4. Most Recent FCPA Settlement
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Background:
S Morgan Stanley
S Garth Peterson - Former Managing Director for Morgan Stanley’s real
estate business in China
S Conspiracy to evade internal accounting controls
S Paid $1.8M to himself and a Chinese official
S Acquired a valuable Shanghai real estate interest from Morgan Stanley’s fund.
5. Most Recent FCPA Settlement
Verdict:
S Peterson faces up to 5 years in prison and has agreed to
pay a fine of $250,000
S Relinquishment of his interest in certain Shanghai real
estate worth $3.4M
S Lifetime ban from the securities industry
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6. Why have a Corporate
Compliance Program?
S Prevent, Detect and Deter issues of non-compliance
S Communicate Organizations Commitment
S Impact on Company’s Reputation
S Raises Awareness
S Trends: Mandatory Requirements – SOX, NYSE,
NASDAQ, FCPA, Dodd Frank, etc.
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7. Compliance Program is
Comprehensive
S Employment/Labor Law
S Anti-Trust
S Anti-Corruption (esp. outside the US)
S Federal Sentencing Guidelines
S Other Federal and State Laws
S International Considerations - GLOBAL
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8. Benefits of an Effective
Compliance Program
S Encourages employees to report potential problems
S Initiate immediate & appropriate corrective action
S Reduces exposure to civil damages, penalties, criminal
sanctions and administrative remedies
S Strong ethical culture – easier to attract employees
8
9. S
Corporate Compliance Overview
Origins of Corporate
Compliance
Seven Elements of a Compliance
Program
Corporate Compliance Infrastructure
FCPA & Compliance
9
10. Origins of Corporate
Compliance - US
S Evolved since the 70’s – (FCPA – 1977)
S Insider trading scandals in 80’s – Insider Trading and
Securities Fraud Enforcement Act
S Sentencing Guidelines for Organizations in the 90’s
S Sarbanes Oxley Act – ’02
S US Patriot Act – ’01 – anti-money laundering compliance
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11. Origins – Outside the US
S In some countries – Corporate Compliance is an
unfamiliar concept
S Less developed capital markets
S Low liquidity
S Strong concentration of capital in family enterprises
S Lack of “Board of Directors” culture
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13. US Sentencing Commission
Federal Sentencing Guidelines
S Effective November 1, 1991
S Controls sentencing of organization for most federal
criminal violations
S Sentencing credit for “Effective programs to prevent and
detect violations of law”
S Detect, Deter, Prevent
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14. Report of Ad Hoc Advisory Group
on the Organizational Sentencing
Guidelines
S Published October 7, 2003
S http://www.ussc.gov/guidelines/index.cfm
S Effective November 1, 2004
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15. Key Recommendations
S “Culture” of ethics and compliance
S Defining ethics and compliance standards and procedures
S Spelling out compliance obligations
S Adequate resources
S Clarifying employee screening practices
S Training as an essential element
S Means of anonymous reporting
S Ongoing risk assessments
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16. Recent Changes to
Sentencing Guidelines
S November 1, 2010 – Revisions included:
S Requirements for establishing an “Effective Compliance
Program”
S Expands eligibility for reduced culpability IF it has an
effective program
S Enhanced Autonomy for Compliance Personnel
S Direct reporting/express authority
S Effective in detecting criminal conduct
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17. S
Corporate Compliance Overview
Origins of Corporate Compliance
Seven Elements of a Compliance
Program
Corporate Compliance Infrastructure
FCPA & Compliance
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18. Seven Elements
① Standards and Procedures
② Oversight
③ Education and Training
④ Monitoring and Auditing
⑤ Reporting
⑥ Enforcement and Discipline
⑦ Response and Prevention
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19. Monitoring and Auditing
S Essential for effectiveness
S Designed to “Detect Criminal Conduct”
S Audits – Independent/objective – use Subject Matter Experts
S Monitoring – real time reviews
S Audit and Monitoring Plan
S Leverage what is already available
S Scalable to risks and resources
S Tools are important – self assessments, internal audits, external
audits, exit interviews, etc.
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21. S
Corporate Compliance Overview
Origins of Corporate Compliance
Seven Elements of a Compliance
Program
Corporate Compliance
Infrastructure
FCPA & Compliance
21
22. What is Infrastructure?
S A set of interconnected structural elements that provide
the framework supporting an entire structure…..
S Provides structure and support for the program……
S Internal Framework…..
Wikipedia encyclopedia
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23. Positions Vital to the
Infrastructure
S Board of Directors
S Oversight Committee
S Senior Management
S General Counsel
S Chief Compliance Officer
(“CCO”)
S Supporting Staff
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24. Vital Functions of Compliance
Committee
S Advises the Chief Compliance Officer
S Assists in implementation
S Development of standards of conduct and policies and
procedures
S Reviews reports and recommendations from Chief Compliance
Officer
S Conducts annual review of the Compliance Program
S Analyzes legal requirement and specific risk areas
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25. Reporting Structure
S Separation of compliance from Legal and Finance
S Independent and objective
S At a minimum, CCO has a “dotted line” to the Board of
Directors
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26. The Wrong Structure
Legal Counsel
Chief
Compliance
Officer
Compliance
Committee
Board of
Directors
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28. S
Corporate Compliance Overview
Origins of Corporate Compliance
Seven Elements of a Compliance
Program
Corporate Compliance Infrastructure
FCPA & Compliance
28
31. Transparency International’s
Corruption Perceptions Index 2011
The Best
S New Zealand (9.5)
S Denmark (9.4)
S Finland (9.4)
S Sweden (9.2)
S Singapore (9.2)
S Norway (9.0)
S Netherlands (8.9)
S Switzerland (8.8)
S Australia (8.8)
S Canada (8.7)
The Worst
S North Korea (1)
S Somalia (1)
S Afghanistan (1.5)
S Myanmar (1.5)
S Sudan (1.6)
S Chad (1.6)
S Uzbekistan (1.6)
S Turkmenistan (1.6)
S Iraq (1.8)
S Haiti (1.8)
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32. What is a Bribe?
S Giving anything of value (directly or indirectly)
S To an individual
S With intent to obtain an improper benefit
S Bribes take many forms:
S Cash, gifts, entertainment, meals
S Travel and events
S Preferred hiring
S Charitable and political donations
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33. Red Flags
S Warning signs of possible corrupt payments or bribes
S Unusual, vague or complex contracting, sourcing, accounting,
payment or billing practices
S Travel and expense and gifts and entertainment, particularly
of government officials
S Government officials request company to use a particular
partner or vendor
S Payments disproportionate to the services performed at the
particular location
S Payment for services not performed
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34. Red Flags
S Multiple single sourced contacts to the same third party rapidly
increasing in value over several months or years
S Recurring identical amounts from the same third party
S Unusual even dollar or high value disbursement amounts for
routine odd dollar or low value purchase
S Unusual payment methods like Cash, or numbered account
payments, payment through third countries or in another
currency
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35. What is a Foreign Official?
S Anyone in government
S Includes State-Owned Enterprises (“SOE”) or National Oil
Companies (“NOCs”)
S Includes public international organizations (e.g. World
Bank)
S Candidates for political office
S Political parties
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36. Bribery Examples
S Medical device testing
S Employing a relative of an Official
S Use of equipment
S And of cour$e……MONEY!
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37. FCPA Cases in Recent
Years…
U.S. v. Vetco International Ltd. - $26M fine
Background:
S Vetco subsidiaries admitted to violating the FCPA by making corrupt
payments of approximately $2.1 million to Nigerian Customs Service
officials over a two-year period through a major international freight
forwarding and customs clearance company.
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38. FCPA Cases in Recent
Years…
U.S. v. KBR, Inc. & Halliburton Co. - $402M fine & $177M
disgorgement of profit
Background:
S KBR was part of a four-company joint venture that was
awarded construction contracts valued at approximately
$6B between 1995 and 2004 .
S KBR paid more than $182M to two agents and admitted
that it had intended for these agents’ fees to be used, in
part, for bribes to Nigerian government officials.
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39. FCPA Cases in Recent
Years…
U.S. v. Siemens AG – $450M fine & $350M disgorgement of profit
Background:
S Siemens Argentina made over $31 million in corrupt payments to various
Argentine officials
S Siemens Middle East (4 subsidiaries) paid over $1.7 million in kickbacks to
the Iraqi government
S Siemens Venezuela made over $18 million in corrupt payments to various
Venezuelan officials
S Siemens Bangladesh admitted to making corrupt payments of over $5M to
Bangladeshi government officials and senior employees of the state-
owned Bangladesh Telegraph & Telephone Board (BTTB)
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41. Morgan Stanley : The De Facto “Adequate
Procedures” Defense
S The Department of Justice commended Morgan Stanley for:
S Employee Training: Over 54 trainings were given to Asia-based
employees.
S Compliance Personnel: Employed over 500 dedicated
compliance officers.
S Regional Compliance Personnel: Employed regional compliance
officers who specialized in particular regions, including China, in
order to evaluate region-specific risks.
S Audit: Randomly audited selected personnel in high-risk areas
and regularly audited and tested Morgan Stanley’s business units.
S Hotline: Provided a toll-free compliance hotline 24/7, staffed to
field calls in every major language, including Chinese.
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42. Morgan Stanley : The De Facto “Adequate
Procedures” Defense
S Written Compliance Materials: Distributed written training materials
specifically addressing the FCPA
S Frequent Compliance Reminders: Distribution of the Morgan Stanley
Code of Conduct, reminders concerning policies on gift giving and
entertainment and guidance on the engagement of consultants.
S Written Certifications: Required employees to certify their compliance
with the FCPA.
S Disclosure of Outside Business Interests: Required employees to
annually disclose their outside business interests.
S Review and Update Policies: Conducted a formal review annually of
each of the firm’s anti-corruption policies.
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HIPAA = Health Insurance Portability and Accountability Act of 1996
US Patriot Act = Uniting (and) Strengthening America (by) Providing Appropriate Tools Required (to) Intercept (and) Obstruct Terrorism Act
Review controls over new Agents and foreign vendors
Look for charitable contributions in foreign locations
Validate commission payments and commission percentage– support required
Proper accounting (books and records provision)
Analyze Travel and Entertainment of Foreign Officials
Legitimate business purpose?
Reasonable?
Documented approval?
Pleasure activities or side trips?
Spousal travel?
Per Diem?
Even though many payments to officials were for amounts smaller than US$1,000, the U.S. DOJ alleged that the payments were made to induce officials to ignore improper importations, improper or incomplete documentation, failure to post sufficient bonds or pay customs duties or other infractions of Nigerian law.
The DOJ imposed the record fine on Vetco Gray in part because the companies failed to comply with prior representations that they would implement a rigorous compliance program.
In addition to paying the fines and disgorgement of profits, KBR also agreed to retain an independent compliance monitor for a three-year period to review the design and implementation of KBR’s compliance program and to make reports to KBR and the Department of Justice.
(i) The payments were improperly recorded on the books and records of the company
(ii) Siemens also paid €596M to settle with the German authorities. To date Siemens has paid more than $1.6 billion in total penalties.
(iii) 4 years of monitorship
Walmart FCPA Case –
Walmart de Mexico is alleged to have orchestrated a campaign of bribery to win market dominance in Mexico
Bribery payments totally more than $24M
Wal-Mart de Mexico’s top executives not only knew about the payments but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark