DELVACCA Presents Contracts & Commercial Law CLE Institute: Corporate Governance Programs for Reporting Concerns — W

1. DELVACCA Presents Contracts & Commercial Law CLE Institute: Corporate Governance Programs for Reporting Concerns — What Companies are Doing September 14, 2010 The Union League of Philadelphia DELVACCA thanks Thorp Reed & Armstrong for their generous sponsorship of this event One Commerce Square 2005 Market Street, Suite 1000 Philadelphia, PA 19103 215 640 8500 215 640 8501 Fax www.thorpreed.com

2. Foreign Corrupt Practices Act(FCPA)15 U.S.C.A. § 78dd-1 et seq. Lourdes Sanchez Ridge, Esq. 412 394 2462 lridge@thorpreed.com

3. Foreign Corrupt Practices Act Bribing a foreign official for the purpose of obtaining and retaining business and/or inaccurately representing the bribe in the books is PROHIBITED!

4. Today’s Focus • Why should Corporate Counsel be concerned? • What conduct Violates the FCPA? • How to Avoid Liability?

5. Trend in Enforcement • Increase in prosecution of individuals (jail time) • Focus on small to midsize companies • Increase in hiring enforcement personnel • Increase in amount recovered in penalties • Multi-jurisdictional prosecutions • Increase in forfeitures/disgorgement • Implementation of aggressive prosecution tools (undercover sting operations, wiretapping, confidential informants)

6. Trend in Enforcement(Cont’d.) • Novel charging statutes (i.e. Travel Act, Money Laundering, Conspiracy) • Increase in prosecutions of foreign entities and individuals • Focus on particular industries (i.e., extraction industry, pharma and medical device) • Increase in prosecutions of foreign individuals under a conspiracy theory • Novel use of non-prosecution and deferred-prosecution agreements by the SEC

7. Consequences ofViolating the FCPA

8. FCPA - Jurisdiction SEC • Public companies and individuals DOJ • Individuals, private and public companies • Domestic • Overseas – if corrupt payment touches US territory

9. Consequences of Violating the FCPA CRIMINAL PENALTIES • Violation of Books & Records Provision • By a corporation – up to $25,000,000 • By an individual – up to $5,000,000 20 years in jail • Violation of Anti-Bribery Provision • By a corporation – up to $2,000,000 • By an individual – up to $100,000 5 years in jail

10. Consequences of Violating the FCPA (Cont’d.) CIVIL PENALTIES $10,000 for individuals and corporations

11. Other Consequences • Reputational damage • Expensive compliance monitor • Loss of business with federal government • Loss of eligibility for export licenses • Suspension or debarment from governmental agency programs, i.e. Medicare, SEC • Securities fraud, derivative and/or RICO actions • Loss of research grant

12. What Conduct Violates the FCPA?

13. FCPA Anti-Bribery Provision It shall be unlawful to make use of mails or other means . . . corruptly in furtherance of an offer, payment, promise to pay or authorization of a payment . . . of anything of value to a foreign official . . . for the purposes of obtaining or retaining business or other unfair advantage

14. What the FCPA Prohibits: Payments, Offers, Promises or Authorizations to Pay • Actual payment is not necessary • Direct or indirect payment to a government official

15. Anything of Value • Anything of benefit to the recipient • No minimum amount • Intangible items (e.g. enhanced reputation or prestige) Exception: • If item is given in good faith and directly relates to the reasonable promotion, demonstration or explanation of your services or products

16. Examples of Items of Value: • Dow Chemical • Less than $100 payments found to violate FCPA • Monsanto Company • Building a house for an official’s wife violates the FCPA • Syncor de Mexico • Granting personal loans to state employed physicians without expectation of payment • Paying physician’s personal expenses • Paying for physician’s office equipment, software and furniture

17. Examples of Items of Value: Gifts • For purposes of good will • Promotional gifts – a mug with company logo • Hospitality gifts • Not in the form of money • Nominal value • Permitted under local customs or laws • Given with transparency in the presence of others

18. Foreign Official “Foreign Official” – any officer or employee of: • Foreign government or department, agency or instrumentality • Foreign “government-controlled” enterprise • Public international organization – (Red Cross, World Bank, United Nations, etc.) • Foreign political party or candidate for political party

19. To Affect Any Act or Influence a Decision • to obtain business • to retain business • to obtain access to decision maker • to gain an unfair advantage • to make ordinary business processes less onerous

20. Books & Records Provision • Inaccurate reflection of transactions • “Red Flags” • Commissions • Consulting Fee • “Miscellaneous” and “others” • Marketing • Petty Cash • Refunds or Rebates • Travel and Entertainment

21. Scienter • DOJ – Criminal • Knowing • Willful blindness – “high probability that an illicit payment will be made to a third party” • SEC – Civil Strict Liability • Foreign subsidiary • Officers of parent company are strictly liable for acts committed by foreign subsidiary or third party • Acquiring company is liable for acts committed by the acquired company prior to the acquisition

22. How to Avoid Liability • Compliance Program • Due Diligence • Opinion Letter from Department of Justice • Opinion Letter from counsel in foreign country • Reasonable Fees – must be justified

23. Compliance Program • “Thou shall not pay bribes” • Establish a culture that demands ethical conduct • Communicate and educate standards to all employees • Monitor the Compliance Program • Audit • Enforce • Implement Reporting Methods

24. Due Diligence

25. representatives consultants agents sponsors joint ventures partners intermediaries sales representatives law firms accounting firms lobbying firms public relations firms vendors distributors others who transact on your behalf subsidiaries Third-Party Affiliates Your company is responsible for illicit acts committed by:

26. Hiring Third-Party Affiliate • Due diligence is required on Third-Party’s: • reputation • ownership • financial soundness • professional capabilities • trustworthiness • prior criminal record • prior compliance with anti-bribery laws

27. Due Diligence Steps To investigate Third-Party Affiliate’s Reputation contact: • Community organizations such as: Chambers of Commerce and Better Business Bureaus • U.S. Embassies and Consulates • U.S. Department of Commerce International Trade Administration http://trade.gov/cs/index.asp • International Company Profiles –www.export.gov/salesandmarketing/ICP.asp • Dun & Bradstreet • or hire specialized firms

28. Hiring Third Party Affiliates • Questionnaire completed by company must contain: • description of necessity of hiring third party • description of expertise of third party • approval of hiring third party by Compliance Officer • Questionnaire completed by third party should containdetailed questions capable of revealing whether third party is: • legitimate • has any affiliations with foreign officials

29. Hiring Third Party Affiliates(Cont’d.) • Investigation of third party • Certifications • Contractual provisions

30. Red Flags – Third Parties (Cont’d.) • No office or staff (potential shell company) • Lack of required expertise • Insistence on unconventional contractual procedures, i.e., payment in cash or bearer instruments, payments sent to an unrelated country • Insistence on receiving unusually high commission or excessive line of credit • Insistence on being paid in advance • Insistence by a Government official that a particular third party be hired

31. Voluntary Disclosures of Violations of the International Trading Rules John P. Donohue, Esq. 215 640 8528 jdonohue@thorpreed.com

32. The Overriding Question • Do I advise the client to voluntarily disclose a violation of criminal law? • Factors to consider • What is the likelihood of the offense being detected? • What is the likelihood of short or long term incarceration of members of management? • What is the effect of disclosure on the organization? • Does the application of other laws require disclosure (e.g. SEC laws)? • Is the corporation an alter ego of management?

33. Relevant Agencies of Government • Bureau of Customs and Border Protection - within the Department of Homeland Security • Office of Foreign Assets Control – within the Department of Treasury (trade to embargoed countries) • Directorate of Defense Trade Controls - within the Department of State (Munitions Control List) • Bureau of Industry and Security - within the Department of Commerce (Export Administration Regulations)

34. When the Decision is Made to Disclose Violations of the Trade Laws • What is my maximum exposure? • Criminal prosecution • Denial of export privileges • Fine • Understanding maximum exposure • The Pentax case • The antidumping cases

35. What Are the Benefits of a Voluntary Disclosure? • Minimize the likelihood of a criminal prosecution • Control the destiny and outcome of the case • Minimize the likelihood of loss of export privileges (suspended denial of export privileges) • Minimize the amount of any fine imposed

36. What Are the Pecuniary Benefits of a Voluntary Disclosure? • Customs – Benefits of disclosure are statutory - 19 USC § 1592(c)(4) • OFAC – Benefits are regulatory – See, OFAC Matrix, Materials, page 10 • BIS and DDTC – “Great Weight” standard, but agencies reserve the right to apply their own criteria on a case by case basis

37. Will the Agency Agree that My Disclosure is “Voluntary”? • What are the tests for the timing of a voluntary disclosure? • Customs - Disclosure must be made “before or without the knowledge of the commencement of an investigation” • 19 USC § 1592(c)(4); Materials, pages 5-6 • OFAC – Disclosure must be made before any other federal, state or local government agency or official discovers the violation

38. Will the Agency Agree that My Disclosure is “Voluntary”?(Cont’d.) • DDTC – Before the Department of State or any other agency or bureau of the U.S. Government obtains substantially similar knowledge AND commences an investigation • BIS – Before the OEE or any other agency of the U.S. Government has learned the substantially similar facts AND commences an investigation

39. Suppose You Lack All the Facts? • All agencies allow for “initial notification” - See, e.g. 19 CFR Part 162.74(b)(4) • All four agencies provide that disclosure is valid as of the date of the “initial notification” letter

40. To Whom Is the Disclosure Made? • For Customs matters: • to the Commissioner of Customs through the port of entry • For BIS matters: • to the Director, Office of Export Compliance, with copy to OEE Office at the port of export • For OFAC and Directorate of Defense Trade Controls matters: • at Washington, D.C. Headquarters

41. Agency Disclosure in Multiple Agency Cases • X Corp. exports military equipment to Iran. Disclosure is made to both OFAC (with jurisdiction over trade with Iran) and DDTC (with jurisdiction of the trade of goods under the U.S. Munitions list) • Y Corp. imports medical devices mismarked with country of origin. Disclosure is made to Customs only and Customs will confer with FDA in assessment of penalty • At all times negotiate the “global settlement.” Agencies will expect one disclosure to resolve all Agency issues

42. What Is Disclosed • Customs – • Material violations of law (but note Customs will consider even statistical errors material omissions of information) • Description of the merchandise involved • Entry number, port of entry and dates of entry • All material false statements or omissions made • The true and correct information

43. What Is Disclosed (Cont’d.) • Office of Foreign Assets Control • A report in sufficient detail to afford a complete understanding of an apparent violation, and should be followed up by responsiveness to any follow up inquiries • Directorate of Defense Trade Controls • description of the violation • statement of facts and circumstances surrounding the violation

44. What Is Disclosed (Cont’d.) • Directorate of Defense Trade Controls (cont’d.) • identities of all persons, domestic and foreign, involved in the violation • the export license numbers, if applicable • description of the merchandise involved • description of the corrective action taken • names and addresses of the disclosing officials • information and belief certification as to the truthfulness of the information submitted • all relevant documents, commercial, governmental and corporate

45. What Is Disclosed (Cont’d.) • BIS • the results of a five year review of exports • the violation involved • explanation of how and when the violation occurred • identities of all persons involved • list of all license numbers involved • list of the merchandise involved

46. What Is Disclosed (Cont’d.) • BIS(cont’d.) • statement of the value of the merchandise, in U.S. dollars • statement of the ECCN numbers by which the exported goods were classified • list of mitigating circumstances • commercial, corporate, and governmental documents relevant • information and belief certification of an authorized official that the statements in the disclosure are truthful

47. Mitigating Factors in Compromising Penalties • Customs • Cooperation with the Agency • Contributory governmental error • Remedial action • Inexperience in importing • Prior good record • Inability to pay

48. Factors in Compromising Penalties • Export Agencies • Was the act willful, intentional or reckless • Inability to pay • Is a compliance program in place • Participation by senior management • Was this an isolated act or part of a larger pattern of conduct • Was there actual or constructive notice to the offender of possible violation

49. Factors in Compromising Penalties (Cont’d.) • Did the conduct harm or impair the larger objectives of the program • If goods were exported without a license, would a license have been granted if applied for • Did the parties cooperate with the government • How long were the sanctions in place at the time of the offense disclosed • Have there been other enforcement proceedings by OFAC or other agencies • Will the imposition of a harsh penalty have a deterrent effect

50. Aggravating Factors in the Resolution of an Enforcement Proceeding • Concealment of the violation • Disclosing party evidenced a disregard for the program • Conduct adversely affected the program for which licensing was established or for which specific harm was identified (Toshiba Machinery case) • Quantity, value and number of shipments were all high • Complained of facts were also in violation of other Agency laws • Prior history of violations • Lack of a compliance program in place