11/18/2009 Meeting - FCPA

0© 2007 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International,
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.
November 18, 2009
Mountain View, CA
ACFE San Jose Chapter Meeting
The Foreign Corrupt Practices Act:
What You Don’t Know Could Hurt You

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.6
Introduction
Susan S. Muck, Partner in the Litigation Group of
Fenwick & West LLP.
Guido Van Drunen, Managing Director at KPMG LLP.

Agenda
FCPA Background
Elements of the FCPA
Case Examples
Red Flags
Investigations
Compliance
Conclusions

Background: The Birth of the FCPA
•Revelations in the 1970s that many U.S. companies
had bribed foreign government officials
− 450 public companies
− Questionable foreign payments exceeding $400 million
− 117 Fortune 500 companies
− Gulf Oil, General Tire & Rubber, Exxon, Occidental
Petroleum, Lockheed, Bell Helicopter
•Facilitated by improper accounting practices
− Records that failed to record transactions
− Records that concealed relevant information
•Falsified records
− FCPA passed and signed on December 19, 1977

Background: Ethical Standards
•Gate-keepers must be committed to enforcing and
promoting high standards of ethical business conduct
and compliance with all applicable laws, rules and
regulations
•Bribery and other improper business practices are
unethical, may result in materially false financials, may
misrepresent a company’s financial performance, and
violate the laws in the U.S. and internationally
•US companies doing business outside of the US –
including employees and agents wherever located – are
required to comply with U.S. and other nations’ anti-
corruption laws

Background: Liability
•Corporation may be criminally liable for actions of its
employees and agents
•Corporation may be liable for the collective actions and
intent of its employees
•Corporate policies prohibiting criminal conduct do not
insulate the corporation from prosecution
•Corporations may be sued by shareholders or others
for engaging in corruption and securities fraud
•Defendants in bribery cases are often not entitled to
indemnity or insurance

Background: Costs of Corruption
•Penalties include imprisonment, potential limitations on business
such as suspension or debarment, disgorgement, civil penalties,
shareholder litigation, corporate governance reforms, monitors, and
loss of strategic opportunities and business partners
•Penalties can be severe:
− Individuals: Five years imprisonment/$100,000 per count of
bribery
− Corporate fines: $2,000,000 per count of bribery
− Or, double the benefit obtained from the corrupt payment
− Or, can be a predicate offense for RICO prosecution which
provides for forfeiture
•The cost of investigating potential violations may exceed the
penalties themselves

Background: Regulatory Enforcement
•Recent increase in the number of cases
•Increase in US regulatory resources
•Increase in international statutes and
requirements
•Limited number of international prosecutions, but
growing
•Potential for duplicative US and foreign
enforcement and penalties

Agenda
FCPA Background
Case Examples
Red Flags
Investigations
Compliance
Conclusions

The FCPA has three key provisions:
1. The “anti-bribery” provision
2. The “internal controls” provision
3. The “books and records” provision

Elements of the FCPA:
The Anti-Bribery Provisions
• Who: any officer, director, employee or agent,
including third-party consultants or distributors
• What: authorizing, offering, promising or paying
“anything of value” directly or through an
intermediary
• Recipient: an official or employee of a government-
owned entity or a political party or candidate
• Purpose: to influence any official act or decision, or
to secure an improper advantage such as reduced
taxes, with corrupt intent

Anti-Bribery: Who is covered?
•Domestic businesses and individuals
•US securities issuers and their officers, directors,
employees, agents or stockholders
•US businesses and their officers, directors,
employees, agents and stockholders
− Incorporated in the US, or with their principal place of
business in the US
− Individuals who are citizens, nationals or residents of
the US
− Foreign businesses and individuals

Anti-Bribery: Who is covered?
•Parents and subsidiaries
− Foreign subsidiaries can be liable if it causes an
act in furtherance of the violation in the US
− Domestic parent can be liable if it directs,
authorizes or controls the entity
•Intermediaries or Third Parties
− Most recent FCPA prosecutions involve violations
by an intermediary, not by the company itself.
Prior to engaging an intermediary, the company
should conduct adequate diligence to assess the
intermediary’s background and identify potential
red flags

Anti-Bribery: What is covered?
Broad application
•Anything of value: money, goods, services, political
contributions, discounts, business opportunities
•An improper offer is enough, even if payment is not actually
made and even if no benefit is actually received
•A violation occurs the moment any act is taken “in
furtherance of” an improper offer or payment
•The offer does not need to be communicated to the foreign
official, and the official does not need to accept it
For example: having a meeting and authorizing others to
proceed with a bribery scheme would be regarded as an FCPA
violation by U.S. enforcement officials even if the scheme
came to light before the official was even contacted

Anti-Bribery: What is covered?
Gifts, Travel, Meals & Entertainment
•Gifts should be routine, customary, and of modest
value
•Travel and entertainment should be modest,
reasonable, bona fide and directly related to business
•In all cases, gifts, travel, meals and entertainment
must:
Not be extravagant or lavish
Conform to local laws and customs
Have no improper purpose
Be accurately reflected in books and records

What is Covered: Gifts
Usually Permitted:
Gifts with logo (but not a
Mercedes with the logo on
the bumper)
Tote bags, T-shirts, coffee
mugs
On customary gift giving
occasions
Nominal value
Usually Not Permitted:
Money, poker chips,
travelers’ checks, gift cards
Expensive or luxury items
Frequent

What is Covered: Travel
Usually Permitted:
Directly related to the
promotion, demonstration or
explanation of products or
services - e.g., visit to facility
Paid directly to service
provider
Length limited to business
purpose
Officials only
Side trips unrelated to
business purpose – e.g., trip
to California with stop in
Orlando, FL
Paying for extra days for
vacation or sightseeing
Paying for family or other
guests
Stipends or spending money
Expenses paid to official (as
opposed to service provider)
*Local sightseeing and
reasonable per diem?

What is Covered: Meals &
Entertainment
Usually Permitted:
In presence of company
Paid directly to provider
Appropriate setting
No member of company
present
Paying for extra “troops”
(other individuals including
family members)
Improper purpose

Anti-Bribery: To Whom (Recipient)?
•To any foreign official at any level
− Officers, employees and others acting in an official
capacity
o Includes departments, agencies and "instrumentalities"
o Includes a public international organization
•To any political party or candidate for public office
•FCPA also covers
− Employees of SOE’s
− Many physicians that are on the payroll of the state
− Many University employees and professors

Anti-Bribery: For What Purpose?
•With a corrupt intent
− FCPA does not define what this is
− Intent to influence an official to misuse his official
position; it need not succeed
− Influence an act or decision of a foreign official, or to
induce a foreign official to influence a decision or to do
or omit to do an act contrary to lawful duty
•To obtain or retain business or to direct business to any
person
− Really means to gain any kind of business advantage
− Need not be consummated; the question is what was
the purpose
− It need not be business with the government

Anti-Bribery: For What Purpose?
•FCPA will cover many things, examples are:
− Payments to obtain a contract
− Payments to obtain non-public information about a
competitor or its products
− Payments to tax officials to reduce taxes

Anti-Bribery: Three Exceptions
•"Grease payments”
− To expedite or secure a routine governmental service
− Phone service, processing visas, obtaining police
protection, "actions of a similar nature"
− Narrowly construed
− When in doubt get a ruling, this is a gray area
•Acts legal under the written laws of the foreign
country
•Reasonable and bona fide expenditures directly related
to:
− The promotion, demonstration or explanation of goods
and services
− The execution or performance of a contract

Anti-Bribery: Key Take-Aways
•Consider whether a company’s customers are employees
or officials of government-owned entities, and when in
doubt, assume they are
•Payments or gifts made without a valid business purpose to
someone who can influence the award of government
business is presumptively “corrupt”
•Lavish entertainment or travel, gift cards, loans, jewelry,
electronics and cash gifts are almost always improper
•Any payment or offer to pay, regardless of the dollar
amount, can be a violation if done for improper purposes
•A violation can occur even if the company does not receive
the business or other benefit for which the bribe was offered

Anti-Bribery: Key Take-Aways
•Third parties present a high risk area for FCPA compliance -
most recent FCPA prosecutions were based on improper
conduct by third parties
•Companies may be liable for improper offers or payments
by consultants, distributors or other third parties
•Companies must use diligence and care in hiring and
monitoring third parties
•Companies can be liable for the conduct of third parties if
management knows or has reason to know that the
intermediary is using funds, such as commissions, for an
improper purpose

Internal Controls
•The FCPA requires that internal controls are adequate
to provide reasonable assurances that:
− The company books and records accurately reflect
expenditures, commissions, gifts, travel, meals
and entertainment paid to foreign government
officials and employees;
− All payments for commissions, consulting fees,
gifts, travel, meals, entertainment and other
transactions are accurately recorded; and
− Employees and consultants, distributors and other
intermediaries understand and comply with the
FCPA

Books and Records
•The FCPA requires that all expenditures, commissions, gifts,
travel, meals and entertainment are accurately recorded in the
Company’s financial books and records
•The FCPA’s books & records provisions may be violated by
falsifying any aspect of a transaction to conceal its real purpose;
including:
− Recording a payment as a “commission” to a consultant
when part of that payment is passed on to a government
official
− Recording a payment as “travel” when the payment was
used for entertainment
− Inaccurately reporting the number or identity of individuals
who participated in a meal, entertainment or who received a
gift

Internal Controls, Books &
Records: Key Take Aways
•The failure to implement internal controls may itself be a
violation of the FCPA
•The failure to follow up on “red flags” – circumstances
suggesting a “high probability” of an improper payment or
corruption – may itself be a violation
•Any error or omission – no matter how small – in a
company’s books and records with respect to such
payments may provide a basis for enforcement action
•Under the FCPA, a bribe must be recorded as a bribe
•Expenses for meals, travel and entertainment must be
accurate, complete and transparent such that the purpose,
recipients and amounts are obvious

Agenda
FCPA Background
Case Examples
Red Flags
Investigations
Compliance
Conclusions

Case Example:
The Titan Corporation, San Diego
•Paid $3.5 million to Titan's agent in Benin, Africa
− $2 million funneled to president for campaign
− To assist in development project and improved
payment terms
− False invoices from agent to disguise purpose of
payments
•Government cited Titan's lack of controls
− No due diligence
− No FCPA policy, no FCPA compliance program and no
meaningful oversight over foreign agents
− Other FCPA violations

Case Example:
The Titan Corporation, San Diego (cont)
•Settlement announced in March 2005
− Three count criminal conviction
− Civil enforcement judgment
•Penalties
− $15.479 million in disgorgement
− $13 million in fines and penalties
•Corporate governance reforms
− Independent consultant
− Structural reforms
•Major merger/acquisition by GE fell through

Case Example:
Schnitzer Steel Incorporated
What Occurred
•Cash payments to officers of government-owned and private steel
producers to purchase from Schnitzer
− “Officer A” in Tacoma, WA received requests from SSI and
forwarded requests to SSI Headquarters in Portland
− “Officer B”—a “senior executive”—approved at least 40
payments
•Payments Totaled $1.8 Million made as:
− Commissions
− Refunds
− Gratuities
− Gift and entertainment
•Produced $55 Million in Profits
− $6 Million from government-owned customers

Case Example:
Schnitzer Steel Incorporated (cont)
•SSI pled guilty
− Paid $7.5 Million Criminal Fine
− $7.25 Million to SEC
o Costs of investigation
o FCPA violations and wire fraud
•Schnitzer entered a Deferred Prosecution Agreement,
which includes a Compliance Program
− Voluntarily disclosed conduct
− Disclosed internal investigation
− Cooperated with investigation
− Disciplinary action imposed
− Replaced senior management
− Significant remedial steps taken

Case Example:
Baker Hughes
•Baker Hughes was charged with foreign bribery and
violating a 2001 cease and desist order by the SEC
•Baker Hughes also pled guilty to three Felony Charges
in a criminal action filed by the DOJ
•The company paid $44 million in criminal fines, civil
penalties and disgorgement of illicit profits
− $23 million in Disgorgement
− $10 million in civil penalties
− $11 million in criminal penalties

Case Example:
Baker Hughes (cont)
•A Baker Hughes subsidiary paid $5.2 million to two
consultants whilst knowing that some or all of these
funds were to be used to pay officials of the Kazakhstan
government
•The company was recognized for co-operating with the
investigations
•As a result, the company now has a monitor appointed
for a period of three years

Case Example:
Dow Chemical Company
•Dow violated the books, records and internal controls
provisions of the Foreign Corrupt Practices Act (FCPA)
•An estimated $200,000 in improper payments were
made
•The payments were made by a fifth-tier foreign
subsidiary of Dow to Indian government officials from
1996 through 2001
• Dow consented to pay a $325,000 civil penalty
without admitting wrong doing
•These were not large payments compared to the
entities mentioned previously

Case Example:
Dow Chemical Company (cont)
•The complaint alleges that the Dow subsidiary, DE-Nocil Crop
Protection Ltd. (DE-Nocil) made the following improper payments
− $39,700 in payments to an official in India's Central Insecticides
Board to expedite the registration of three DE-Nocil products
− $87,400 in improper payments to state officials in order to
distribute and sell its products
− payments to Indian government officials consisting of an
estimated $37,600 for gifts, travel, entertainment and other
items
− $19,000 to government business officials
− $11,800 to sales tax officials; $3,700 to excise tax officials; and
$1,500 to customs officials over a six-year period
•Without admitting or denying the Commission's findings, Dow
consented to the entry of the order that requires Dow to cease and
desist from violating the relevant FCPA provisions

Agenda
FCPA Background
Case Examples
Red Flags
Investigations
Compliance
Conclusions

Red Flags
Red flags are situations or circumstances requiring extra scrutiny
before proceeding:
Requests for unusually high commissions, “extra” profit or
unusual payment structures - especially before an award
decision
Requests for payments to compensate unidentified partners,
“big men,” or “cultural consultants”
Lack of visibility into use of funds or partners
Assurances that person “has the right connections” to
influence standards-setting or an RFP award
Lack of knowledge or experience in the industry
Government customers who suggest a bid be made through a
specific representative

Red Flags: Today’s environment,
where do you do business?
•The areas that business leaders speak about from a growth
and profit perspective are the nations known as the BRIC
nations.
•These nations and the regions they are in also rank very
high on the risk scale with respect to bribery and corruption
as identified by Transparency International.
•The question is often, who are you really doing business
with?
•Simply because a country is not operating in a high risk area
does not mean you do not have an FCPA risk/exposure.
•The fines and penalties for violations of the FCPA are
significant and can have a significant impact on a company.

Red Flags: Currently Economic Growth
and Risk are Correlated

Red Flags:
What is an “improper payment?”
-----Original Message-----
From: Allen
To: Bob
Subject: $100K Invoice
Bob:
RE: Settlement Payment for Krakozia Project.
Several weeks ago we agreed to pay an additional $100K to KTS to satisfy them regarding
the delay in implementing a new upgrade to our software (and the extra efforts KTS had
to make to satisfy the Krakozia Broadcast Authority). Attached is their invoice.
Recall this is a negotiated amount down from over $200K.
If there is a way to push through for quick payment, I’d appreciate it.
Thanks much,
Bob
-----Original Message-----
From: Victor
To: Allen
Subject: KTS $100K Invoice
Hi Allen
If you any questions for this Invoice, please let me know ASAP.
Victor

Red Flags:
How might it be documented?

Red Flags:
Potential Follow up
•Issue: A request for extra funds to avoid a penalty for late
delivery to a government customer is a red flag and requires
investigation.
•Company should not ignore the red flag or proceed with
the transaction or payment unless review satisfies
management/reviewer that the transaction or payment is
appropriate and has adequate and accurate documentary
support.
•Cautionary Tale: In InVision, a Senior Vice President was
copied on an email referring to additional compensation. The
SVP did not respond to or acknowledge the email, but
authorized payment to the distributor based on the invoice.
The SVP paid $65,000 in penalties and InVision paid $1.9
million in disgorgement and penalties.

Red Flags:
What is an “improper offer?”
From: George
To: Allen
Subject: Pricing for KTDI - Krakozia Project
Allen,
You might have to seriously consider increasing the consulting fee for
Krakozia Consulting Associates (KCA) since they anticipate greater
marketing expenses. KCA used several of its influential friends to
guide the RFP toward software specs that put us in a better
position in bidding for this project. KTDI needs sufficient profit to
share with them.
The RFP will be issued very soon, possibly in the next couple of
weeks.
The success of Krakozia will definitely affect the progress of
Transylvania, Carpathia, Crimea and many other projects.
Best regards.
George

Agenda
FCPA Background
Case Examples
Red Flags
Investigations
Compliance
Conclusions

Investigations: Quality Standards
The investigation should:
•Be overseen by the audit committee and monitored by
independent directors
•Be led by a reputable law firm with forensic accounting
support and no ties to management
•Be allowed sufficient latitude and not restrained
•Be disclosed to outside auditors at the outset and they
should be updated throughout the investigation
•Consider the need for voluntary disclosure
•Result in timely and appropriate remedial action

Investigations: What triggers
enforcement actions?
•Whistleblowers
•Private suits by disgruntled agents
•Press reports
•SEC Filings
•M & A transactions
•U.S. and foreign enforcement, other regulatory
requirements
•World Bank referrals
•Self-reporting
•Competitors

Investigations: Enforcement &
Trends
•Corporate liability is very broad
•DOJ is working toward consistent anti-bribery provisions
globally
•Self-reporting and cooperation are crucial
•Advance opinions can be sought
•Investigations are increasingly initiated by the DOJ and the
SEC as a result of voluntary disclosures
•The company that discloses voluntarily and cooperates
often benefits from the settlement through deferred
prosecution agreements, etc.
•Full disclosure is required as part of the “cooperation”

FCPA Investigations: DOJ & SEC
Questions
•Who is the client (company, management, audit
committee)?
•How “independent” is the investigation?
•Is the investigating entity known to the SEC and DOJ?
− Are investigators competent and knowledgeable, with
necessary skills and tools?
− Do investigators have sufficient resources and authority?
•Does the investigation have the proper scope?
•Is there effective preservation of documents?
− Paper
− Electronic
•What remediation efforts have been made?

Investigations: DOJ & SEC
Questions (cont)
•What is the company’s business (how, where, risks)?
•What is the existing controls environment?
•What is the compliance culture?
•How far into the process is the investigation?
•What is the plan going forward?
− Implementation
− Timetable
− keeping regulators apprised
•Is the investigation focused on issues of interest to the
DOJ and SEC?
•Are the DOJ and SEC able to examine key documents?
•How and why did the violation occur?

Investigations: Summary
The world has changed
•Self investigation, reporting and disclosure is
becoming the order of the day
•When making a disclosure to the authorities a full and
complete independent investigation will need to have
been conducted
•The DOJ will let you know if they believe what you
have done is adequate
•The DOJ has taken the position that a voluntary
disclosure will benefit the company
•SEC enforcement of FCPA violations is on the rise and
will likely increase

Agenda
FCPA Background
Case Examples
Red Flags
Investigations
Compliance
Conclusions

What must I do to comply?
“It's getting much harder for me to distinguish good from evil. All I'm
certain about is what upsets the government in an investigation.”

Compliance Programs
An ounce of prevention is worth a pound of cure
•There is a legitimate business case for having a sound
compliance program
− In addition to the civil and criminal penalties along with
disgorgement there is the cost of the investigation
•Both the DOJ and the SEC will generally require an
independent investigation
− This will need to be conducted under the auspices of
independent counsel with assistance from a forensic
accounting firm
− The costs of these investigations can be substantial

Compliance Programs: Framework
•Tone at the Top/Management and Board support
•Strong Code of Conduct
•Importance of comprehensive FCPA provisions in
compliance programs and policies
•Certifications by employees on an annual basis
•Exception reporting mechanisms
•Continuous training
•The ability to establish that the training took place

Compliance Programs: Reviews
Periodic Compliance Reviews should:
•Test compliance with Code of Conduct
•Be part of Internal Audit’s Annual Audit Plan
•Incorporate high risk countries and business lines
− Sub-certification review
− Training review
•Review the Company’s disclosure procedures and
follow up procedures
•Confirm appropriate tone at the top

M & A Transactions
Due diligence takes on a new meaning
•FCPA risk is one which needs to be specifically considered in
acquisitions
•Successor liability is a significant risk; some deals have failed as a
result of thorough due diligence
− Do you know where to look?
− What do you do about do about off book transactions?
− Which intermediaries has the target retained?
− What types of compliance programs and sub certification
programs does the target company have in place?
•A failure in the due diligence arena can turn a perceived profitable
acquisition into a potential drain on earnings

Mark Mendelsohn
Deputy Chief, Fraud Section, USDOJ
“If you have an effective, robust
compliance program, you ought to be
finding violations if you are doing
business globally.”

Agenda
FCPA Background
Case Examples
Red Flags
Investigations
Compliance
Conclusions

Conclusions on FCPA
• A real business risk to be considered in the context of overall
enterprise risk management.
• Expansion into the high growth economies which score lower on
bribe payers and corruption indices increases risk
• Limit exposure to FCPA risks through:
− Strong internal controls
− High quality accounting systems
− Proactive recurring and continuous training programs
− Detailed due diligence
− Annual certification by employees
• The Department of Justice and SEC are much more active in
pursuing these cases
− Fines, prosecutions and disgorgement have increased
− Costs of investigations are substantial

Conclusions on FCPA (cont)
•Self-disclosure and cooperation have become part and
parcel of mitigating damages and managing risk
•An incident response plan needs to be in place to
ensure potential violations are properly and thoroughly
investigated
•The ultimate outcome of detected incidents is
dependent on the systems in place, the cooperation
received, and the specifics of the case

Resources
DOJ’s Layperson’s Guide to the FCPA
http://www.usdoj.gov/criminal/fraud/fcpa/dojdocb.htm
Transparency International Corruption Perceptions
Index
http://www.transparency.org/policy_research/surveys_ind
ices
World Bank’s Doing Business Index (includes
assessments of ease of obtaining business and risks
of corruption)
http://www.doingbusiness.org/EconomyRankings

Questions?

Contact Information
Guido van Drunen
KPMG
gvandrunen@kpmg.com
206-913-4208
Susan Muck
Fenwick & West LLP
smuck@fenwick.com
415-875-2325

Disclaimer
Information discussed is of a general nature. This
document does not constitute a binding written
agreement of our engagement. Our engagement is
subject to successful completion of our normal
engagement acceptance procedures and the mutual
execution of an engagement letter. KPMG LLP does
not provide legal services.

11/18/2009 Meeting - FCPA

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11/18/2009 Meeting - FCPA