi-million dollar penalties have become the norm. Executives, both U.S. executives and foreigners, are going to jail. Enforcement officials are applying expansive legal theories on issues like jurisdiction, vicarious liability, and successor liability. Cross-border cooperation in enforcement is on the rise. International treaties, like the OAS’s Inter-American Convention against Corruption, the OECD Anti-Bribery Convention, and the UN Convention against Corruption, are establishing common standards. Some Latin American countries are strengthening their own anti-corruption laws based on international commitments. Whistleblower bounties introduce additional pressures. Active non-governmental organizations, like Transparency International, keep the spotlight on countries’ efforts to enforce their new anti-bribery laws. Continued regional and global economic integration – companies doing more and more business across borders – means that opportunities for officials to ask for bribes will only increase. The trends are undeniable, unmistakable, and unavoidable.
Because the scope of these laws is so broad, company employees that work thousands of miles away, like here in Panama, can create multimillion dollar liability for the far-off parent company. You, local lawyers throughout Latin America, have a critical role to play.
The Basics of the FCPA
Because the FCPA has formed the basis of so much of the international anti-corruption movement, it is a good place to start. It has two key provisions.
Anti-Bribery Provisions. The anti-bribery provisions make it illegal for foreign persons acting in the United States or U.S. companies or individuals acting anywhere in the world to pay or even offer or promise to pay foreign officials to obtain or keep business. It is important to note a few things. First, there does not have to be an actual payment to create a violation. A promise, offer, or authorization of payment is sufficient. Second, “anything of value” is broad and can include favors or excessive promotional activity or even giving an internship to the child of an official. Third, “foreign official” is defined broadly to include elected or appointed officials, officials from any branch of government at any level, and even employees of state-owned enterprises. Finally, payments can violate the law not only if they are made directly but also if they are made indirectly through agents, consultants, distributors, or other third parties.
The Accounting Provisions. The books and records provisions require issuers to make and keep books and records “in reasonable detail” to “accurately and fairly reflect” transactions and disbursements of the issuer’s assets. Examples of violations include mischaracterization of kickbacks as “commissions” and disguising of bribes as legitimate expenses through false invoices. The internal controls procedures require that issuers devise and maintain a system of internal accounting controls that, among other things, “provide reasonable assurances that . . . transactions are executed in accordance with the management’s . . . authorization.” Violations include the absence of a compliance program, maintenance of off-book accounts, having hidden accounts, and payments contrary to company policy.
Enforcement Trends. Several statistics help demonstrate the upward trend of enforcement. In 2011, the DOJ and the SEC initiated nearly 50 FCPA enforcement actions. Monetary recoveries from companies for FCPA violations topped $500 million. FCPA enforcement accounted for nearly half of the $2 billion in settlements and judgments secured by the U.S. Department of Justice’s Criminal Division in 2010. In 2010 alone, five FCPA settlements exceeded $100 million. While in 2004 the DOJ collected about $11 million in criminal fines, since 2009 the DOJ has collected more than $2 billion in criminal fines. Prison sentences are becoming more common. Enforcement officials feel that if they can proceed against individuals as well as companies, they will help drive compliant behavior.
Jurisdiction. The FCPA is applied broadly and can apply to non-U.S. individuals and companies as well as U.S. individuals and companies operating anywhere in the world. Specifically, the FCPA can apply to:
– U.S. companies and U.S. nationals (“domestic concerns”) anywhere in the world (no need for U.S. nexus).
Companies that are issuers in the United States (listed on U.S. stock exchanges).
– Any company or individual that takes “any act in furtherance of” a prohibited payment while in the territory of the United States. Authorities have interpreted this broadly to include the mere sending of an e-mail that authorizes an improper payment or the use of a U.S. bank account to deposit funds related to a bribe.
– Individuals, including foreign nationals, who are employees, officers, directors, or shareholders of a covered entity.
– An entity that acts as an “agent” of a covered entity, which could include subsidiaries of U.S. multinationals.
– Subsidiaries may also be indirectly subject to the accounting standards and anti-corruption compliance programs of their parent companies or investors.
Consequences. The consequences of violations can be varied and severe. They can include multimillion dollar penalties, incarceration of individuals, disgorgement of profits, deferred prosecution agreements, internal investigations, shareholder derivative lawsuits, reduced stock values, damaged reputations, debarment, monitorships, and weakened leverage in mergers and acquisitions.
The Role of Local Counsel in Compliance
Now that we have overviewed the trends in international anti-corruption law and the basics of the FCPA, the next question is – where do you fit in as the local outside lawyers of multinational corporations? Consider this paraphrased quote from former U.S. Secretary of Defense Donald Rumsfeld: “There are things we know that we know, there are things that we know we don’t know. But there are also things we do not know we don’t know.” You, local external counsel, are key to the FCPA compliance system because you tell headquarters and local staff what they don’t know that they don’t know. You can help establish the crucial link between the company’s U.S.-based compliance team and the front-line – the place where business happens and risk lives.
You are on the front lines. You are the trip-wire for potential corrupt acts. You are the early warning system. You are the eyes and ears of the company on the ground. Successful anti-corruption compliance cannot work without you catching issues and communicating foreign ideas about corruption to the business people. The standards might be international, but successful compliance is local.
There are some specific elements of this crucial role that you perform. Let me highlight a few of them here. They are drawn from my own experiences over years of anti-corruption work throughout this region and others.
Advise on Local Law and Custom. What do you do when your client wants to transport an oversized truckload down a highway and the local police demand that it directly pay three police officers to accompany the truck? Could this be interpreted as an improper payment for a business advantage? When dealing with this issue, we needed lawyers on the ground to tell us if the local police really were correct – that this was a rule. We also needed local lawyers to advise us on how to obtain receipts from the police to ensure that these were official payments to the government, not payments to their own pockets.
In another case involving Asia, a client confronted a cultural norm of giving mooncakes to officials during the Luna New Year. Was this really permissible? Did local law allow it? With assistance from local counsel, we were able to tailor the client’s compliance program to accommodate local customs. We made an exception for the practice, but stipulated that the gifted mooncakes could not be lavish, they could not cost above a certain amount, and they could not contain “red envelopes” inside.
Companies will need you to advise them on whether certain practices are permissible under local law. They will need you to advise them on local custom. Under Brazilian law, is it permissible for country managers of a multinational company to take to dinner, once a month, the executive team of its Brazilian joint venture partner … when that partner is state-owned Petrobras? In Mexico, is it really the case that, in order to get a court judgment, you have to pay the local clerk to get a stamp? During the holidays in the Dominican Republic, is it customary to give baskets of gifts, like fruitcakes?
Keep in mind that a multinational’s liabilities might not be limited to just the FCPA. You can also advise on local anti-corruption laws. Latin American countries are starting to improve their own anti-bribery regimes. We are seeing developments in places like Colombia, Brazil, and now discussions in Mexico. You can watch the local enforcement trends and keep your clients updated.
Provide Local Information. What happens when an investment gets close to closing and your client realizes that the Prime Minister of the country is a partner at the local law firm it is using for the deal? How can a multinational quickly and efficiently avoid a scenario where it hires a local agent to obtain permits and then later realizes that the agent has a bad reputation for illegal acts in the country? You can help companies avoid these situations. You can spot red flags before transactions proceed too far.
Since multinational companies can be liable for the acts of their consultants, agents, and other third parties in your countries, you might be hired to vet those agents before they are used. You might be asked to look into the reputation of a certain consultant, interview references, check local media sources to see if there is any negative publicity or questionable conduct related to the agent, check government files to see if they are in good standing, and write a report of your findings. You might be asked to recommend a local private investigation firm to look into an allegation of wrongdoing.
You can also offer extremely valuable informal assistance with third parties. You know the cultures, the actors, the way that business works, the reputations. You speak the local language. You work with other companies in the same sectors and know what agents they are using and the types of commission that are standard in the market. You know when an agent who is promising to obtain regulatory permits faster than others really has experience and expertise or whether he is just well connected and has friends in high places.
Connect Compliance to Day-to-Day Business. How does a U.S. company ensure that “compliance audit rights” in its joint venture agreement means the same thing to its Brazilian joint venture partner? How does a multinational effectively and efficiently conduct acquisition due diligence on a family-owned business in Argentina?
You can help facilitate the compliance process on the ground. In a joint venture agreement, you can ensure that “compliance audit rights” means the right to inspect records related to a specific transaction, not just the annual financial statements, as well as the right to interview individuals involved in a transaction. In an acquisition, you can educate local business owners on the dynamics behind anti-corruption compliance and the reasons why acquisition due diligence is essential. Sometimes compliance can be seen as a burden or roadblock to doing business. But you are positioned to help make the process run smoother.
Conclusion
If you can grasp the basics of international anti-corruption law and learn how to bridge the gaps between international expectations and local practice, you will make yourselves extremely valuable to your multinational clients. You can provide specific legal advice when needed. You can also spot issues when they do not. By doing this, you will help them better manage corruption risk.
The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com [3].
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© 2012 Matteson Ellis Law, PLLC