Bribery and Corruption (FCPA): What Auditors Need to Know

FraudResourceNet
Knowledge Center for Enhanced
Fraud Detection, Prevention, and Audit

Bribery and
Corruption (FCPA):
What Auditors
Need to Know
July 24, 2013

James Tillen
Marc Alain Bohn
Copyright © 2013 FraudResourceNet™ LLC

About Peter Goldmann, MSc., CFE
 President and Founder of White Collar
Crime 101
 Publisher of White-Collar Crime Fighter
 Developer of FraudAware® Anti-Fraud Training
Monthly Columnist, The Fraud Examiner, ACFE
Newsletter

 Member of Editorial Advisory Board,
ACFE
 Author of “Fraud in the Markets”
Explains how fraud fueled the financial crisis.


About Jim Kaplan, MSc, CIA, CFE
 President and Founder of
AuditNet®, the global
resource for auditors
 Auditor, Web Site Guru,
Internet for Auditors Pioneer
 Recipient of the IIA’s 2007
Bradford Cadmus Memorial
Award.
 Author of “The Auditor’s
Guide to Internet Resources”
2nd Edition

James Tillen
 Vice Chair of the Miller &
Chevalier’s International
Department
 Practice focuses on FCPA and
money laundering matters
 Experience includes FCPA
investigations, enforcement
actions, compliance programs,
training, M&A due diligence,
audits, and assessments
 Vice-Chair of Anti-Corruption
Committee, International Bar
Association

Marc Alain Bohn
 Focuses primarily on FCPA and
anti-corruption
 Advises U.S. and internal
companies on compliance and
enforcement matters
 Works with companies to develop
tailored forward-looking
compliance programs and effective
systems of internal control
 Publishes frequently on anticorruption matters and serves as
contributing editor to FCPA Blog

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6

Today’s Agenda
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Introduction: The Growing Fraud Threat
Auditing for Fraud: Standards & Essentials
FCPA Basics
Enforcement Trends
Case Examples
Compliance, Prevention, Detection and Response
International Enforcement Landscape
Practical Steps to Prevent Violations and
Seek Guidance
 Your Questions
 Conclusion

Fraud: The Big Picture
According to major accounting firms, professional fraud
examiners and law enforcement:
 Fraud jumps significantly during tough economic times
 Business losses due to fraud increased 20% in last 12 months,
from $1.4 million to $1.7 million per billion dollars of sales. (Kroll
2010/2011 Global Fraud Report)

 Illicit financial flows, including corruption, bribery, theft and
tax evasion, cost developing countries US $1.26 trillion per
year, which is equivalent to the economies of Switzerland,
South Africa and Belgium combined. (TI)


The Auditor’s Role
 1200: Proficiency and Due
Professional Care
 1220: Due Professional Care
 2060: Reporting to Senior
Management and the Board
 2120: Risk Management
 2210: Engagement
Objectives


The US Foreign Corrupt
Practices Act


Copyright © 2013 Miller & Chevalier Chartered

Two Primary FCPA Elements
 Anti-Bribery Provisions
 Accounting Provisions
 Books and Records
Requirements
 Internal Controls
Requirements



FCPA Anti-Bribery Provisions:
Elements of a Violation
 No issuer, domestic concern, person with a U.S. nexus
 May corruptly
 Take any action in furtherance of payment or a promise,
offer, or authorization of payment
 Of a bribe or anything of value
 Directly or indirectly (with “knowledge”)
 To a foreign official
 To obtain or retain business or improper advantage


Why it’s a Hot Topic
 Cases more frequent, penalties higher
 More criminal prosecutions
 More individual prosecutions
 International cooperation / enforcement abroad
 Industry-focused investigations
 Continually evolving compliance requirements

13


Sustained Increase in FCPA
Enforcement
Total Resolved FCPA Enforcement Actions (DOJ and SEC)
1977 through 2012 © Miller & Chevalier Chartered. Please do not reprint or reuse without permission.
120
100
80
60
40
20
0

Note: The 2012-13 totals are estimated based off of the current pace of enforcement through 2012.



Significant Penalties Under the
FCPA
Largest FCPA Settlements
(Combined Penalties/Disgorgement)
$900
$800
$700

Millions

$600
$500
$400
$300
$200
$100
$0

Amount
in Millions

$137 M
Alcatel‐
Lucent
(2010)

$149 M
Jeffrey
Tesler
(2011)

$185 M
Daimler
(2010)

$218.8 M
JGC (2011)

$338 M
Technip
(2010)

$365 M
Snamproget
ti / ENI
(2010)

$398 M
Total SA
(2013)

$400 M
BAE (FCPA‐
related)
(2010)

$579 M
Halliburton
/ KBR
(2009)

$137

$149

$185

$219

$338

$365

$398

$400

$579

$800 M
Siemens
(2008)
$800

© Miller & Chevalier Chartered. Please do not reprint or reuse without permission.



Polling Question 1
Two primary elements of the FCPA are Bribery
provisions and Kickback provisions
A.

True

B.

False


New FCPA Guidance
An unprecedented, substantial effort
 120 pages, > 400 footnotes
 General principles, case summaries, discussions of
issues, examples, hypotheticals, “practical tips”
 First systematic discussion of compliance
 A joint DOJ-SEC document
 Clarifications and elaborations, confirmation of prior
policies, some reassurances
 No surprises, no changes in law or practice


Broad Coverage
 U.S. companies, citizens, resident aliens –
anywhere
 Foreign companies, listed on U.S. exchanges
 Foreign companies and individuals with sufficient
nexus to U.S.



Foreign Subsidiaries
Applicability to Foreign Subsidiaries
 Anti-bribery provisions apply to foreign branches, but not directly
to foreign subs
 Subs may nonetheless become subject to anti-bribery provisions
 As agent or intermediary
 As co-conspirator
 By taking any action within U.S. territory (like any other foreign
company)

 Subs of “issuers” are indirectly subject to accounting provisions
(parent liable if sub doesn’t meet FCPA standards)
 Enforcement incentive to find jurisdictional hook


Purpose
 Items given with a corrupt
intent
 Secretively, surreptitiously
 To obtain some quid pro
quo
 Contrary to local law

The “Wall Street Journal” Test

 With intention to influence
improperly



Anything of Value
Not just money:
 Non-essential, lavish travel
expenses
 Lavish gifts or entertainment
 Up-front, lump sum per diem
 Travel for family members
 Complimentary services / favors
 Scholarships and internships
 Improper campaign contributions
 Overpayment or discounts
 “Psychic Benefit


Promotional Expenses
FCPA allows legitimate promotional expenses, including nominal
gifts and reasonable meals, entertainment and travel, but only if
ALL these conditions are met:
 The expense is directly related to a promotional activity or performance of
an existing contract
 The expense is reasonable. This means that it is not lavish, extravagant, or
too frequent for the stated purpose or the spending level of the local
economy
 The expense is not incurred in secret and gives no appearance of
impropriety
 The expense is accurately and completely recorded in company records,
regardless of value
 The expense is consistent with local law


Gifts and Entertainment
 Recent FCPA Guidance
 Rejects claims that modest gifts – coffee, taxi fares –
would violate the FCPA
 Violations don’t occur without corrupt intent
 Incidental hospitality not inappropriate
 A bit less expansive, however, than official guidance
on UK Bribery Act
 No bright lines; “reasonableness” is key



Foreign Official
FCPA defines “foreign official” very broadly, to
include:
 Employee of any agency or instrumentality,
customs official
 Judge or legislator
 Officer or employee of government-controlled
company or joint venture
 Private person acting officially
 Official of public international organization
 Tribal leader or Member of Royal Family
 Political party, party official, or candidate for
public office
 Relative or dependent of an official


Foreign Official (cont’d)
 This issue is about “instrumentalities”
 Importance relates to gifts, hospitality (local rules)
 New Guidance adopts courts’ “fact-specific,” 11-factor
test for instrumentalities
 This test can be cumbersome, impractical
 New Guidance does give primary weight to share
ownership
 Some practical implications for compliance



Liability for Bribery by Third Parties
 Companies can be liable for bribery by a third party,
if they:
 Authorized the payment
 Paid the third party “while knowing” there is a “high probability”
that the payment will pass through to an official
 Failed to investigate third party risks and ignored “red flags”
 Hired a third party who was likely to pay

Important: Companies may be liable even if they did not
have actual knowledge of the payment



Know Your Partners
Due Diligence
 Business rationale
 Qualifications
 Ownership
 Relationships with officials
 Reasonableness of compensation

Safeguards
 Contract terms
 Certifications
 Monitoring


Polling Question 2
Choose from the following the items that are
ILLEGAL under FCPA
A. Up-front, lump sum per diem
B. Travel for family members
C. Complimentary services / favors
D. Scholarships and internships
E. All of the above


Limited Exception
Facilitating Payments
 Small amounts
 To expedite or secure “routine governmental action”
 Secure basic services (telephone, water, mail)
 Schedule (but not pass!) inspections
 Speed paperwork
 Official action must be non-discretionary, i.e., official has no
legal basis to refuse to provide the service
 ALL payments must be accurately recorded as such
 But is it legal under local laws, or other international anticorruption laws?


FCPA – Accounting Provisions
Require “Issuers” (public companies) to:
 Maintain books, records, and accounts that, in reasonable detail,
accurately reflect transactions and assets
 Maintain a system of internal accounting controls sufficient to
reasonably assure accountability for assets
Provide far-reaching basis for liability:
 Strict civil liability over parents for subsidiaries’ inaccurate books
and records, even when anti-bribery elements not present
 Obligations automatically flow down to majority-owned or
controlled subsidiaries
 Good-faith obligation for non-controlled subsidiaries
SEC: Any illicit payment is “material” per se


FCPA – Accounting Provisions (cont’d)
Common books and records issues:
 Mischaracterized payments (e.g., “commissions”) (Biomet)
 Recording an invoice that incorporates bribes (Triton)
 Misrecording “facilitating payments” (BJ Services)
Common internal controls issues:
 Payments contrary to company policies (Chiquita)
 Payments without adequate due diligence (Parker Drilling)
 Failure to document payments (Titan)
 Failure to provide FCPA training (Ralph Lauren)
 Series of payments just under DOA limit (Schering-Plough)
 Maintenance of off-book accounts (Allianz)
 Misuse of petty cash (Willbros)
 Failure to conduct audits/detect violations (Oracle)
 Absence of adequate controls (Total)


FCPA Guide on the Accounting
Provisions


Notes that bribes are often concealed in records as legitimate
payments, and includes long list of past mischaracterizations



Confirms that “design of a company’s operational controls must take
into account the operational realities and risks attendant to the
company’s business”



Summarizes different types of schemes resulting in internal controls
“failures” in Siemens, Daimler cases

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Emphasizes key role of “targeted audits to make certain controls on
paper are working in practice”

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SEC officials speaking during rollout repeatedly emphasized
important role of internal audit functions in ensuring compliance
program and controls integrity and effectiveness



Case Examples
Bribes in Connection with Regulatory Approvals

•

•

•
•

2012
Paid nearly $5 million in
bribes in dozens of countries
to, among other things, secure
regulatory approvals
Bribes disguised as legitimate
expenses (e.g. ‘consulting
fees”)
Secured more than $10 million
in illicit gains
$26,7 million penalty

2012
• Subsidiaries (including recently
acquired Wyeth) made millions in
illegal payments to government
officials in eight countries (e.g.,
China, Kazakhstan, Italy and
Russia) to obtain regulatory
approvals and sales.
• Bribes included entertainment,
travel, gifts, and cash kickbacks
• $60.2 million penalty


33

Case Examples
Bribes in Connection with Taxes and Customs

2013
• Provided $593K in improper
payments and benefits to tax
and customs officials in
Argentina (e.g., money,
perfume, dresses, handbags).
• Payments made through
customs broker to obtain
paperwork, permit clearance of
items, and/or avoid inspection
• $1.6 million in penalties

2013
• Paid an agent over $1.25
million while knowing that a
portion would be used to
corruptly influence a panel in
Nigeria reviewing company’s
adherence to Nigerian customs
and tax laws.
• Agent secured over $3 million
reduction in panel assessment
• $15.85 million in penalties



Polling Question 3
FCPA’s accounting provisions require companies to
maintain a system of internal accounting _________
sufficient to reasonably assure accountability for assets
(Choose the word the best fills in the blank)
A. Principles
B. Standards
C. Controls
D. None of the above


FraudResourceNet

Compliance, Prevention,
Detection and Response

Compliance
 This extra-statutory issue gets full discussion in
new Guidance
 Guidance lists 10 “hallmarks” of an effective
compliance program
 Investigations will assess compliance program
 Continued emphasis on compliance “culture”
 Due diligence and testing listed as best practices
 Compliance as an affirmative defense: rejected


“Hallmarks” of Effective
Compliance Program
 DOJ and SEC have “no formulaic requirements” -employ “common-sense and pragmatic approach” to
evaluating compliance programs
 Agencies make inquiries related to three basic questions:
 Is the company’s compliance program well designed and
tailored to “specific needs, risks, and challenges”?
 Is it being “implemented earnestly and enforced fairly”?
 Does it detect violations and “remediate them promptly and
appropriately”?



Compliance Program (cont’d)
Key elements:
 Commitment from senior management and strong ethical
culture of compliance
 Clearly articulated policy against corruption
 Code of Conduct and compliance policies and procedures
(including internal controls)
 Senior-level oversight, adequate autonomy, and appropriate
resources for compliance and internal controls functions
 Regular risk assessments that underlie compliance program
design and implementation
 Training of applicable employees and mechanisms for
continuing and timely compliance advice


Compliance Program (cont’d)
Key elements (cont’d):
 Positive incentives (financial and otherwise) and appropriate
disciplinary measures
 Third-party due diligence and monitoring
 Mechanism for confidential reporting of issues and violations
and “efficient, reliable and properly funded process” for
documenting and investigating such reports
 Processes for pre-acquisition due diligence and postacquisition integration of new entities into compliance
program and internal controls
 “Continuous improvement – periodic testing and review” of
program in light of changing business risks and identified
weaknesses


Prevention
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Early issue identification
Risk assessments
Convincing tone at the top
Business decisions that reflect compliance commitment
Believers: tone at the middle
Policies, user-friendly guidelines
Due diligence – pre-acquisition; third parties
Accountability of business managers for compliance failures
Practical training (including individual liability risks)
Expertise in red flags
Anticipation of certain discipline


Detection
 Frequent discussions of risks and
compliance
 Feedback from in-person training
 Knowledgeable financial audits
 Compliance audits
 Hotlines, whistleblower protections,
reporting channels
 Due diligence, especially post-closing
(M&A)
 Field visits
 Surveys, questionnaires, certifications
 Monitoring third parties, third-party audits


Detection: Agencies’ Expectations for
Financial Audits

 Review of books and records for detail and
accuracy (no materiality test)
 Review system of internal accounting controls
 Recorded assets are compared with existing
assets at reasonable intervals
 Audit sites chosen based on objective, riskbased factors (including corruption)



Polling Question 4
DOJ and SEC have “no formulaic requirements”
to evaluating compliance programs. Instead,
they employ a “common-sense and pragmatic
approach”
A. True
B. False


Detection: Modus Operandi of
Corrupt Official
 Direct cash payments
 Gifts, travel, and entertainment
 Payments through agents/consultants/reps
 Payments through contractors
 Payments by partners
 Doing business w/companies owned by officials
 Charitable contributions, social bonuses
 Family members: hiring, tuition, indirect payments



Detection: Spotting FCPA Issues in
Transactions
Compliance with Policies and Procedures
 Failures to comply with Code of Conduct or other policies
 Failures to abide by notification and approval procedures
 Consolidated responsibility for authorizing, recording, controlling,
and reviewing of payments
 Failure of an affiliate to obtain sign-offs or auditor opinions

General Ledger
 Off-book accounts or multiple accounting records
 Failure of general ledger account reconciliations
 References to facilitating payments


Transactions (cont’d)
Accounts Payable – Vendors
 Improper recording of A/P liabilities or purchases
 Incorrect amounts recorded for A/P liabilities or purchases

Cash Disbursements
 Inadequate controls over cash disbursements or manual checks
 Consolidated responsibility for cash, checks or bank reconciliation
 Cash payments from other than imprest petty cash
 Suspicious petty cash activity (e.g., excessive use; lack of
documentation; unusually large payments)



Transactions (cont’d)
Travel and Expense Reports
 Red flags related to employee expenses/reimbursements (e.g., inadequate
supporting documentation or recordkeeping; suspicious expenses; lack of
proper approval)
 Excessive per diem for officials or expenses for family members

Third Party Contracts (consultants, sales agents)
 Inadequate due diligence on third party
 Written contract is missing or payments do not match terms
 Unusually high commissions or compensation
 Otherwise suspicious payments (e.g., off-shore payments; payments to 3rd
parties; invoices lacking support)
 Requests for payment in cash
 Noncompliance with required contract compliance terms



Response
 Assess potential issues promptly
 Independent investigations of potentially serious issues





Preserving documents and evidence (e.g., document holds)
Establish privilege, as appropriate
Discussing issues and potential issues in audit reports
Informing audit committee or outside auditors

 Strong, prompt remediation
 Certain discipline when warranted
 Negative feedback
 Accountability affecting promotions and compensation
 Rewards for compliance-strengthening actions

 Voluntary disclosure?


Polling Question 5
Detecting violations of FCPA requires use of
numerous techniques. Choose all of the
following that would qualify…
A. Frequent discussions of risks and compliance
B. Feedback from in-person training
C. Compliance audits
D. Field visits
E. All of the above

FraudResourceNet

Practical Steps to Prevent
Violations and Seek
Guidance

The Proposal
SCENARIO:

PLAYERS:
Saskia
Acme Co. VP

Acme Co. is pursuing a large project in RoX, where it hopes to
establish a subsidiary. Mary arranges a lunch meeting at the Four
Seasons for Saskia with Daniel to discuss. Daniel is very happy
about the project's potential, but he sees some obstacles:
“Our procurement process takes forever,
and you know they just look at the bottom
line. We need to be creative to get you in."

Daniel
Minister of Finance,
Republic of X

Mary
Saskia’s former
colleague, now
advising the
Republic of X on
trade matters

After a long, complex discussion about local content and existing
contracts between the Ministry and Mary's local consulting firm,
Daniel proposes that Acme Co. partner with Mary's firm, which would
receive a share of revenues, but not interfere with Acme Co.’s work.
Mary's firm would help satisfy local content requirements and make
sure things go smoothly with government relations.
Maybe it's the jet
lag, but this plan
sounds sketchy.

How Can I Help Prevent a Violation?
Remember FCPA’s broad definition of official:
 Any employee of a government controlled company, including public
companies controlled by local or national government, is an official
 Any employee of a government owned university, hospital, or research
institute is an official

Gifts, travel and entertainment, which must be:
 directly related to a valid purpose (e.g., building relationships or contract
negotiation, but NOT in in exchange for a benefit)
 reasonable under the circumstances (customary and modest in value)
 accurately recorded
 permitted under local law

Vet and monitor third parties


If you hear rumors of improper payments or see other warning
signs (“red flags”), don’t ignore them:
 Suggestion that gifts, travel, entertainment or something else of value
could secure an improper benefit for your company
 An official offering inappropriate assistance
 An official directing you to retain a particular company
 An official directing payments to accounts not in government’s name
 Entertainment that is extravagant (luxury bars or golf resorts) or
impropriate (adult or illegal), or travel that is unrelated to an
engagement (leisure or family travel)
 Lack of accuracy or detail in expenses (e.g., misreporting purpose)
 Using personal accounts or third party accounts (rather than co.
accounts)
 Payment patterns or fin. arrangements that prevent expense tracking
or accounting, such as cash, gift or debit cards, fake receipts, etc.
 Suspicion that a client is making improper payments


If an official requests an improper payment, you should:
 Refuse to make the payment; explain that your
company does not make such payments
 If a business partner or third party is involved, explain
that they are not authorized to make the payment on
your company’s behalf, instruct them not to do so and
explain that the company cannot continue to work with
them if they make the payment
 Be clear that refusals are absolute and do not come
with a “wink and a nod”
 Immediately report the request to the legal or
compliance function at your company


The Proposal: Revisited
SCENARIO:

Risks presented by partnering with Mary's local firm
 Mary could use her share of revenues to pay bribes
 Daniel may have an interest in Mary's firm
 Mary may be related to Daniel, so payments to her
could be viewed as benefitting Daniel
 Beyond anti-corruption compliance, your company may
face reputational risk if perceived to have dodged
procurement process
How should Saskia respond to Daniel's proposal?
 Explain that these types of arrangements need to be
syndicated by a broad group of stakeholders, including
your company’s Legal department
 Immediately contact your company’s Legal department
for guidance © 2013 FraudResourceNet™ LLC Copyright © 2013 Miller & Chevalier Chartered
Copyright

Coming Up….
 ”Fraud Risk Assessment: Key to Effective
Internal Controls” July 26,, 2013
 "Quick Response Fraud Detection using
Data Analytics: Hitting the Ground Running
using Technology in a Suspected Fraud
Case”, July 31


Questions?

Any Questions?
Don’t be Shy!


Contact Information

Marc Alain Bohn

James G. Tillen

Miller & Chevalier
655 Fifteenth Street, N.W.
Suite 900
Washington, D.C. 20005

Miller & Chevalier
655 Fifteenth Street, N.W.
Suite 900
Washington, D.C. 20005

(202) 626-5559
mbohn@milchev.com

(202) 626-6068
jtillen@milchev.com



Thank You!
Website: http://www.fraudresourcenet.com
Jim Kaplan
FraudResourceNet™
800-385-1625
jkaplan@fraudresourcenet.com
Peter Goldmann
FraudResourceNet™
800-440-2261
pgoldmann@fraudresourcenet.com


Bribery and Corruption (FCPA): What Auditors Need to Know

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