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Harry Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Richard L. Cassin Editor at Large

Elizabeth K. Spahn Editor Emeritus 

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

FCPA Blog Daily News

Entries in Intermediaries (48)

Monday
Apr212014

Upcoming Event: Fighting graft through collective public, private action

The International Center for Collective Action (ICCA), a division of the Basel Institute on Governance, is hosting a collective action event on June 26 and 27.

Click to read more ...

Wednesday
Apr162014

How H-P Russia mimicked the mob

Hewlett-Packard's $108 million FCPA settlement last week included a guilty plea by its Russia subsidiary to two felonies for conspiracy and substantive violations of the anti-bribery and accounting provisions of the FCPA.

Click to read more ...

Tuesday
Nov262013

Weatherford pays $152.6 million for FCPA violations, $100 million for trade sanctions

Weatherford International agreed Tuesday to pay $152.6 million to the DOJ and SEC for FCPA offenses in the Middle East and Africa and violation of the Iraq oil-for-food program.

Click to read more ...

Thursday
Aug292013

Humphrey arrest in China spotlights due diligence dilemma

[Editor's Note: This post comes from a reader who asked not to be named. We're very grateful for his generosity -- rlc]

Click to read more ...

Monday
Jun272011

Anti-Corruption Training for Third Parties

For a variety of reasons, requiring training of agents and other third-party business representatives is among the most challenging aspects of having an anti-corruption compliance program. And, it is a challenge that apparently many companies have yet to address.

Click to read more ...

Monday
Jan052009

Dealing With Danger

Compliance-savvy executives worry about the risks that come from third parties -- overseas acquisition targets, joint venture partners, distributors and agents. About three quarters of the bosses, according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey, think their company's handling of intermediaries isn't working. They cite difficulties performing effective due diligence and their inability to adequately audit third parties for compliance.

The executives are right to be concerned. The Foreign Corrupt Practices Act says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are your responsibility, no matter how indirectly you try to pass them on. So when American companies go abroad, it's up to them to make sure all their business partners -- suppliers, subcontractors, professional advisors, agents and joint venture partners -- keep the business clean. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

But how far must companies go to prevent their middlemen from paying bribes? That's always the question on everyone's mind. There's no bright line here, no blueprint from the DOJ or SEC, no safe harbor. And that's what worries the executives. They have to do business with and through intermediaries, but they also have to comply with the Foreign Corrupt Practices Act. Doing both sometimes seems impossible.

Take, for example, our reader who sent the comments below. He's a top compliance professional but he doesn't have all the answers and neither do we. But we appreciate his honesty and willingness to share his concerns and thoughts. He's fairly typical, we think, of those who want to comply with the FCPA but aren't always sure how to do that -- a group most of us are in most of the time.

Here's what he says:
__________

During the ACI FCPA conference held in Washington in November, the topic of documentation of agents came up. This is a familiar topic to anyone who has experience with the FCPA.

One of the points was that companies get hammered because they do a poor job of documenting or having the agent document their activities. I thought to myself "what would the agent document?" If they are out trying to drum up business what is it that they need to report? Do they report the golf trip with potential customers? Do they document the dinner they had or the train ride they took where they discovered a potentially new client and discussed opportunities?

This led me to ask what do business development people document for their activities? Surely they must provide something to justify their salaries. Shouldn't an agent's documentation be just as thorough? But then again, because a business development person is on salary and everyone knows they're sort of doing something, maybe they don't have to document very well. If they get results, some companies may ask "Does it matter?" If the documentation is poor or nonexistent, and all the focus (risk) is on agents, why wouldn't a company consider bringing agents in as business development employees? They could structure the compensation (salary and/or bonus) to be identical to what the agent already received. This would have the effect of moving the expense to payroll from agent commission or something similar.

Speaking from experience in conducting FCPA investigations, the scrutiny of payroll expense is night and day different from the scrutiny of commission or agent expense. Furthermore, perceived FCPA due diligence requirements are not the equal for employees as agents. What about the recording of a bonus as payroll expense when all or a portion is used to pay a bribe to a government official? The question then would be what is documented as the purpose of the bonus and did the company know about where the money would ultimately go?

We all know about the high level Jack Stanley-like business development people, but what about the local agents with cousins in the Ministry or uncles in Parliament. These are the guys that bring relationships to the table who might be hired as "employees" and be buried in payroll but continue on agents as if nothing really changed. . . .
_____________

Other readers with good or bad experiences dealing with intermediaries are invited to share their thoughts, anecdotes and advice about this difficult topic.
.

Sunday
Nov092008

Fearing Third Parties

U.S. executives know that most Foreign Corrupt Practices Act compliance risks come from third parties -- overseas acquisition targets, joint venture partners, agents and others. Despite that knowledge, about three quarters of them think their company's due diligence of intermediaries isn't working. That's according to KPMG's 2008 Anti-Bribery and Anti-Corruption Survey.

Here are some findings from the survey based on responses from 103 executives at U.S. multinational companies:

  • 82 percent of the respondents said they face difficulties performing effective due diligence on foreign agents and other third parties.
  • 76 percent said they cannot adequately audit third parties for compliance.
  • 73 percent said their mergers and acquisition due diligence is sub par.
  • 27 percent said their level of M&A due diligence is minimal.
Eighty-five percent of the respondents said their company has a formal FCPA or anti-corruption compliance program. That's good. What's not good is that the programs aren't dealing effectively with the greatest compliance risk of all -- third parties. No wonder Justice Department and SEC enforcement actions under the FCPA are still rising -- they more than doubled last year -- and why most U.S. company executives are still worried about violating the FCPA.

Recent cases involving individuals illustrate how FCPA offenses can harm anyone caught in the mess. That's why, even in tough times, U.S. executives should demand the protection of an effective compliance program. They shouldn't accept compliance risks from third parties that can damage or destroy their companies, their careers, and their families.

View the 2008 KPMG Anti-Bribery and Anti-Corruption Survey here (courtesy of the White Collar Crime Prof Blog).

.

Thursday
Jul172008

Why We Keep Plugging

It's a familiar and unwelcome moment. Those on the other side of the table spot the FCPA compliance language for the first time:

The joint venture and all its personnel shall comply in all respects with the requirements of the United States Foreign Corrupt Practices Act.
Faces darken. The mood in the room goes sour.

"What's this?" they ask. "U.S. law doesn't have anything to do with our joint venture."

You start explaining: "The FCPA outlaws public bribery by Americans outside the United States. American companies are obligated to comply wherever they do business. Part of that is making sure their overseas partners don't pay bribes . . . "

"Excuse us," they say. "Our new joint venture isn't an American company and we're not Americans. Forget it. Anyway," they add, "our country has its own anti-corruption laws. And we always obey THEM."

It's going to be a long day. Lots of long days.

_____________

Reactions overseas to the FCPA range from mild irritation to vein-popping outrage. It's understandable. The law is sometimes seen as another example of America's arrogance and overreaching, a violation of sovereignty -- legal imperialism at its worst, and high-handed global moralizing. But that's a bum rap. Really.

The FCPA's aim isn't to change the world. It's to stop U.S. companies and their people from bribing foreign officials to obtain or retain business. That's clear from the early debates. Congress didn't want Americans bribing foreign government officials. Doing that, lawmakers and regulators said, distorts competition, ruins reputations, harms local populations and interferes with the foreign policy of the U.S. government.

But people always look for loopholes and shortcuts, so the FCPA takes that into account. It outlaws bribes to foreign officials that are paid directly or indirectly. And it's the indirectly part that causes so much upset overseas.

The FCPA says you can't hire an agent to pay bribes for you. You can't use joint venture partners for the dirty work either. You can't use a brother-in-law or charitable foundation or any other circuitous route. Bribes to foreign officials that originate from your hand are always your responsibility, no matter how indirectly you try to pass them on.

So when American companies go abroad, they have to make sure their business partners -- suppliers, subcontractors, professional advisors, agents and, of course, joint venture partners -- don't pay bribes to foreign officials to help the business. Taking steps to prevent that is required by an effective compliance program. Companies that don't try to stop intermediaries from paying bribes have no real defense under the FCPA when problems happen.

Does explaining all this (and a lot more) to overseas business partners help? Does it soothe their bruised pride and wounded nationalism? Yes, it usually helps, but the process isn't easy. Let's face it -- the FCPA makes people mad. Take due diligence: What contacts have you had for the past five years with any government or government-controlled entity? Are you now paying or have you ever paid bribes to anyone in any government? Can we ask your lawyer, banker, accountant and business associates if you're trustworthy? Those sorts of questions never sound friendly.

To get deals done overseas, though, it's necessary to explain what the FCPA is, what it's meant to accomplish, and how it works. That's good compliance and good business -- and worth fighting for.

So what's better? Spending a few extra hours or days at the negotiating table to do the right thing at the start, or spending years or even a lifetime trying to repair the terrible damage that an FCPA offense can cause?

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Wednesday
Apr022008

Ten Fast Facts About The FCPA

It's easy enough to scoff at the slogans, proverbs and aphorisms that line the halls of the great corporations. Who hasn't emerged from a conference-room donnybrook wondering who the Teamwork posters are supposed to be talking about? And yet, THINK helped create an industry and a company to lead it, and Safety First really can save lives.

How about compliance? Can we ever be reminded too many times to play by the rules, obey the law, keep our noses clean? Just as the best safety programs prevent accidents before they happen, so the best compliance programs should likewise head off illegal schemes before they hatch. So, could it be that the best -- which means the most memorable -- lessons about the FCPA might just be the shortest?

With that in mind, here are ten fast facts about the FCPA. Some aren't all that "fast" and none will fit on a bumper sticker. But we'll keep trying -- and we'll welcome your help.

1. Companies and individuals subject to the FCPA's antibribery provisions cannot give or promise to give anything of value to foreign officials directly or indirectly in order to obtain or retain business.

2.Those subject to the FCPA's accounting standards must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation, and have internal accounting controls adequate to provide reasonable assurance of the integrity of the company's financial systems and its disclosures.

3. An FCPA antibribery offense is punishable by up to five years in jail; intentionally violating the accounting standards can result in 20 years in prison.

4. The antibribery provisions generally apply to all organizations based or operating in the United States, and the accounting standards apply to companies with securities trading on a U.S. exchange and filing periodic reports with the SEC. Directors, officers, employees and agents of the foregoing are covered by the FCPA, as is anyone who does anything to cause an FCPA offense while they're on U.S soil.

5. Even if a foreign subsidiary isn't covered by the FCPA, its acts might cause its U.S. parent to be in violation.

6. Indirect payments or promises to pay foreign officials through partners, agents or other intermediaries can violate the law.

7. Corrupt payments to a foreign political party, party official or candidate for foreign political office intended to obtain or retain business are prohibited.

8. Anyone acting on behalf of a "public international organization" such as the International Olympic Committee, the United Nations, the World Bank and the International Red Cross is a “foreign official” for the FCPA.

9. Members of a royal family are “foreign officials” for the FCPA.

10. The best protection against an FCPA violation is an "effective compliance program." It can result in penalty reductions for companies by up to 95%, according to the U.S. Federal Sentencing Guidelines.

10-A. The board of directors is always responsible for the oversight and management of the company’s FCPA compliance program.

Tuesday
Oct092007

With Friends Like These . . . .

The U.S. Foreign Corrupt Practices Act prohibits both direct and indirect corrupt payments to foreign officials. Indirect payments typically pass through the hands of an overseas partner or agent, then end up with the foreign official for an unlawful purpose. Most violations happen that way.

A plain-English explanation of the anti-bribery provisions written by the Department of Justice warns U.S. firms about their choice of overseas partners and agents. A bad choice is someone who is likely to make corrupt payments. That likelihood, the DOJ says, is usually indicated by warning signs called "red flags." If there are red flags to start with and if the intermediary does bribe a foreign official to help the business, the U.S. company will have trouble arguing it shouldn't be responsible for an FCPA violation based on an indirect corrupt payment.

Red flags, as the name suggests, are easy to spot. Unusual payment patterns or financial arrangements. A history of corruption in the country. A refusal by the foreign joint venture partner or representative to certify that it will not take any action that would cause the U.S. firm to be in violation of the FCPA. Unusually high commissions. Lack of transparency in expenses and accounting records. An apparent lack of qualifications or resources on the part of the joint venture partner or representative to perform the services offered. A recommendation from the local government of the intermediary. All these, the DOJ says, should set off compliance alarm bells.

When red flags appear, the burden of compliance increases. More red flags mean more caution is required. It's a mistake to interpret red flags merely as a sign of the local culture, a helpful clue about how business is really done there, and something you just have to live with. Seeing red flags and lowering compliance standards, when the right response is to raise them, often leads to an FCPA disaster.

View the DOJ's "Lay Person's Guide to FCPA" Here.

Monday
Sep242007

Paradigm's Pre-IPO Due Diligence Reveals FCPA Violations

Paradigm B.V., a Houston-based oil and gas services provider, entered into a non-prosecution agreement with the U.S. Department of Justice to resolve payments that violated the Foreign Corrupt Practices Act. Paradigm made prohibited payments to foreign officials in China, Indonesia, Kazakhstan, Mexico and Nigeria. It will "pay a $1 million penalty, implement rigorous internal controls, retain outside compliance counsel, and cooperate fully with the Department of Justice," according to the DOJ's September 24, 2007 announcement.

Paradigm's parent company, Paradigm Ltd., which is controlled by private equity fund Fox Paine, discovered the corrupt payments during due diligence for its planned NASDAQ IPO and self-disclosed them to prosecutors. The conduct at issue did not involve current senior management, according to the company. The DOJ said, “Paradigm’s actions in this matter, including voluntary disclosure and remedial efforts, are consistent with our view of responsible corporate conduct when FCPA violations are uncovered. Accordingly, the Department has resolved this case to permit the company to move forward on sound footing, governed by ethical business practices.”

The corrupt payments involved $22,250 deposited into the Latvian bank account of a British West Indies company recommended as a consultant by an official of KazMunaiGas, Kazakhstan’s national oil company, to secure a tender for geological software. The DOJ said Paradigm performed no due diligence, did not enter into any written agreement and apparently received no services.

In China, Paradigm used an agent to make commission payments to representatives of a subsidiary of the China National Offshore Oil Company in connection with the sale of software to the CNOOC subsidiary. Paradigm also directly retained and paid employees of Chinese national oil companies or state-owned entities as "internal consultants" to evaluate Paradigm’s software and to influence their employers’ procurement divisions to purchase Paradigm’s products. Employees of CNOOC and other state-owned enterprises in China are "foreign officials" for purposes of the FCPA.

Paradigm said it also made corrupt payments in Mexico, Indonesia and Nigeria. In Nigeria, it used intermediaries to pay between $100,000 and $200,000 to politicians to obtain a contract to perform services and processing work for a subsidiary of the Nigerian National Petroleum Corporation. In Mexico, it hired the brother of a Pemex decision maker, and paid for the decision-maker's $12,000 trip to Napa Valley, California and $10,000 to entertain him. In Indonesia, its agent paid employees of Pertamina through a New York bank account.

In a sign that the DOJ is encouraging more voluntary disclosure and self-directed remedial action -- which means implementing an "effective compliance program" -- Paradigm's non-prosecution agreement expires after just 18 months instead of the usual three-year period, and requires appointment of outside compliance counsel instead of an independent monitor. In addition to Paradigm's self disclosure and remedial actions, another major influence on the DOJ's handling of the case must have been the fact that the company's current senior management was not involved in the unlawful conduct.

View the Department of Justice's News Release Here.

View Paradigm's Non-Prosecution Agreement Here.

Sunday
Sep232007

FCPA Defenses That Don't Work

The text of the Foreign Corrupt Practices Act sets out three types of payments to foreign officials that are lawful -- facilitating payments, promotional expenses and payments permitted under the written laws of the host country. In addition to these three defenses, there are others that are repeated often -- but are bogus. They originate not from judges or jurisprudence but from the wishful thinking of companies and people in need of a defense, and fast. Knowing which defenses are real and which are counterfeit is crucial, however, and learning the differences too late can have dire consequences.

Here, then, are some of the most popular FCPA defenses that do not work:

Everyone pays bribes in this country.

Don't look at me. The / joint venture partner / agent / foreign subsidiary / did it.

Only big companies get into FCPA trouble. No one cares about a little fish like us.

My supervisor approved it.

We had no choice -- either pay up or lose the deal. That's extortion, not bribery.

We can't control what our agent does on his own time with his own money.

A hundred tiny bribes do not add up to one big bribe.

We have to pay bribes to do business here. The U.S. Government doesn't really expect us to leave, does it?

I was outside the U.S. and only used foreign bank accounts.

It's not fair. . . . .

________________________

More information is available from Cassin Law LLC.

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