FCPA Rules & Regs

1. What Private Investors
Need to Know About the FCPA
July 2007
3163760

2. Introduction
This presentation will:
• Describe the requirements and prohibitions of the U.S.
Foreign Corrupt Practices Act (“FCPA”)
• Outline the risks associated with noncompliance
• Explain how the FCPA can impact private equity and
venture capital firms and their partners

3. Understanding The Legal Risks
The FCPA prohibits:
Improper payments and other practices in connection
with overseas business activities
The FCPA requires:
Maintaining accurate books and records, which includes
documenting the nature of all payments
Retaining those records for five years
Implementing controls to prevent improper payments

4. Understanding The Legal Risks
The FCPA has two provisions:
Anti-bribery
Accounting and Internal Controls
(“Books and Records”)

5. The Anti-Bribery Provision
How is it applied?
The anti-bribery provision applies to:
•U.S. companies, public and private
•Most foreign subsidiaries of U.S. companies
•U.S. citizens and resident aliens
•Foreign nationals acting for a U.S. company
•Foreign nationals who commit an act in
furtherance of a foreign bribe while in the U.S.

6. The Anti-Bribery Provision
How is it applied?
Private equity firms and their partners may be liable for
FCPA violations committed by the companies they acquire
• Successor liability for violations that occurred before the
acquisition
• Partners who serve as directors may face individual liability
Venture capital firms and their partners may be liable for
FCPA violations committed by the companies in which
they invest
• Successor liability depends on structure of transaction
• Partners who serve as directors may face individual liability

7. The Anti-Bribery Provision
The FCPA forbids people and entities from:
Corruptly
Making a promise or offer, or authorizing the payment of,
A bribe or anything of value
Directly or indirectly
To a foreign government official
To obtain or retain business or to gain an improper business
advantage

8. Anti-Bribery Provision
What Is A Foreign Official?
Foreign officials include:
• Officials of all branches of government
• Government entities
• Public international organizations
• Political parties and party officials
• Candidates for public office
• Employees of government-owned businesses, such as airlines,
hospitals, or oil companies
It does not matter whether the foreign official is paid or unpaid or
holds an “official” state post

9. The Anti-Bribery Provision
How Does It Affect Me?
The FCPA imposes liability on you or your company if you
know or have reason to know that:
• an improper payment or offer for payment was made;
• an improper payment or offer for payment is most likely going to
be made; or
• there are circumstances in place that will lead to an improper
payment or offer for payment
Thus, to be liable under the FCPA:
• There does not need to be an actual payment, and
• You do not need actual knowledge of the payment or offer

10. The Anti-Bribery Provision
How Does It Affect Me?
Examples of liability-imposing behavior:
Approving an improper payment
Knowingly creating or accepting a false invoice
Covering up an illegal payment or activity
Knowing an improper payment was made or likely made, and
not reporting it
Ignoring comments indicating problematic business dealings
(e.g., in Nigeria, a suggestion that something was handled “the
African way”)

11. The Anti-Bribery Provision
Payments by Third Parties
A private equity or venture capital firm and its partners can
be held liable for improper payments made or actions taken
by third parties who act or acted on behalf of a company the
firm invested in or acquired
These improper payments and actions are scrutinized by law
enforcement authorities and can occur in many forms,
including:
• Gifts and lavish entertainment
• Gratuities and kick-backs
• Charitable or social contributions
• Special processing or intervention fees

12. The Anti-Bribery Provision
Exception for Facilitating Payments
There are exceptions under very specific and
extremely limited circumstances for “facilitating” or
“expediting” payments
• Made to ensure or speed the proper performance of a foreign
official’s duties
• The duties must be essentially clerical and must not require the
official to use any discretion or judgment
To fall under the exception, the payments must be for small
amounts (but there is no magic number)
Many local laws (and FCPA policies) forbid facilitating payments
These payments MUST be recorded properly

13. The Anti-Bribery Provision
Exception for Promotional Expenditures
What is allowed?
• Reasonable meals, travel, and entertainment
• Small, token gifts and promotional items of nominal value
Expenditures must be bona fide and directly related to a legitimate
business purpose, such as:
• The promotion or demonstration of products or services
• The execution or performance of a contract with a foreign
government or agency
Payments must be :
• Authorized as required by the company’s FCPA Policy
• Recorded properly (exception: promotional items of nominal value)

14. The Anti-Bribery Provision
Illegal Payments
Illegal payments:
(not proper facilitating or promotional payments)
Excessive payments for “facilitation” or “expediting”
Payment to persuade a government official to do something discretionary
Lavish gifts, entertainment, or travel
Improper campaign contributions
Lump sum per diem in advance of travel
Payments to family members of government officials for education,
shopping, or travel
Under-pricing of services or overpayment to government officials

15. The “Books and Records” Provision
Applies to all U.S. and foreign companies with registered
securities and companies that file reports with the SEC
Requirements:
• Maintain accurate books, records, and accounts
– Must have reasonable detail
– Must accurately and fairly reflect nature of transactions
• E.g., document all facilitating payments and nature of all
payments to government officials
– Must show disposition of assets
• Retain records of those payments for five years

16. The “Books and Records” Provision
Requirements (cont.):
• Implement a system of internal controls that:
– Prevents improper payments
– Ensures that transactions are executed with management's
authorization
– Ensures that assets are recorded to permit preparation of financial
statements
• Conduct periodic audits at reasonable intervals
– The audits should ensure financial accountability
– If there are discrepancies in the books, additional research must
be done to determine the cause

17. Due Diligence
What Is It, And What Diligence is Due?
Due Diligence is an evaluation of the potential advantages
and risks of a given transaction (e.g., third party contract,
merger, acquisition)
To comply with the FCPA, a company must evaluate the
individuals and entities with which it associates to determine if
their conduct could negatively impact the Company
Occurs in third party relationship and M&A contexts
Private equity and venture capital firms should conduct FCPA
due diligence before acquiring or investing in a company and
should ensure the company continues to conduct due diligence
on third parties after the acquisition or investment

18. Due Diligence
What Is It, And What Diligence is Due?
For third parties:
• Choose third parties carefully; inquire into background, reputation
• Ensure that all third party relationships are subject to a written agreement,
including an FCPA certification, before any work begins
• Screen and monitor all business opportunities with third parties who may
interact with foreign government officials
For mergers and acquisitions:
• Understand the target company’s international business and industry
• Conduct pre-acquisition due diligence to determine potential FCPA issues
• Ensure due diligence is covered in clauses and agreements

19. Due Diligence
Red Flags
A “red flag” is a clue that there is a potential FCPA violation
When a “red flag” is discovered during due diligence or otherwise, you should:
• Subject it to greater scrutiny than normal
• Try to resolve it immediately
• Implement safeguards
Examples:
• The transaction is in, or involves, a country known for corrupt payments
• Lavish entertaining of government officials or their relatives
• Insistence by the foreign customer that a particular agent be used
• Objections to FCPA, anti-bribery, or other compliance requirements
• Unusual contract terms or payment arrangements
• Excessive commissions or fees

20. Compliance
When making compliance decisions:
• Use common sense
• Document your decisions
A “culture of compliance” develops by:
• Committing to compliance “at the top”
• Developing thorough and value-driven policies
• Providing regular training and updates
• Giving practical guidance geared to real business situations
• Conducting regular audits and other monitoring

21. The Penalties
For the Company
Anti-Bribery:
• Up to $2 million fine (per violation) and/or restitution
Books & Records:
• Criminal: up to $25 million fine (per violation) and/or restitution
• Civil: $10,000 fine per violation (for public companies)
In addition, a company can be:
• Suspended or debarred from contracting with U.S. Government
• Have its import and/or export licenses revoked or denied

22. The Penalties
For Individuals
Anti-Bribery:
• Up to $250,000 fine (per violation), 5 years in prison, and/or
restitution
Books & Records:
• Criminal: up to $5 million fine (per violation), 20 years in
prison, and/or restitution
• Civil: $10,000 fine per violation
In addition, foreign nationals may face extradition to the
U.S. and/or seizure of personal assets

23. FCPA Enforcement
It Really Happens
U.S. v. Kay & Murphy, 2004
• A criminal case brought against Kay and Murphy, executives for
American Rice, Inc., for allegedly authorizing payments to customs
officials in Haiti to induce the officials to accept false documents
underestimating the quantity of rice their company shipped, thus
reducing the customs duties and sales taxes owed by the company.
• Kay, the Vice President of Operations, was sentenced to 37 months in
prison and Murphy, the President and CEO, was sentenced to 63
months.
• The court held that in enacting the FCPA, Congress intended to cast “a
wide net over foreign bribery” and that a bribe does not have to relate
directly to obtaining a particular piece of business to violate the
FCPA.

24. FCPA Enforcement
It Really Happens
Baker Hughes Incorporated, 2007
• Among other things, Baker Hughes allegedly paid $4.1 million in bribes to a
third party consulting firm, knowing that such funds were to be transferred
to an official of the state-owned oil company in connection with a $220
million oil field services contract.
• Baker Hughes characterized the payments in its books and records as
“commissions,” “fees,” and “legal services.”
• The DOJ and SEC criminally charged Baker Hughes with violating the anti-
bribery and internal controls provisions of the FCPA and a 2001 cease-and-
desist order.
• Baker Hughes paid a record settlement of almost $44 million in combined
fines and penalties.

25. FCPA Enforcement
FCPA in the News
Leo Winston Smith, 2007
• Smith, a former executive of Pacific Consolidated Industries
(“PCI”), was arrested for allegedly violating the FCPA by offering
more than $300,000 in bribes and providing lavish hospitality to a
UK Ministry of Defence official to secure equipment contracts
valued at $11 million
• The case was referred to the DOJ by a private equity investment
group, Cherington Capital, that acquired PCI after the alleged
wrongdoing and discovered nine suspicious payments during a post-
acquisition audit
• This is the first FCPA case to involve a private investment firm

26. Hypothetical Situations
Need some practical guidance?
Let’s take a look at the following
hypothetical situations...

27. Hypothetical Situations
Third-Party Conduct
During a board meeting, a U.S. company’s executive reports that the company’s
consultant in India has successfully facilitated several large contracts with the
Indian Ministry of Communications.
When a director inquires about the consultant’s success, she learns that the
consultant has a “close relationship” with an influential Communications Minister
and was paid a 25% success fee upon the award of each contract.
Red Flags:
• The “close relationship” with the Procurement Minister could be problematic if
the consultant is a relative or has an otherwise improper relationship
• Did due diligence uncover this relationship?
• “Success fees” are red flags because they do not require detailed invoices or an
explanation of the services performed for payment
• The director has a duty to inquire further about the details of this transaction

28. Hypothetical Situations
Gifts and Entertainment
A U.S. technology company wanted to host several Chinese officials for a tour of
the company’s U.S. operations and a demonstration of the company’s products.
While the Chinese officials paid for their own airfare to the U.S., the company
paid for the officials’ local transportation, hotel charges, meals, and
entertainment, and provided them with a $100 /day per diem. They also paid for
a weekend excursion to a luxurious local resort.
A few of the officials brought their spouses on the trip. One of the officials ran
up a very large hotel bill, including lavish food and entertainment charges.
Red Flags:
• Payment of entertainment expenses and a weekend excursion for the officials is not
likely to be considered related to a legitimate business purpose
• The spouses should not be allowed on the trip
• Large hotel bill – the company should not reimburse the official; to prevent the
problem up front, the officials should be asked to pay for all incidentals

29. Hypothetical Situations
Mergers and Acquisitions
Company A, a U.S. public company, plans to acquire Company B, another U.S.
company with several foreign subsidiaries.
During pre-acquisition due diligence, Company A’s auditors discover that
Company B made three $30,000 payments to an agent working with its
Indonesian subsidiary to a bank account in London. The auditors also discover
that Company B entered into a contract with the Cameroon government that
required Company B to pay $2 million to improve Cameroon’s schools and to
make the payment to a bank account held by the business advisor of Cameroon’s
President.
Red Flags:
• Indonesia and Cameroon are high-risk countries
• Large, round-number payments and payments to overseas accounts are red flags
• While the $2 million to improve Cameroon’s schools is included in a legitimate
contract, making the payment to an individual suggests an improper purpose
• An investigation of these issues, and more extensive due diligence, should be
conducted before this deal goes through

30. This presentation is intended only as a general discussion and should
not be regarded as legal advice.
For more information, please contact your Fund Services Group
attorney or Lisa A. Prager of WSGR's white collar crime and internal
investigations practice.