Presenting a live 90-minute webinar with interactive Q&A

FCPA Compliance: Gifts, Entertainment and Hospitality Understanding the Risks, Avoiding Common Pitfalls, and Implementing Compliance Strategies to Meet FCPA Requirements TUESDAY, SEPTEMBER 25, 2012

1pm Eastern

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12pm Central | 11am Mountain

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10am Pacific

Today’s faculty features: Margaret M. Cassidy, Principal, Cassidy Law, Washington, D.C. Matteson Ellis, Founder/Principal, Matteson Ellis Law, Washington, D.C. John E. Davis, Member, Miller & Chevalier, Washington, D.C.

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Foreign Corrupt Practices Act Compliance Gifts & Hospitality

Margaret M. Cassidy, Esq. Cassidy Law PLLC

[email protected] (202) 652-1527

Strafford Publications September 25, 2012

Foreign Corrupt Practices Act Compliance Provisions Related to Gifts & Hospitality

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FCPA - Provisions Related to Gifts & Hospitality •US persons (business organizations & persons) must comply with the FCPA • Governs interactions with foreign government officials • Prohibited transactions - need to have corrupt intent

• Facilitating Payments - specifically excepted out • Affirmative Defenses - conducting certain business transactions • Accounting for gifts & hospitality

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FCPA- Definition of Government Officials 15 U.S.C. §§ 78dd-1(f)(1), 78dd-2(h)(2), 78dd-3(f)(2).

•non-US government official or employee -regardless of position or rank in the organization -non-US organizations includes state owned enterprises •official or employee of public international organizations -World Bank; UN; Red Cross etc. •person acting in an official capacity for or on behalf of a non-US government organization or public international organization -can include honorary or ceremonial positions -can include consultants acting for an organization •political party members, party officials, or political candidates

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FCPA - Prohibited Transactions 15 U.S.C. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a).

Offer, promise, authorize payment of any gift or hospitality, promise to give or authorize any gift or hospitality for the purpose of obtaining or retaining business or a government advantage by:

•influencing a non-US official’s act or decision in their official capacity •inducing non-US official to do or omit to do any act in violation of their lawful duty •securing any improper advantage from a non-US official •inducing a non-US official to use influence with a foreign government to influence the government’s act or decision

Third Parties - Cannot have others do what you cannot do. Adequate due diligence is required to assure others do not act contrary to the FCPA on your behalf.

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FCPA - Facilitating Payments 15 U.S.C. §§ 78dd-1(b), 78dd-2(b), 78dd-3(b).

Facilitating or expediting payments for the purpose of speeding up or securing routine government action Applies to routine government actions such as:

•obtaining business permits, licenses, or other official documents •processing governmental papers •police protection, mail, or scheduling inspections; •telephone service, protecting products from deterioration Note: Gifts & hospitality not natural fit here.

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FCPA - Affirmative Defense 15 U.S.C. §§ 78dd-1(c), 78dd-2(c), 78dd-3(c).

The following are the affirmative defenses to the prohibited FCPA actions: (1) the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country; or (2) the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to-•the promotion, demonstration, or explanation of products or services; or •the execution or performance of a contract with a foreign government or agency thereof.

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FCPA - Accounting Requirements 15 U.S.C. §§ 78m

Accurately record transactions with enough detail to identify the transactions Create and maintain an accounting system with controls that provide reasonable assurances that: •transactions are executed as management has authorized •transactions are recorded to assure financial statements conform with generally accepted accounting principles or any other applicable criteria for the statements, •assets may be accounted for •access to assets is permitted consistent with management's authorization •recorded transactions are compared with the existing assets at reasonable intervals and appropriate action is taken if differences are identified

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Foreign Corrupt Practices Act Compliance: Gifts, Entertainment and Hospitality Matteson Ellis International Anti-Corruption Attorney Founder & Principal, Matteson Ellis Law PLLC [email protected] 1.855.FCPA.LAW www.MattesonEllisLaw.com Editor, FCPAméricas Blog

Strafford Publications September 25, 2012

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FCPA & Gifts, Entertainment, and Hospitality: Lessons from Enforcement Actions Diageo (2011): The British spirits company that makes Johnnie Walker and Windsor Scotch whiskeys paid more than $16 million to settled FCPA charges with the U.S. Securities and Exchange Commission (SEC) for, in part, its gift-giving, travel, and entertainment practices. •

Spent approximately $64,184 on rice cakes (customary and traditional gifts in Korean culture) and other gifts for the South Korean military over the span of four years. Gifts ranged in value from $100 to $300 per recipient. Many of the recipient officials were responsible for procuring Diageo products.

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Provided more than $100,000 in travel and entertainment expenses to South Korean customs and other officials to inspect scotch facilities in Scotland, adding “purely recreational side trip[s] to Prague and Budapest.” Several expenses booked as “Entertainment – Customer,” hiding the fact that the recipients were officials.

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Spent approximately $165,287 on hundreds of non-traditional, non-seasonal gifts and entertainment for the South Korean military. The company called them “Mokjuksaupbi” payments (“payments for relationships with customers”). The SEC, however, found that approximately $106,000 of the payments were actually “for the purpose of influencing specific purchasing decisions.” 13

FCPA & Gifts, Entertainment, and Hospitality: Lessons from Enforcement Actions Aon Corporation (2011): The Chicago-based company, one of the largest insurance brokerage firms in the world, administered training funds that were purportedly used to educate Costa Rican insurance officials on industry issues by providing travel to seminars and conferences. The company settled for a total of $16.2 million in criminal penalties, disgorgement, and prejudgment interest. •

The training funds reimbursed officials for non-training related activities, like travel, hotels, and meals, sometimes with their spouses, at tourist destinations including Paris, Monte Carlo, Zurich, Munich, Cologne, and Cairo. These trips had only a minor, if any, business-related component.

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Many of the invoices and records did not provide the business purposes or otherwise show that the trips were related to legitimate business activities. Some of the subject matters recorded, like a literary conference and a Mexican information technology conference, had no logical connection to the insurance industry.

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Over the span of eight years, the company earned profits of approximately $1.8 million in connection with its Costa Rica insurance business. 14

FCPA & Gifts, Entertainment, and Hospitality: Lessons from Enforcement Actions Lucent Technologies Inc. (2007): The global communications solutions provider conducted business in China. Entered into a non-prosecution agreement with the U.S. Department of Justice (DOJ), agreeing to pay $1 million. Consented to a cease-and-desist order with the SEC, agreeing to pay a $1.5 million civil penalty.

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Spent over $10 million over three years to take hundreds of Chinese officials to the United States to “inspect” facilities in 315 trips.

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The officials were considered “decision-makers” at state-owned and state-controlled telecommunications enterprises.

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They visited Hawaii, Las Vegas, New York City, Disneyworld, and the Grand Canyon, even though no company facilities existed in those places.

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The company improperly booked the expenses as business trips.

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The company benefitted with an estimated $50 million in contracts. 15

FCPA & Gifts, Entertainment, and Hospitality: Unique and Lavish Bribes Control Components, Inc. (2009): The DOJ settled with a control valves company for an $18.2 million criminal fine based on corrupt payments to officials in China, Malaysia, and the UAE. •

Gifts included the payment of the college tuitions of at least two officials who were company clients.

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Provided officials with five-star hotel rooms and charter boat trips in Hawaii and trips to Disneyland and Las Vegas “under the guise of training or inspection trips.” The DOJ stated that the “actual purposes of the trips were to reward the customers’ officers and employees for causing their employees to purchase defendant CCI products, retain current business from defendant CCI, and obtain new business for defendant CCI.”

Alliance One (2010): SEC settled with the U.S. tobacco company for $10 million in disgorgement for the bribes that employees and agents of the company’s subsidiaries paid to officials in numerous countries. •

Bribes included lavish gifts like watches, cameras, and laptop computers in China and Thailand. 16

FCPA & Gifts, Entertainment, and Hospitality: Cash Bribes Johnson and Johnson (2011): The company provided more than $7 million in travel sponsorships unrelated to conferences or other business purposes to public doctors in Poland who agreed to purchase its medical products and in Romania who agreed to prescribe its drugs. •

As part of the scheme, it also made arrangements with travel agents to overcharge for the travel and then give the extra money to the officials as “pocket money.”

ABB (2004): As part of the settlement with U.S. authorities, the company paid almost $16 million in fines and disgorgement. •

Made cash payments to Angolan officials during various training trips.

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SEC noted that, not only did the company pay for the travel, meals, lodging, and entertainment expenses on one trip, it “also provided them with cash spending money of $120 to $200 per day, at a time when Angola’s gross annual per capita income was just $710.” On another trip, the cash payments totaled $4,320 per official.

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The payments were made to “future decision-makers.” To fund these payments, the company devised “elaborate, circuitous schemes” to conceal the sources.

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FCPA Compliance: Gifts, Entertainment and Hospitality

FCPA Opinion Releases September 25, 2012 John Davis Miller & Chevalier Chartered [email protected] 202-626-5913

Enforcement Agency Guidance

• DOJ FCPA Opinion Procedure Releases • Cases and Settlements • New Guidance in October 2012?

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FCPA Opinion Procedure Releases

• DOJ’s Opinion Procedure Process (28 C.F.R. Part 80)  Process: Companies may propose transaction and seek statement from the DOJ of enforcement intentions based on facts disclosed  Not binding on any person not a party to the request, but public summary released by DOJ  Can provide some insight into DOJ’s view of specific circumstances and safeguards agencies require or deem appropriate  Significant number of Opinions related to gifts, entertainment, or travel expenses 20

DOJ’s Factors– Affirmative Defense

• “Promotional” affirmative defense added to FCPA in 1988 was intended in part to codify prior Opinion practice • Under both, gifts, entertainment or travel expenses must be:  Reasonable and bona fide  For the express purpose of the “promotion, demonstration, or explanation of products or services or the execution or performance of a contract”

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Key Factors for Consideration • DOJ Opinions have determined whether gifts, entertainment or travel expenses are reasonable and bona fide by considering several factors:  Purpose of the expenditure (must be articulated and permissible business-related purpose)  Whether the expense complies with local law  Whether the value of each expenditure is reasonable  Whether the method of selecting recipients is reasonable and transparent  Whether payment for travel and entertainment is made directly to foreign official or third party service providers  Whether the expenditures are accurately recorded in the company’s books and records 22

Purpose of Expenditure Gifts

Travel and Entertainment

• Product sample provided for inspection or testing purposes (see Opinion 81-02) • Gifts of nominal value that are given in connection with business promotional activities, such as souvenir items imprinted with company logos. (see Opinion 09-01)

• Travel expenses paid for “promotion, demonstration, or explanation of products or services” (see Opinion 08-03) • The term “explanation of services” has been interpreted to include expenses given for educational, instructional, and training purposes. • No “non-routine business” pending before recipient officials (see Opinion 11-01)

• Gifts given with corrupt intent are neither reasonable nor bona fide and thus, potentially violate the FCPA

• Payment of entertainment and travel expenses for purely sightseeing, entertainment and leisure purposes has been found to violate the FCPA.

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Local Law

• All relevant DOJ Opinions have included a local law analysis in determining the appropriateness of the gift, entertainment or travel for an official • Most have cited written assurance, sometimes from an “established international law firm” of local law compliance as important • DOJ places little to no weight on consistency of such expenditures with social norms or local business practices; emphasis is on compliance with applicable laws and regulations (see Opinion 08-03)

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“Reasonable” Value of Expenditure Gifts

Travel and Entertainment

• Gifts are reasonable if “nominal” value (see Opinion 11-01) • Souvenirs (see Opinion 08-03) • No guidance on “reasonableness” beyond very small value items

• “Moderate” value • Avoid lavish meals or travel arrangements – (e.g., first class tickets) • Strict limits on leisure side-trips • Avoid cash and equivalents (e.g., gift cards), if possible • If cash stipend (such as a per diem), must be reasonable approximation of legitimate expenses (Opinion 08-03)

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Selecting Recipients

• Is there pending, current or potential business with government officials or agencies involved? • Absence of direct power over key business goals minimizes the appearance of quid pro quo element of the expenditures (see Opinion 04-03) • Allow the government to select the recipients of the benefit (see Opinion 07-01 and Opinion 04-03); otherwise provide transparency to agency/superiors of recipients • Do not pay expenses for spouses, family or other guests of the officials (see Opinion 07-01) 26

Recipient of Funds: Paying Third Party Service Providers

• For travel/hospitality, a key safeguard can be directing payments for expenses such as airlines, hotels, car services, etc. to the vendors themselves, rather than to officials • Officials still considered to receive a benefit, but cannot divert cash • Enhances transparency and ease of record-keeping

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FCPA & Gifts, Entertainment, and Hospitality: Strategies for Approaching Compliance 1. General questions to help illuminate how outsiders might interpret the activity

2. Rules-Based Compliance Issues

3. Principles-Based Compliance Issues

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FCPA & Gifts, Entertainment, and Hospitality: GENERAL QUESTIONS 1. Would the company be embarrassed to see the gift or hospitality reported in the paper? 2. Would it care if the entertainment were being recorded on a hidden camera? 3. Would the boss of the person providing the gift or entertainment, or the boss of the government official receiving it, disapprove if they knew? 4. Could the activity damage the company’s reputation? 5. Are the details something that would appear sensational in a news headline? 6. Do the gifts or entertainment seem reasonable and customary, not only in the recipient’s country, but also in the giver’s country? 7. After the activity is over, is the recipient left in a position of obligation which can only be satisfied by improper behavior designed to favor the host or donor? 29

FCPA & Gifts, Entertainment, and Hospitality: RULES-BASED COMPLIANCE • Stand-Alone Policies • Periodic Review and Approval by Management • Appointed CCO with Final Responsibility and Authority • Policy Specificity • Rule Clarity

• Consistent Enforcement

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FCPA & Gifts, Entertainment, and Hospitality: PRINCIPLES-BASED COMPLIANCE  Transparency • Open transactions less likely to appear to have corrupt motive. • Ensuring that right people know about the activity. • Written invitations with proposed itineraries when hosting officials.  Appearance • • • •

“20/20” vision of enforcement. Consider all facts and circumstances surrounding gift or hospitality. Consider patterns of gifts, travel, and entertainment. Are red flags present? 31

FCPA Compliance: Gifts, Entertainment and Hospitality

Benchmarking

Benchmarking – Sources on Best Practices

• UK Bribery Act • Local Laws • Industry Practice • Internal Policy of Beneficiary

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UK Bribery Act – SFO Guidance • Hospitality and promotional expenses must be:  Reasonable  Proportionate and  Made in good faith

• Avoid “lavish” hospitality or expenditures (Olympics versus “private island” vacation); suggests a higher value than current FCPA-related guidance from DOJ/SEC • To form the basis of offenses, there must be:  an element of “improper performance” and  intent to influence the foreign public official so as to obtain or retain business, or an advantage in the conduct of business. 34

Local Laws

• Many countries have updated or introduced laws and regulations regarding receipt of gifts, hospitality and other benefits by officials • Others have created or extended their own FCPAequivalents (OECD countries, China) • Some emphasize reporting, and penalize lack of reporting above certain thresholds (e.g., Mexico, Indonesia) • Some have issued codes of conduct for officials (Brazil) 35

Industry Practice & Internal Policies • Industry Practice  Pharmaceutical Industry-- PhRMA Code  Occasional,

modest meals in conjunction with a presentation of scientific or educational value; limited to in-office or in-hospital settings

 No

entertainment and recreational benefits

 E.g. no tickets to sporting or theatre events, sporting equipment or vacation trips  Prohibited regardless of value  Prohibited regardless of whether the company engaged the healthcare professional as a speaker or a consultant

• Company (SOE) Internal Policies  PetroChina – Code of Ethics for Senior Management  The

exchange of limited non-cash business courtesies by the Senior Management in business activities may be acceptable, however, such exchange shall not improperly influence the decisions of any business partner of the Company.

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Foreign Corrupt Practices Act Compliance Establishing Controls Related to Gifts & Hospitality

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Establishing Controls - Ownership Structure Leadership Commitment •Leaders must create and resource organizational structure to assure defined ownership and proper accountable •Leaders must be educated on the risk and the organization’s controls •Leaders must establish policy •Leaders must receive regular reports on activities and controls

Approving Gift & Hospitality Requests •Identify and empower a responsible owner to review and approve requests for gifts and hospitality •Owner must have knowledge and expertise to make sound judgment •Owner must have authority to make decisions and have access to leaders •Owner must stay current on new laws, regulations, opinions, industry standards Note: Poorly designed or ineffective controls may result in liability

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Establishing Controls - Ownership Structure Internal Audit • Responsible party to lead and execute audits • Properly resourced and trained to review for improper payments • Must have expertise in conducting audits and reviews • Must have ability to verify controls and approvals • Must have access to leaders Receiving and Reviewing Concerns and Questions •Identify a responsible party to oversee and manage receipt and processing concerns and questions • Properly resourced, trained, appropriate language skills • Accessible to employee, third parties and outsiders • Confidentiality must be assured • No retaliation when genuine concerns are raised Employees

•Must be regularly trained on policy and in identifying red flags •Training may be targeted based on duties and exposure to risk •Must be informed about approval process and reporting process •Organization must have defined process for discipline for those who do not comply with approval process or who improperly provide gifts and hospitality

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Controls - Process & Documentation Gifts & Hospitality

•Approval process should be documented- consider automating work flow -Who approves -Standards for approval -Obtaining local counsel opinion -Dollar limits

•Track requests by date/requestor/recipient; aggregate gifts to one individual •Approved expense must be adequately described:

-Nature and reason for travel; meals; gifts; hospitality -Recipients’ names, positions, duties -Actual cost per person

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Controls - Process & Documentation Audit Plan •Plan for reviewing for improper payments should be documented •Define and document escalation process when improper payments or expenses contrary to policy identified •Method to close out gaps or improper payments/expenses •Method to review how expenses are recorded •Method to reconcile transactions •Define plan to assess adequacy of procedures and controls •Automate reviews for certain types of expenses

Certifications •Consider certifications across the organization - target toward high risk groups - should be electronic and traceable •Reach 100% completion •Establishes employees understood policies and procedures •For leaders, requires some due diligence to make the certification for area under their responsibility •Unrecorded foreign payments - should certifier know or should know?

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