Corporate Social Responsibility is 2013's Newest Business Imperative: Are You Prepared for the Regulatory Deluge? August 10, 2013, ABA Annual Meeting in San Francisco • • • T. Markus Funk, Perkins Coie (Moderator) Mikhail Reider-Gordon, Navigant (Panelist) Andrew S. Boutros, USDOJ (Panelist – in his personal capacity) Declan Croucher, Verité (Panelist) James R. Meehan (Price Waterhouse Coopers) The opinions expressed in this presentation are those of the panelist and do not reflect the opinions, practices or policies of the panelists' respective employers, nor do they constitute legal advice.
Overview: Why is CSR the Current Compliance “Hot Topic” - T. Markus Funk (Perkins Coie)
Where is Human Trafficking Most Prevalent?
Corruption is a Global Problem: Transparency International Corruption Perceptions Index Scale of 1 (poor reputation) to 10 (good reputation)
California Transparency in Supply Chains Act Disclosure Regime - T. Markus Funk (Perkins Coie)
The California Act Applies To… 1. Retail manufacturer/seller of any product (would likely qualify – online sales count); 2. With annual gross worldwide receipts exceeding $100 million; and 3. And are “Doing business” in California (property or salaries in California exceeding $50 K) ü November 30, 2012: California Franchise Tax Board (FTB) confidentially released business names to AG ü Estimated 6, 000+ businesses are on list Confidential: Attorney-Client Privileged August 2013 6
The California Act Was Passed To… Help consumers “distinguish companies or the merits of their efforts to supply products free from threat of slavery and trafficking” Confidential: Attorney-Client Privileged August 2013 7
The California Act Requires… Disclosure of your supply chain verification/audit results ü Disclosures must be on internet homepage ü Homepage disclosure must be through a “conspicuous” and “easily understood” link to full -text document (can’t hide it) Confidential: Attorney-Client Privileged August 2013 8
The California Act Specifically Requires… Disclosure of what you did to: Ø Maintain internal “accountability standards and procedures” for those who fail to meet your standards Ø Provide training to those with supply chain responsibility (focus on mitigating supply chain risks and identifying trafficking) Ø Verify supply chain to evaluate/address “risks of human trafficking and slavery” Confidential: Attorney-Client Privileged August 2013 9
The California Act Also Requires… Disclosure of what you did to: Ø Audit suppliers to evaluate compliance with your standards? Unannounced and through independent auditors? Ø Obtain direct supplier certification that materials incorporated into goods comply with local antitrafficking and slavery laws Net impact: Reporting clean bill of health requires significant supply chain due diligence Confidential: Attorney-Client Privileged August 2013 10
What Can Happen if You Don’t Comply? California AG Injunction… But also ü Class Actions - Consumers say wouldn’t have purchased product if knew tainted by trafficking? (Consider recent “cruelty free” class action against Avon, Estee Lauder and Mary Kay Cosmetics) ü Advocacy Group Pressure - Hundreds of advocacy groups around world targeting businesses Confidential: Attorney-Client Privileged August 2013 11
What Can Happen If You Don’t Comply? (Cont’d) ü ü ü Boycotts –Consumers don’t want products made with child or trafficked labor Shareholder Proposals and Suits - CSR proposals have been largest class of Shareholder proposals for last 3 years Note: Shareholder suits to increase with new SEC reporting requirements (e. g. , Conflict Minerals Rules and H. R. 2759) Federal Trade Commission Action - Deceptive advertising theory Confidential: Attorney-Client Privileged August 2013 12
H. R. 2759: The Business Transparency on Trafficking and Slavery Act Mikhail Reider-Gordon, Navigant
H. R. 2759 Will Apply To …. Companies that: 1. Are publicly traded; and 2. Have annual global receipts in excess of $100 million Confidential: Attorney-Client Privileged August 2013 14
H. R. 2759 Will Require… Ø Annual filing with SEC of report titled “Policies to Address Forced Labor, Slavery, Human Trafficking and the Worst Forms of Child Labor” ü Disclosure contents largely mirror California Transparency in Supply Chains Act Disclosures ü Requirement of “clean”/“untainted” supply chain mirrors Kimberley Process Confidential: Attorney-Client Privileged August 2013 15
Want a Federal Contract? Join the U. S. Government’s Global Anti-Trafficking Fight T. Markus Funk, Perkins Coie
Executive Order on Trafficking in Federal Contracts “We’re making clear that American tax dollars must never, ever be used to support the trafficking of human beings. We will have zero tolerance. We mean what we say. We will enforce it. ” - President Obama, September 25, 2012 Confidential: Attorney-Client Privileged August 2013 17
Executive Order on Trafficking in Federal Contracts (cont’d) Why? § § Over 20 million men, women and children victims Third-party business partners (suppliers, agents, distributors, etc. ) are #1 source of compliance liability How and When? § § § Federal Acquisition Regulations (FAR) amended by October 2013 (today’s best estimate) “Zero Tolerance” Certifications Confidential: Attorney-Client Privileged August 2013 18
Executive Order on Trafficking in Federal Contracts (cont’d) Impacts? § § § Over 300, 000 federal contractors and direct subcontractors must report anti-trafficking efforts Compliance also for suppliers and transaction partners? Mandatory: (1) no trafficking activity in supply chain and (2) agree to self-report and take remedial action if identify any activities “inconsistent with” the Executive Order Confidential: Attorney-Client Privileged August 2013 19
Executive Order on Trafficking in Federal Contracts (cont’d) Why Comply? Debarment Imprisonment Business death knell for non-compliance (9. 406 -2) “Knowing and willful” false certification is a crime. Reckless disregard or conscious avoidance of truth qualify as “knowing. ” Consequences include up to 5 years imprisonment & $250 K fine Government Fraud (31 U. S. C. § 3729) False Claims Act Deceptive advertising? FTC Action? Class Actions Hundreds of advocacy groups around world Advocacy Group Pressure targeting businesses Consumer Boycotts Few want products made with child or trafficked labor. Trafficking is today’s “hot topic” Confidential: Attorney-Client Privileged August 2013 20
European Union CSR Initiatives - Mikhail Reider-Gordon, Navigant
European Union & CSR European Union: An Evolving CSR Landscape • Business Transparency in Trafficking & Slavery Act • Directive on Transparency and its amendments • EU Timber Regulation (March 2013 ) • Voluntary approach found to not be working – companies not forthcoming. Result? • Adopted April 16, 2013, mandatory reporting for companies with 500+ employees. Directive amends the Accounting Directives (Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts, 78/660/EEC and 83/349/EEC, respectively). The objective is “to increase EU companies’ transparency and performance on environmental and social matters. ” • Comply or Explain latitude will only go so far… Confidential: Attorney-Client Privileged August 2013 22
European Union & CSR • EU strategy 2014 – “enhancing the visibility of CSR and improving the disclosure of social and environmental data • EU expected to publish proposals in 2014 on how it will monitor the CSR policy commitments of EU based companies with over 1000 employees, regardless of where their operations are located. • One aim of the legislative measures being considered is to “improve accountability and promote sustainable business among multinationals” • Already held public consultation on “green-washing” to address it specifically in the Unfair Commercial Practices Directive
European Union & CSR • Commission adopted legislative proposals in 2012 to improve disclosures for retail investment products which provide a basis for providing summary information about CSR and socially responsible investment matters. • Effort underway to align EU CSR requirements for enterprises with more than 1000 employees to standards consistent with global approaches, i. e. , ISO 26000, UNGC, or OECD GL. Implementation expected in 2014. • Alignment to include that ALL European enterprises meet corporate responsibility to respect human rights as defined in UNGPs and that member states develop national plans for the implementation of the UNGPs. Due date? 2013
European Union & CSR • France leading the way, many expected to follow: • Grenelle II Act, Article 225 • Law No. 2001 -420 • Law of 7 July 1977 on Social Review • Article 225 on “business transparency in the environmental and social domains” prescriptive CSR reporting in Europe. • Mandatory reporting already more stringent thatn the Fourth Company Law Directive in: U. K. , Sweden, Spain, Denmark
Forced Labor & Human Trafficking: Prevention, Detection, and Remediation - Declan Croucher, Verité
How Forced Labor Happens in Practice Red Flag Indicators of Vulnerability The Recruitment ‘Bait’ The Workplace ‘Switch’ Migrant Labor Deception Substituted Terms & Conditions ‘Hot Spots’ Fraudulent Visas Labor Broker as On-Site Manager Labor Brokers Recruitment Loans Passport Confiscation Recruitment Fees Worker Pays ‘Runaway’ Insurance Who Pays the Broker? Earnings Withheld, Delayed, Unpaid Restrictive Guest Worker Visas Excessive or Illegal Deductions ‘Receiving’ Country Protections Freedom of Movement Curtailed Financial Penalties for Termination Third Party Control of Bank Accounts Confidential: Attorney-Client Privileged August 2013 27
Case Study – Broker Facilitated two-year Contract in Electronics Factory in Taiwan Foreign Contract Workers from Indonesia, Philippines, Thailand & Vietnam pay NT$ 260, 000 to NT$ 360, 000 to cover: Sending Country Placement Fees Loan interest Board & Lodging Taiwan Broker Fees Taiwan Costs (medical, airport transport etc. ) Airfare to home country. Net monthly earnings are NT$ 17, 000 – NT$ 18, 000 It takes 15 -21 months to Pay for the Cost of that Job Confidential: Attorney-Client Privileged August 2013 28
How Should Companies Respond to this Risk? Tailored Risk Assessment Start with ‘Hot Spots’ where strategic suppliers have operations Use Red Flag Indicators to Screen Focus on Labor traceability at sample facilities in high risk areas Detailed Compliance Program Policy commitments Terms & conditions of business Supplier codes, measurable standards & reporting mechanisms Communicate & Train Monitor, Audit, & Remediate Periodic Reviews Confidential: Attorney-Client Privileged August 2013 29
Best Practice Case Studies Major Global Technology Company Facility audits uncovered complex recruitment practices in Southeast Asia Risk assessment in 2 countries identified significant debt bondage risks Strengthened Supplier Code of Conduct and implemented measurable Prevention of Involuntary Labor Standards for monitoring & due diligence Cascaded across entire region Suppliers have repaid $13 M in illegally / unethically withheld fees Major Global Food Company Comprehensive risk assessment uncovered illegal fees, deception about terms & conditions, passport retention, financial penalties etc. Supplier Code of Conduct and Audit Protocols revised Program currently being rolled across the region to internal staff, suppliers and auditors. Confidential: Attorney-Client Privileged August 2013 30
SEC Conflict Minerals Rules – An Overview - Andrew S. Boutros, USAO – NDIL
The SEC Conflict Minerals Rules’ Purpose and Scope Purpose? Ø Stop atrocities in Congo region ü Conceptually similar to 2003’s Kimberley Process for conflict diamonds What Are “Conflict Minerals”? Ø Gold and other minerals determined by the Secretary of State to finance conflict in the DRC or adjoining country (Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia) Confidential: Attorney-Client Privileged August 2013 32
The SEC Conflict Minerals Rules Apply To Companies that: 1. Are public; 2. Manufacture or “contract to manufacture” a product; and 3. The product contains conflict minerals that are “necessary to the functionality or production” of that product Note: “Contract to manufacture” involves an undefined “degree of influence” test “Necessary to the functionality” also undefined Confidential: Attorney-Client Privileged August 2013 33
The SEC Conflict Minerals Rules Apply To Steps: 1. Do Conflict Minerals Rules apply? 2. If so, conduct “reasonable country of origin inquiry” 3. Based on this, if NOT conflict free (or unsure), prepare Conflict Minerals Report Confidential: Attorney-Client Privileged August 2013 34
Foreign Anti-Bribery Initiatives – Thinking Beyond the FCPA - Andrew S. Boutros, USAO - NDIL
China President Hu Jintao: “China should take more forceful steps to root out government corruption, " which he said remains a "grave problem. ” “More efforts should be made to investigate graft in key industries and key posts. ” 10 Jan 2011 Speaking at a three-day plenary session of the CPC Central Commission for CCDI Confidential: Attorney-Client Privileged August 2013 36
China – Corruption remains in the news and a top policy issue. • Recent Bo Xilai scandal – T. I. “Corruption Perception Index” steady: • 2012: 80 th (score: 39) 0 = highly corrupt; 100 = very clean – Outrage, but little chance for widespread protest Ø 4 -year old dies on way to hospital when ambulance driver refuses to drive w/o bribe from parents (June 2012) Ø People’s Daily: “Stop using term ‘corruption’” (promotes false idea that corruption is everywhere (June 2012) Confidential: Attorney-Client Privileged August 2013 37
China Risk Areas – Gift giving culture (Travel & Entertainment) – State owned enterprises (‘SOEs’) – employees deemed ‘government officials’ – Longer supply chains/unfamiliar trade practices – Wages of government staff – bribes supplement wages – Decentralization of power – Inconsistent enforcement of laws – Immature legal remedies and dispute resolution mechanisms – Scarcity of qualified and experienced middle management – Prevailing culture of loyalty to family, friends, etc. Confidential: Attorney-Client Privileged August 2013 38
China Domestic legal / enforcement landscape – PRC Criminal Law prohibits bribery of public officials (harsh penalties) and corporate officials – Amendment in 2011 makes it a crime to bribe a foreign public official (FCPA-like) – Corruption investigations conducted by: – Communist Party (Discipline and Inspection Committees) – National-level prosecutors’ offices (Supreme People’s Procuratorate) – State-level agencies (incl. State Administration for Industry and Commerce) (SAIC) Confidential: Attorney-Client Privileged August 2013 39
China's State Secrets Law (2010) • “Matters related to State security and national interests” and “other secret matters” • If doing internal investigation relating to SOE, risk of violation • Negligence is floor for mens rea • Secret trials; limited access to counsel Confidential: Attorney-Client Privileged August 2013 40
U. K. BRIBERY ACT - James R. Meehan (Price Waterhouse Coopers) “There a lot of people saying this is the FCPA on steroids. ” - Mark Mendelsohn Former Deputy Chief, DOJ Fraud Section (The Wall St. J. , Dec. 28, 2010)
“There a lot of people saying this is the FCPA on steroids. ” - Mark Mendelsohn Former Deputy Chief, DOJ Fraud Section (The Wall St. J. , Dec. 28, 2010) Confidential: Attorney-Client Privileged August 2013 42
Overview of the U. K. Bribery Act The U. K. Bribery Act creates four separate offenses: 1) Offering, promising, or giving a bribe to a private party 2) Agreeing to receive or accepting a bribe 3) Offering, promising, or giving a bribe to a foreign government official with the intent to influence the performance of his or her functions as a public official in order to obtain or retain business or a business advantage 4) Failing to prevent bribery by associated persons Offense #3 most closely mirrors the FCPA. In several respects, the Bribery Act is further-reaching and possibly harsher than the FCPA. Confidential: Attorney-Client Privileged August 2013 43
Differences between FCPA and Bribery Act Issue FCPA Bribery Act Prohibits bribery of private officials No* Yes Prohibits bribery of domestic officials No* Yes Prohibits receiving bribes No Yes Corrupt intent required Yes No** Exception for facilitating payments Yes No Exception for promotional expenses Yes No*** Affirmative defense for robust compliance program No Yes * The U. S. Travel Act may apply. ** General offenses require evidence of improper performance (reasonable person standard). The offense of bribery of a foreign official requires evidence of an intent to influence the official in order to obtain or retain business. *** The U. K. government says it does not intend to prohibit reasonable and proportionate hospitality and promotional expenses as long as there is no improper intent. Confidential: Attorney-Client Privileged August 2013 44
Another Difference: Jurisdiction FCPA U. K. Bribery Act Applies to: 1) Issuers of U. S. securities 1) U. K. companies, citizens, and residents 2) “Domestic concerns” 2) Non-U. K. nationals/entities where part of act takes place in the U. K. 3) Other persons who act in furtherance of a corrupt payment while in U. S. territory 3) Companies who “carry on a business, or part of a business, ” in U. K. Confidential: Attorney-Client Privileged August 2013 45
U. K. Bribery Act: Adequate Procedures to Prevent Bribery If an “associated person” pays a bribe for the benefit of the company, the only defense to criminal liability is to prove the company has “adequate procedures” to prevent bribery. Guidance published by the U. K. Government identifies six key principles: 1) Proportionate procedures 2) Top-level commitment 3) Risk assessment 4) Due diligence 5) Communication (including training) 6) Monitoring and review Confidential: Attorney-Client Privileged August 2013 46
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