The Sting in the Deal: What Every Buyer & Seller Must Know About the FCPA

1. The Sting in the Deal: What Every Buyer & Seller Must Know About the FCPA April 15, 2010 Sponsored by:

2. The Sting in the Deal – What Every Buyer and Seller Must Know About the Foreign Corrupt Practices Act Discussion Leader Jonathan Marks, CPA, CFF, CFE Partner In-Charge of Fraud & Ethics 212.572.5576 or jonathan.marks@crowehorwath.com http://www.linkedin.com/in/jonathantmarks

3. Panel Jonathan Marks, CPA, CFE, CFF Partner In-Charge of Fraud & Ethics at Crowe Horwath LLP Gregory Paw Attorney engaged in Foreign Corrupt Practices Act matters at Pepper Hamilton LLP Matthew Tanzer VP and Chief Compliance Counsel, Tyco International Kathleen Hamann Trial Attorney, U.S. Department of Justice, Criminal Division, Fraud Section

4. Siemens: $2.6 Billion

5. Others Impacted

6. Real World?

7. Why Anti-Corruption Compliance Is Important Increased Enforcement Number of investigations is on the rise! Increased Penalties Penalties are up significantly from prior years Individual Enforcement DOJ and SEC are increasingly targeting executives; sentences include jail time Increasing cooperation and coordination internationally 38 countries have adopted OECD Convention on Combating Bribery of Foreign Public Officials in International Business Some countries aggressively enforcing

8. Why Anti-Corruption Compliance Is Important Voluntary disclosure is increasing DOJ and SEC are encouraging companies to voluntarily disclose issues Almost 2/3 of the disclosed FCPA investigations in 2005-2007 were voluntarily disclosed to the SEC Government settlements are also requiring external monitors to ensure compliance 2- and 3-year monitors are becoming a standard part of settlements The annual cost of external monitors can range from $1 to $3+ million per year

9. Why Anti-Corruption Compliance Is Important Increase in M&A FCPA-related due diligence is leading to voluntary disclosures SOX certification and internal controls Increased expectations of Board of Directors and Audit Committees – possibility of personal liability World governmental attitudes changing Many other countries are cracking down on bribery Cross country cooperation

10. And One More Reason… • Target Industries • Technology • Oil and Gas • Manufacturing • Engineering and Construction • Pharmaceutical • Medical Devices • Mining • Transportation Source: Transparency International

11. FCPA Fundamentals Anti-Bribery Provision Makes it illegal to make payments with a corrupt motive directly or indirectly, to foreign officials, officials of foreign political parties, or any other person acting as a conduit for payments to foreign officials or political parties for the purpose of influencing the official, in order to assist in obtaining/retaining business Books and Records Provision Requires companies who file reports with the SEC to maintain records that accurately reflect transactions and the nature and quantity of corporate assets and liabilities Other Key Facts Ignorance of the law is not a valid defense Source of the alleged bribe does not have to be in the U.S. Actions of an agent acting “on behalf” of a company are attributed to company Actions of the foreign sub will be attributed to the U.S. parent

12. 5 Elements Constituting a Violation

13. * Fines levied against individuals may not be paid by their employer or principal

14. M&A Anti-Corruption Issues Pre-acquisition due diligence Successor liability Vicarious liability Controlling Interest Compliance programs

15. M&A: Pre-Acquisition Due Diligence Private firm Latin Node, Inc. had a number of contracts with state-run telephone companies in Honduras and Yemen In 2007, eLandia International, Inc. acquired Latin Node for over $26 million

16. M&A: The Other Shoe Drops Shortly after purchase, eLandia discovered bribery scheme to obtain contracts, and reported to the SEC Latin Node entered guilty plea to FCPA offenses, paid $2 million fine eLandia reported it overpaid by $20.6 million for the true value of Latin Node

17. Private Equity: The Impact of Corruption “Pirate of Prague” Viktor Kozeny led an effort in late 1990s to invest in and privatize SOCAR, the state oil company of Azerbaijan Handbag magnate Frederic Bourke was part of a group of private equity investors that included Omega Advisors, Inc. and AIG Prosecutors charge that Kozeny led his bid with offers of bribes to Azerbaijani officials

18. Private Equity: Criminal Liability? Clayton Lewis, Omega employee, allegedly was told by Kozeny about bribes to secure SOCAR bid Pled guilty to FCPA offenses, awaiting sentencing Omega Advisors Agreed to cooperation agreement and $500,000 civil forfeiture Frederic Bourke allegedly turned “blind eye” and kept “head in the sand” about Kozeny’s actions Convicted at trial, sentenced to 1 year and 1 day imprisonment, on appeal David Pinkerton, AIG Indicted but charges dropped

19. Private Equity: ABB/Vetco/Aibel In 2004, private equity group led by JP Morgan sought to purchase ABB/Vetco. Two Vetco units had pending FCPA charges. Release 2004-02: Justice approves procedures before sale, emphasizing importance of compliance program. Vetco/Aibel sold again to private equity, and more FCPA issues emerge. Early 2007, 3 years later, three Vetco units pled to FCPA offenses and paid $26 million fine. Aibel also agreed to compliance reforms Agreement took into account compliance failures, as well as new sale, new compliance efforts and self-disclosure Late 2008, Aibel enters plea to FCPA offenses and pays $4.2 million fine

20. Lessons Learned Pre-acquisition due diligence Vibrant compliance program Timely post-acquisition review / compliance Self audits Periodic reevaluations Remedial steps Self reporting of violations

21. What is Effective Due Diligence? Tailor due diligence based on risk of business being acquired What is the nature of the business Where are they conducting business Who are the key players and with whom are they conducting business Due diligence should address Use of agents and other third parties Commercial dealings with state-owned customers Joint venture, teaming or consortium arrangements Customs and immigration matters Tax matters Any government licenses and permits

22. What is Effective Due Diligence? Consider external counsel and consultants, including forensic accountants, to conduct the due diligence Obtain representations and warrantees from seller Implement contractual protections Covenants, representations and warranties Audit rights Suspension/termination rights Confidentiality provision allowing pre-acquisition disclosure Document due diligence steps

23. 10 Steps to Minimizing FCPA Risk Ensure commitment and accountability of senior management Include FCPA in corporate code of conduct Establish FCPA policy guidelines including clear approval guidelines for disbursements Review FCPA-related internal controls to ensure you are properly flagging high-risk areas of your business Use all available tools to conduct internal audits of FCPA controls, records and payments made by foreign affiliates

24. Investigate when red flags or bribery allegations arise Understand corruption risk in countries where business is being done (see Transparency International’s CPI) Include FCPA language in contracts and agreements including right to audit Ensure periodic training of relevant employees Perform proper due diligence on foreign business partners 10 Steps to Minimizing FCPA Risk (continued)

25. Intangible Benefits of Anti-Corruption Efforts For example, in Iraq, the United Nations Oil-for-Food Program became corrupted Massive surcharge and kickback scheme 139 companies pay oil surcharge 2,250 companies pay kickbacks Over $1.4 billion diverted to Iraq government through payment of “Inland Transportation Fees” and “After-Sales Service Fees”

26. Follow the Money Over $1.4 billion diverted from “humanitarian” purposes Diverted to Ministries of Defense and Military Industrialization, as well as intelligence services Used to buy trucks, tires, batteries, even date palm excavators

27. At the Scene

28. ACG Philadelphia Cup Business Case Competition Sponsored by:

29. ACG Philadelphia Cup Judges Co-Chairs • Michael Bailey, Argosy Private Equity •  Barbara Shander, Morgan Lewis & Bockius • Judges Committee •  Scott Heery, KPMG •  Mitchell Hollin, LLR Partners • Ken Jones, Boathouse Capital •  Mike McAleer, KPMG •  Joe McGinley, Comcast Corporation • Andrew Panzo, NewSpring Capital Partners Sponsored by:

30. ACG Philadelphia Cup Finalists Temple University, Fox School of Business Qiyi Bao Michael Ettinger Vijay Iyer Shao Zhang The Wharton School of the University of Pennsylvania Deb Bardham Uttam Jain Aditya Joshi Nikhil Kirtane TzerHan Lim Fabio Salvagni Drexel University, LeBow College of Business Ryan Baker Paul Green Robert Lodge Scott Freeman La Salle University School of Business Birad Bhatt Justin Solomon Mikael Vincke Penn State University, Smeal College of Business Jonathan Wesner Xiaoyu Zhang Howard Ho Tieming Lang Sponsored by:

31. ACG Philadelphia Cup 2nd Place Team Villanova University School of Business Meet Doshi Patrick Doherty Olivia Pietrunti Sumedha Verma Sponsored by:

32. ACG Philadelphia Cup 1st Place Team St. Joseph’s University, Haub School of Business Chris FrystockJan Bartczak Sponsored by:

33. Mark Your Calendar for 2010 Events Upcoming Events May 5 - 6, 2010 ACG InterGrowth Miami, FL May 20, 2010 Lenders’ Panel Discussion: Joint Program with TMA Philadelphia June 3, 2010 Corporate Buyers Dinner Discussion (Invitation Only to Strategic Buyers) June 17, 2010The Honorable David M. Walker, Former US Controller July 12, 2010 Annual ACG Member Guest Golf Outing Huntingdon Valley Country Club