Managing Ethics and Responsibilities in International Distribution

1. Critical Issues in International Distribution International Distribution Institute European Company Lawyers Association Union Internationale des Avocats

2. Termination Indemnity to distributors, “Illicit Commissions”, Revision of EC Competition Rules June 12 and 13, 2009, Barcelona

3. Pedro Montoya Group Chief Compliance Officer EADS Agreements with agents who might make an illicit use of the amounts received. What is the extent of the principal’s responsibility?

4. 1 Why bother about bribery? PwC research conducted in 2008 with 390 senior executives shows that • 45% of the companies concerned could not do business on a specific market because of corruption risks • 39% of respondents say that their bid was not successful due to a corrupt public official • 42% believe their competitors are paying bribes

5. 2 Stakes are high Ten highest FCPA “agreements”  • Siemens : 350 mio $ (SEC) and 450 mio (DoJ) • Chevron: 28 mio $ (SEC) and 27 mio $ (DoJ) • Baker Hughes : 33,1 mio $ (SEC) and 11 mio $ (DoJ) • Willbros: 10,3 mio $ (SEC) and 22 mio $ (DoJ) • Titan: 15,5 mio $ (SEC) and 13 mio $ (DoJ) • York Intern. Group: 12 mio $ (SEC) and 10 mio $ (DoJ) • Statoil: 10,5 mio $ (SEC) and 10,5 mio $ (DoJ) • Volvo : 12,6 mio $ (SEC) and 7 mio $ (DoJ) • Fiat: 10,8 mio $ (SEC) and 7 mio $ (DoJ) • ABB: 5,9 mio $ (SEC) and 10,4 mio $ (DoJ)

6. 3 Need for intermediaries? • Large corporations in a globalized world may be asked: do you still need intermediaries or can you – with your important resources – ensure a presence in all markets where your company wants to offer its products or services • The answer to that difficult question would be double: • There is a need for specialized, professional intermediaries, who can give access to far away, unexplored, difficult or technical markets, • But, each time an intermediary will be hired, the effective need for its intervention must be evidenced • Hiring an intermediary will be an intricate procedure

7. 4 They carry the colours • The intermediary’s (unethical) conduct will often be considered as the principal’s responsibility, causing potentially high reputational damage • A principal can no longer shift the blame for unethical behaviour to the intermediary • For good or for worse, the intermediary will carry the principal’s colours (as will other business partners) • A strong corporate preventive policy is therefore necessary

8. 5 Who’s responsible? • The conventions, mentioned by previous speaker, have established, beside corporate liability of physical persons, corporate criminal liability • This covers in essence two situations: • liability is diffuse in the organization and cannot be crystallized on one single person, or • the company has omitted to take even minimal preventive measures to avoid an infringement of the law to happen

9. 6 Common Industry Standards • The European Defence and Aeronautics industry has established, with ICC’s technical assistance, the basis for its own ethical standards (Common Industry Standards, CIS) • It is remarkable that the most important provisions of these CIS address the issue of intermediaries • Intermediaries are seen as “an effective means of developing, expanding and maintaining the companies’ business”. It is noted however that “if not carefully selected or if inappropriately managed”, they may “create considerable harm to a company’s reputation or may even trigger judicial proceedings”

10. 7 Due diligence • One cannot anymore do as if one does not “know his intermediary” (compare to banks with the “know your customer”, KYC) • Based on a careful risk analysis (“if my company is to be under fire, where will the shots come from?”), each company is to create its own due diligence procedure • containing its vetting process for candidate intermediaries • its “red flags” (prohibiting the hiring of an unethical candidate intermediary) • detailing the administrative steps for the approval of the contract with the intermediary

11. 8 Need for an orderly file • The contract with the intermediary must be in writing and must contain a full description of the intermediary’s task (do’s and don’t) as well as his area of activity • The contract must contain (i) the intermediary’s ethical commitment (i.e. that no part of any payment by the principal shall be passed on as a bribe) and (ii) the principal’s ethical commitments (i.a. compliance with the company’s code of ethics and the anti-corruption legal provisions) • The full process must be documented and regularly updated

12. 9 Training and information • Companies have more and more full integrity programmes containing an element of “training and information” • One may bring intermediaries’ employees in this programme to ensure that they follow the principal’s evolution in matters of integrity

13. 9 Auditing/verification • It is strongly recommended that the agreement with the intermediary contains auditing/verification rights for the principal in order that he can satisfy himself that the intermediary remains compliant with his ethical commitments • Should be part of regular auditing programmes • Audit/verification can cover other matters such as labour law right, human rights etc

14. 10 Termination of the contract • Non-compliance by the intermediary of his non-bribery commitment should entitle the principal to terminate forthwith the agreement • According to some commentators, a no-bribery practice is so essential in the principal /intermediary relationship that continuation of the agreement should not be allowed in case of (even the smallest) infringement (zero tolerance)

15. 11 Reporting • As a matter of general good practice and for keeping an eye on ethical compliance, regular, detailed and genuine reporting should be made by the intermediary about what he does to fulfil his task • One should not be satisfied with general talk

16. 12 Fees (I) • The most difficult issue • There are no tariffs • Always be careful to keep fees tax deductible • Commercially difficult to pay only for hours spent and cost made (cost+)

17. 13 Fees (II) • Fees to intermediaries “shall correspond to an appropriate remuneration for legitimate services effectively rendered” • No cash payments • Payments are made, save exceptional circumstances, in the country where the intermediary is active or registered • Fees are properly recorded in the principal’s books and records