Overview Significant New Prosecutions & Settlements Compliance Program Developments M&A diligence and joint ventures Declinations, DPAs and NPAs Voluntary Disclosure Whistleblower Update FCPA Legislative Reform Efforts and DOJ Guidance Foreign Official Opinion Release Non-US Developments
Significant New Prosecutions & Settlements: DOJ and SEC Investigations
Significant New Prosecutions & Settlements: Top Ten Corporate FCPA Fines
Significant New Prosecutions & Settlements: Morgan Stanley Declination (April 25, 2012) • The DOJ and SEC declined to charge Morgan Stanley for the actions of its former managing director, Garth Peterson • The DOJ stated in its press release: • After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct. The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation • Peterson, according to the DOJ and SEC, was a “rogue employee”
Significant New Prosecutions & Settlements: Garth Peterson Sentenced (July 17, 2012) • Morgan Stanley’s former managing director for real estate in China was sentenced to nine months in federal prison • Garth Peterson pleaded guilty in April to a one-count criminal information charging him with conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA • He also agreed in April to pay approximately $250,000 in disgorgement and forfeit Shanghai real estate worth $3.4 million to settle civil FCPA charges filed by the SEC
Significant New Prosecutions & Settlements: FalconStor Software Inc. (June 27, 2012) • SEC’s complaint charged FalconStor with violating, inter alia, the books-and-records and internal controls provisions in order to reach conduct involving commercialbribes • FalconStor admitted concealing over $400,000 in bribes to a JP Morgan Chase official, including gambling slush funds and stock options • SEC: $2.9 million civil fine • DOJ: DPA and $2.9 million penalty • The case demonstrates that the SEC can use the books and records provisions in non-FCPA bribery cases involving non-foreign government officials
Significant New Prosecutions & Settlements: Orthofix International N.V. (July 10, 2012) • Orthofix International N.V., a Texas-based medical device company, settled FCPA charges relating to bribes in Mexico • The complaint alleged that between 2003 -2012 Orthofix’s Mexican subsidiary, Promeca S.A. de C.V., bribed officials at Mexico’s government-owned health care and social services provider in order to win lucrative healthcare contracts, falsely recording them as promotional and training costs • According to the SEC, Orthofix asked about the charges but didn't take immediate action or launch an investigation • Eventually Orthofix learned of the bribery and self-reported it to the SEC; the company also took corrective action including firing the Promeca executives who orchestrated the bribery scheme • SEC: $5.2 million civil fine • DOJ: DPA and $2.22 million penalty
Significant New Prosecutions & Settlements: Pfizer (August 7, 2012) • Pfizer H.C.P. Corporation (Pfizer HCP), a wholly-owned subsidiary of Pfizer Inc. (Pfizer), entered into a two-year deferred prosecution agreement and paid $15 million criminal penalty to resolve FCPA violations involving conduct in multiple countries: • Government alleged that Pfizer’s employees and agents paid bribes in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia to foreign officials ”for the purpose of improperly influencing foreign officials in connection with regulatory and formulary approvals, purchase decisions, prescription decisions, and customs clearance” • Pfizer, Inc. paid the SEC $26.3 million in disgorgement and pre-judgment interest • Wyeth LLC, acquired by Pfizer three years ago, separately agreed to pay $18.8 million to the SEC in disgorgement and pre-judgment interest, for pre-acquisition conduct
Significant New Prosecutions & Settlements: Pfizer (August 7, 2012) • DOJ and SEC statements of facts describe multiple schemes, including, e.g.: • Providing HCPs lavish incentive trips and/or cash based on prescription volume • Sponsorship agreements in exchange for prescriptions • Sham consulting agreement payments to officials holding influence over registration and reimbursement decisions • Hospital bonuses used to influence sales and the “inclusion of pharmaceutical products in tenders or on formulary lists” • Making payments through third parties to influence registration and prescription decisions • Utilizing collusive vendors to falsify invoices and generate cash for improper payments • Making questionable donations of goods to hospitals
Significant New Prosecutions & Settlements: Morgan Stanley Declination An effective compliance program can save a company from prosecution
Compliance Program Developments • DOJ Compliance Appendix sets forth DOJ’s evolving views on the essential elements of an effective anti-corruption compliance program • Two recent additions to the list [Bizjet; DS&S; NORDAM; Pfizer] – • Conduct mergers and acquisitions due diligence on prospective targets • Ensure prompt application of the acquirer’s policies and procedures to the newly acquired or merged entities • Promptly train directors, officers, employees, agents, consultants, representatives, distributors and JV partners of the newly acquired or merged entities • Conduct FCPA-specific audits of the newly acquired or merged entities as quickly as possible
Compliance Program Developments • Johnson & Johnson “Enhanced Compliance Obligations” • Appointment of an experienced, senior corporate executive as Chief Compliance Officer, with a direct reporting line to the Audit Committee • Appointment of heads of compliance within each business unit and corporate function • Maintain a global compliance leadership team, reporting directly to the Chief Compliance Officer • Maintain stringent gifts, hospitalities and travel policies and procedures • Maintain an effective reporting and complaint hotline and mechanisms for promptly and consistently responding to corruption issues • Conduct periodic risk assessments and audits • M&A elements as noted above • Third party diligence procedures and standard contractual provisions • Training and certification
Compliance Program Developments • Pfizer HCP Corporation “Enhanced Compliance Obligations” • Tailored to Pfizer, but generally comparable to Johnson & Johnson • A pharmaceutical industry-wide standard? • A new standard of general application?
M&A Diligence and Joint Ventures - The Goals of M&A Due Diligence • Identify possible corruption exposure that may cause deal to be aborted or modified • Better early than late • Also, better late than never • Weigh risks of successor liability • Mitigate potential liabilities where corruption found • Impart effective anti-corruption program and remedial action in pre-closing and closing period
M&A Diligence and Joint Ventures: Risk Based Assessment - Factors to Consider • What countries does Target operate in? • How do they rank on TI’s Corruption Perceptions Index? • Is the Target’s business susceptible to corruption? • Is the Target highly regulated? • Does it sell to/or regularly deal with foreign governments? • Has the Target been the subject of corruption allegations or sanctions?
M&A Diligence and Joint Ventures: Risk Based Assessment - Factors to Consider Have background checks on shareholders, management, customers, and agents identified red flags? Does the Target rely on third-parties to conduct business? Does the Target have effective anti-corruption compliance policies and procedures?
M&A Diligence and Joint Ventures: Stages of Due Diligence Commencement of Process Initial Review Execute Non-Binding Letter of Intent Detailed Review Decision Enter into Definitive Agreement Integration (Pre-closing/Post-closing) Monitoring
Declinations, DPAs, and NPA • Scrutiny of enforcement practices also driving some transparency regarding resolution decision making • Lanny Breuer (September 13, 2012): • “Because Morgan Stanley voluntarily disclosed Peterson’s misconduct, fully cooperated with our investigation, and showed us that it maintained a rigorous compliance program, including extensive training of bank employees on the FCPA and other anti-corruption measures, we declined to bring any enforcement action against the institution in connection with Peterson’s conduct. That is smart, and responsible, enforcement.” • Huntsman Corporation SEC Filing (Aug. 1, 2012): SEC and DOJ declined to take enforcement action in light of the company’s prompt self-disclosure, cooperation, and termination of employees involved in the improper conduct
Declinations, DPAs, and NPA • In 2011, Representative Sandy Adams (R-FL) asked Greg Andres (DOJ) about the DOJ’s FCPA declination decisions and requested that the DOJ provide more detail as to its declination decisions, including the DOJ’s reasons and rationale for why it did not pursue enforcement actions in certain cases • In August 2011, the DOJ responded to Congresswoman Adams request and listed several elements the DOJ takes into consideration when deciding to issue a declination decision
Declinations, DPAs, and NPA • According to the DOJ’s letter, the Department declined matters in which some or all of the following circumstances existed: • A corporation voluntarily and fully self-disclosed potential misconduct • Corporate principals voluntarily engaged in interviews with the Department and provided truthful and complete information about their conduct • A parent corporation voluntarily and fully self-disclosed information to the Department regarding alleged conduct by subsidiaries • A parent company conducted extensive pre-acquisition due diligence of potentially liable subsidiaries, and engaged in significant remediation efforts after acquiring the relevant subsidiaries • A company agreed to a civil resolution with the SEC, while also demonstrating that a declination was appropriate for additional reasons • A single employee, and no other employee, was involved in the provision of improper payments • The improper payments involved minimal funds compared to overall business revenue
Declinations, DPAs, and NPA • DOJ also continues to utilize non-prosecution and deferred prosecution agreements heavily and views them as a key enforcement tool • Lanny Breuer (September 13, 2012): “Over the past three-and-a-half years, the Department of Justice has entered into dozens of DPAs, and non-prosecution agreements, or NPAs. I’ve heard people criticize them and I’ve heard people praise them. What I’m here to tell you, is that, along with the other tools we have, DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe . . . . The result has been, unequivocally, far greater accountability for corporate wrongdoing – and a sea change in corporate compliance efforts. Companies now know that avoiding the disaster scenario of an indictment does not mean an escape from accountability . . . Companies also realize that if they want to avoid pleading guilty, or to convince us to forego bringing a case altogether, they must prove to us that they are serious about compliance.
Declinations, DPAs, and NPA • We are now seeing the SEC utilize these types of settlements, including in the FCPA context • In 2011, Tenaris, a Luxembourg-based pipe maker became the first company to enter into a DPA with the SEC in any kind of enforcement action • As part of the DPA, Tenaris is required to update its code of conduct and undertake certain compliance program measures • Robert Khuzami, director of SEC division of enforcement announced that the SEC would be using DPAs, NPAs, and other tactics to encourage greater cooperation, and noted “This is a potential game-changer for the division of enforcement. There is no substitute for the insiders' view into fraud and misconduct that only cooperating witnesses can provide.”
Voluntary Disclosure • DOJ/SEC position is that companies will receive meaningful credit for self-reporting, potentially including: • Better chances of declination or NPA from DOJ, or administrative settlement or DPA from SEC • Credit under U.S. Sentencing Guidelines, reducing any fine • Further reduction in any fine below bottom of sentencing guidelines range • More opportunity to shape factual basis of any resolution • More likely to avoid compliance monitor • But benefits depend on prosecutorial discretion • Publicly resolved cases do not clearly demonstrate the benefits of voluntarily disclosure vs. other factors influencing resolutions (e.g., cooperation, remediation, litigation risk) • Costs of voluntary disclosures can be steep • Responding to government’s requests and inquiries • Expansion of scope • Loss of control • Post-resolution obligations
Voluntary Disclosure • Factors to consider • Independent disclosure obligations • Risk that the government will discover from another source • Whistleblower • Dodd-Frank whistleblower provisions increase this risk • Competitors/industry-wide investigation • Foreign law enforcement • Media • Seriousness of possible violation • Where possible violation occurred • Important to investigate internally and remediate, whether or not disclose to government
Whistleblower Update • Dodd-Frank Act whistleblower provisions effective July 21, 2010 • SEC implementing rules proposed November 3, 2010, and adopted, after extensive public comment, on May 25, 2011, effective August 12, 2011 • Office of the Whistleblower administers program • Rewards whistleblowers with 10-30% of penalties • Whistleblower must provide “original information” to the SEC • Information must lead to enforcement penalties of $1 million or more • Some factors that may be considered in determining an award are: significance of the information provided; degree of assistance provided; programmatic interest of the SEC; etc. • New private right of action for whistleblowers who suffer retaliation by the company • SEC (and DOJ) officials report increase in quality of tips under whistleblower program • FCPA whistleblower bar has emerged
Whistleblower Update • No requirement to report internally, but an employee may still receive reward if reported to internal compliance prior to government • Whistleblowers have 120 days to report to the government after internally reporting • Internal reporting constitutes a factor that could increase the amount of the award, while interference with the internal reporting process could decrease the amount of the whistleblower’s award • Whistleblowers who report internally may get credit for all of the information uncovered as a result of the company’s internal investigation, increasing their potential reward • Internal compliance and audit personnel may qualify for whistleblower status if: • at least 120 days have elapsed since provided information to audit committee, chief legal or compliance officer, or supervisor • reasonable basis to believe disclosure necessary to prevent conduct likely to cause substantial injury to financial interest or property of company or investors • reasonable basis to believe company is engaged in conduct that will impede investigation
Whistleblower Update • Steps to consider in light of whistleblower incentives • Reinforce compliance culture • Publicize internal reporting mechanisms and encourage their use • Assure employees that complaints will be taken seriously and addressed in timely manner and that there will be no retaliation • Ensure that procedures and resources for responding to and investigating complaints are adequate to fairly and quickly resolve complaints • Proactively investigate potential violations in order to learn sufficient facts to make informed decision as to whether voluntary disclosure may be appropriate • Communicate appropriately with employee who raises concerns so comfortable concerns are being addressed • Maintain records of complaints, investigations, resolution, and remediation
FCPA Legislative Reform Efforts and DOJ Guidance • US Chamber of Commerce white paper and proposed amendments • Adding a compliance defense • Limiting a company’s liability as an acquirer for the conduct of an acquired company • Adding a “willfulness” requirement for corporate liability • Limiting a company’s liability for the acts of a subsidiary • Defining a “foreign official” under the statute • OECD review of US implementation and related recommendations • Guidance for the private sector
FCPA Legislative Reform Efforts and DOJ Guidance • DOJ Guidance • Promised by AAG Lanny Breuer on November 8, 2011 • Subsequently, USG consulted with corporate community, NGOs and the Chamber • Topics might include: self-reporting; successor liability; definition of “foreign official”; corporate hospitality; M&A diligence • SFO Guidance [Issued October 10, 2012] • Self-reporting • Facilitation payments • Gifts and hospitalities • Tone
“Foreign Official” Opinion Release • FCPA Opinion Release 12-01 (September 18, 2012) • Requested by U.S. lobbying firm proposing to hire consulting company in which royal family member was partner to introduce lobbying firm to foreign country embassy and assist in providing lobbying services for foreign country embassy • First and only release of 2012 • Seven months from request to opinion • Mere membership in royal family does not make one a “foreign official” • Fact-intensive, case-by-case inquiry, with no single factor being dispositive • control or influence over levers of governmental power • how foreign government characterizes the individual • whether and under what circumstances individual may act on behalf of or bind the government
“Foreign Official” Opinion Release • DOJ cited earlier opinion release (No. 10-3) involving consultant who acted on behalf of government under unrelated contracts • In that opinion, DOJ emphasized that acting on behalf of foreign government could, depending on the circumstances, render an individual a foreign official • DOJ cited multi-factor test articulated in U.S. v. Carson for determining whether a state-owned entity is an “instrumentality” • foreign state’s characterization of entity and employees • foreign state’s degree of control • purpose of entity’s activities • entity’s obligations and privileges under foreign state’s law • circumstances surrounding entity’s creation • foreign state’s extent of ownership/financial support of entity
“Foreign Official” Opinion Release DOJ concluded that particular royal family member did not “presently” qualify as foreign official—so long as he did not directly or indirectly represent that acting on behalf of royal family or in capacity as royal family member
Non-US Developments • Increased activity / enforcement outside the United States • Planned amendments to India’s anti-corruption law • Mexican Federal Anti-Corruption Law adopted (June 2012) • Russia accedes to OECD Anti-Bribery Convention (Apr. 2012) • Amendments to Chinese Anti-Corruption Law (2011) • Increased cooperation among in-country and foreign law enforcement agencies, e.g.: • Serious Fraud Office • Russian Federal Anti-Monopoly Service • Hong Kong / Guangdong anti-corruption bureaus • Use of multilateral legal assistance treaties to investigate cross-border activity • U.S. government training foreign prosecutors and sharing best practices
Non-US Developments: UK DPA • On 17 May 2012 the Ministry of Justice announced an intention to use DPAs for serious economic crime committed by commercial organisations and solicit comments from the public • Serious economic crime is defined as “...fraud (which includes any financial, fiscal or commercial misconduct or corruption), bribery (specifically offences under the Bribery Act 2010), and money-laundering.” • Summary of the responses are expected to be published week beginning 22 October 2012. • After public consultation, government intends to proceed with introduction of DPAs and will be introduced in Parliament soon.
Non-US Developments: UK DPA • The Government (and many others) considers deferred prosecution agreements, as currently in use in the US, are necessary to effectively deal with economic crime committed by corporations. • Investigations and prosecutions of economic crime are expensive and lengthy • This Announcement after Innospec Case • Lord Justice Thomas found plea agreements are not available to prosecutors as a tool for dealing with economic crime committed by organisations, stating “the imposition of a sentence is a matter for the judiciary.”
Non-US Developments: UK DPA • Transparency • DPA process will probably be more transparent than the U.S. process • Judicial involvement will occur at an early stage, with the proposed DPA considered at a preliminary hearing before it returns for final judicial approval. In line with other court proceedings, the details of the finalised and approved DPA will also be published. • Consistency • Another key principle under the consultation is to ensure consistency: • A Code of Practice, procedural rules and operational guidance will be adopted to ensure the consistency of decisions and treatment.
Non-US Developments: UK DPA • Composition Will be Similar to the US, possible elements are: • statement of facts • a time period for the duration of the agreement, usually between 1-3 years. • a financial penalty (expected to be the most common condition); • disgorgements of profits, or benefits; • reparation to victims; • make available to the prosecutor all relevant, non-privileged information and material and to provide access to witnesses; • remove/replace implicated individuals, or pull out from the market in which the wrong doing is admitted; • put in place anti-fraud and anti-corruption policies and procedures, as well as having independent monitors. • Non-Prosecution Agreements Not Available
Non-US Developments: UK SFO Guidance • SFO Guidance [Issued October 10, 2012] • Self-reporting • Facilitation payments • Gifts and hospitalities • Tone • Most significant change – clarifies that self-reporting does not guarantee that company will not be prosecuted • Fact of self-reporting will be a relevant consideration to extent set out in Guidance on Corporate Prosecutions • Must be “genuinely proactive approach” • Each case turns on own facts