THE U S FOREIGN CORRUPT PRACTICES ACT IMPLICATIONS

THE U. S. FOREIGN CORRUPT PRACTICES ACT IMPLICATIONS FOR INTERNATIONAL DISTRIBUTORS One Commerce Plaza Albany, New York 12260 P 518. 487. 7600 F 518. 487. 7777 www. woh. com Leslie K. L. Thiele Partner International Practice Group

Overview of the FCPA Enacted in 1977 as an “anti-bribery” law – but both broader and narrower ▪ Applies to activities outside US or using “interstate commerce” - Cannot give or offer to give “anything of value”, even indirectly - to a foreign official, a candidate for office or a political party; - for “corrupt purpose” of causing a person to act or not act or to otherwise secure an improper advantage; - to obtain or retain business or direct it to particular persons ▪ Both accounting & anti-bribery components - Accounting rules designed to identify bribery / concealment / mischaracterization ▪ Single statutory exception: “routine governmental actions” 2

Scope of the FCPA Expanding in scope & application: significant enforcement since 2007 ▪ 1998 amendments: incorporated OECD Anti-Bribery Convention Extended to foreign citizens/businesses “while in territory of the US” ▪ Payments must have a “corrupt purpose” - “Corrupt purpose” not defined in law: broadly defined by courts - Mere PROMISE of benefits enough ▪ “Foreign official” broadly interpreted: wider than OECD Convention - “any officer or employee of a foreign government, or any department, agency or instrumentality thereof” - China, Middle East: substantial state or ruling family ownership - Management of nationalized companies? (General Motors? ) 3

Implications of the FCPA Why should foreign lawyers / clients worry about the U. S. FCPA? ▪ Accounting rules apply to US public companies only Sarbanes-Oxley Act of 2002 raised level of accounting controls ▪ Bribery / “corrupt practices” prohibitions apply to - any issuer with stock traded on US exchange - U. S. citizens & residents - all businesses located in US or organized under US law - all persons within the territory of the US (since 1998) ▪ Results are far-reaching: US subsidiaries/branches of foreign entities bound by FCPA Overseas management visiting the US can violate the law US citizens working overseas can violate the law 4

More Implications of the FCPA Other aspects of FCPA affect foreign businesses involved with US ▪ Actions of contractual parties imputed to the principal: includes U. S. agents, distributors, consultants, contractors, subsidiaries, etc. - US-based agent with “North American” territory may violate FCPA bribery rules in Mexico - US-based agent may seek reimbursement of mischaracterized expenses, violate accounting rules ▪ Increasing international cooperation on corruption issues - KBR: US, France, Italy, Switzerland, UK - Siemens: Germany, US, Italy, China, Hungary, Indonesia, Norway ▪ Expect ‘trickle-down’ of FCPA requirements from affected companies 5

Broad Application of FCPA Examples show breadth of FCPA in practice ▪ Pharmaceutical & medical device companies’ marketing practices under investigation: payments to MDs or employees of state-owned hospitals in China were to “foreign officials” ▪ Donations to legitimate charitable organizations prohibited if made at request of govt. official. Considered “indirect payment” to official ▪ Conviction of 2 American Rice executives who knew that it is illegal to bribe foreign officials, even though unaware of specific FCPA directives. US v. Kay, 513 F. 3 d 461 (5 th Cir. 2008) ▪ Expansive jurisdiction: December 2008 Siemens settlement - Home office & conduct overseas; fined by Germany. - US still exerted jurisdiction under FCPA 6

Enforcement Increasing enforcement - both in quantity and magnitude ▪ SEC focuses on accounting/reporting violations, SOX DOJ lead enforcer on anti-bribery provisions ▪ 2008: highest number of enforcement actions ever 82 corporations with open investigations with SEC/DOJ in 2008 ▪ Increase in SEC, DOJ, FBI staff dedicated to FCPA enforcement Enforcement Focus: 2008, continuing into 2009 ▪ ▪ Identified industries w/ problematic track records Energy, technology, medical devices, defense contracting, infrastructure Individual offenders: increased enforcement against individuals FBI stated emphasis is to “convict individuals” 7

Penalties ramped up significantly in wake of Enron & other financial disasters ▪ Civil fines: $10, 000 against firm, officers, directors, employees, agents or shareholder acting on behalf of the firm ▪ Criminal: - $2 million for corporations/businesses; - $100, 000 + 5 years’ jail for officers, directors, employees, agents - Actually higher under Alternate Fines Act ▪ Debarment: no federal contracts, no export licenses, no OPIC funds ▪ SEC fines of $500, 000 for entities, $100, 000 for natural persons ▪ Generally, no private cause of action under the FCPA but violation of Travel Act may action for treble damages under RICO 8

Red Flags Prohibition on payments “knowing” this will violate FCPA ▪ FCPA requires actual knowledge of both the act of making payment and circumstances under which payment is made ▪ Includes conscious disregard or ‘willful blindness’ to purpose of payment Common ‘red flags’ DOJ uses to measure ‘knowledge’ ▪ Unusually high commission/margins for product in country Special attention in targeted industry or sensitive countries ▪ Atypical financial arrangements, in new or existing relationships ▪ Relative lack of qualifications/experience in an agent, joint venture partner, consultant measured against success or promises ▪ New intermediaries with family connections to ruling families or government officials 9

Achieving Compliance – Preparation Focus on PREVENTION and EARLY DETECTION ▪ Focus here on contractual relationships: Acquisition needs higher level of due diligence, preventative reps & warranties, exclusions First: Get own house in order ▪ Written anti-corruption / anti-bribery / ethics policies IN HOUSE ▪ Training of corporate employees Policies without implementation worthless ▪ Internal accounting controls to detect oddities which could = bribes ▪ Targeted industries exercise special care 10

Achieving Compliance – Due Diligence Second: Due diligence before transaction ▪ Who IS this new partner? Research dictated by size/experience of new partner, transaction ▪ New intermediary understands FCPA or related OECD standard? ▪ Does ownership of partner make improper use of connections likely? ▪ Prior track record in country, particularly in countries with high corruption levels Resources: banks, embassy reports, financial references, customer references Paid research: private background research ▪ ▪ 11

Achieving Compliance – Contract Issues Third: Contractual provisions to assure compliance / contain damages ▪ Simple prohibition: intermediary will comply with FCPA and relevant local anti-corruption legislation. Specificity depends on partner ▪ TRAINING of new intermediary or subsidiary ▪ Require intermediary to have OWN anti-corruption policy binding staff ▪ Approval of subagents, subcontractors; right to monitor payments ▪ Provisions for when improper payment made by intermediary - Should contract be void? Voidable? Neither? - Immediate termination for cause: specify standards, notice; payments for goodwill or indemnity - Claim for damages against agent for fines/defense costs

Maintaining Compliance DOJ FCPA Opinion procedures useful (28 CFR Part 80) ▪ Request ruling whether proposed conduct would violate anti-bribery provisions ▪ Answer within 30 days (once DOJ has all needed information) ▪ Process: www. usdoj. gov/criminal/fraud/fcpa/opinproc. htm Fourth: Due diligence during contract ▪ Make sure contractual commitments by intermediary are kept ▪ Review background of orders to high-risk countries ▪ No unusual payments, high commissions w/o clear justification ▪ Monitor payments to subagents; T&E ▪ Changes in partner during contract: political involvement, changes in ownership, etc. 13

And When Things Go Wrong And if it blows up? ▪ Consider voluntary self-reporting to DOJ of any violations ▪ Limits criminal & civil exposure, particularly when coupled with strong remedial action by company and cooperation ▪ Guidance on relevant factors in DOJ “Filip Memorandum” (August 2008): lists criteria for determination whether corporation deserves credit for cooperation 14

Contact Information The information in this presentation is intended as general background information on legal issues arising in international business transactions in the U. S. . It is not to be considered as legal advice with regard to any particular business relationship or transaction. U. S. and foreign laws affecting international operations change often and information becomes rapidly outdated. Businesses considering international transactions or investments should consult legal counsel for advice on their particular issues. Leslie K. L. Thiele, Esq. International Practice Group Tel: (518) 487 -7636 Fax: (518) 487 -7777 lthiele@woh. com WHITEMAN OSTERMAN & HANNA LLP One Commerce Plaza Albany, New York 12260 USA © 2009 Whiteman Osterman & Hanna LLP 15