Question

What is the Foreign Corrupt Practices Act? Briefly explain what payments the law permits and what it does not allow. What happened to Siemens AG as relates to the FCPA. What is the Sons and Daughters FCPA issue? In the case of Taikang Life insurance, a Chinese company, J.P. Morgan settled for $264million, but was not charged under the FCPA., Why not? Why do U.S. companies feel the FCPA is unfair.

Answer 1

Foreign Corrupt Practices Act

Legislation in the United States, passed in 1977, that banned U.S. corporations and others from bribing foreign officials in order to secure better business conditions. Prior to the passage of this Act, many American companies made unethical payments to high government officials in other countries to secure a contract or perhaps a legal change that would make it easier for an American company to conduct business in the foreign country. The Act also increased transparency requirements for some security issuers. It was amended by the International Anti-Bribery Act of 1998.

Foreign Corrupt Practices Act

A 1977 amendment to the Securities Exchange Act that sets penalties for those engaging in bribery of foreign government officials or foreign personnel and that requires adequate records and internal controls in all publicly held companies.

In details:-

The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. ("FCPA"), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.

Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of securities. With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.

The FCPA also requires companies whose securities are listed in the United States to meet its accounting provisions. See 15 U.S.C. § 78m. These accounting provisions, which were designed to operate in tandem with the anti-bribery provisions of the FCPA, require corporations covered by the provisions to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls.

Amazingly the FCPA contains an exception for "facilitating payments,” small bribes to secure the performance of routine government action. Many companies, on their own, have established a policy against paying facilitating payments. The reasons:

A) Facilitating payments are actually bribes and are always illegal in the country where your employees pay them.

B) The definition of a facilitating payment under the FCPA is technical. It would be folly to delegate the decision on whether a specific payment is a facilitating payment or a bribe to your sales people on the ground.

C) Facilitating payments are transactions and have to be recorded accurately on the company's books and records, i.e., as “A facilitating payment of $X to government official Y of country Z to provide (a specific service).” So your company is required to create an accurate financial record, and that record is written proof your company intentionally violated the law of the country where you made the payment - Catch 22?

The facilitating payment exception has never been used in a reported case.

What happened to Siemens AG as relates to the FCPA

On December 15, 2008, Siemens AG, Europe's largest engineering conglomerate and the largest electronics company in the world, settled a wide-ranging Foreign Corrupt Practices Act (FCPA) investigation resulting in combined penalties of $800 million to the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Together with various penalties imposed in Germany, Siemens' penalties are $1.6 billion. The US penalties are by far the largest monetary sanction ever imposed in an FCPA case, dwarfing the prior record of $44 million paid by Baker Hughes. The company and three subsidiaries that pleaded guilty to criminal charges also agreed to retain an independent compliance monitor for a term of four years.

The settlement with the DOJ and SEC involved at least 4,200 allegedly corrupt payments totaling approximately $1.4 billion over six years to foreign officials in numerous countries.1 Those payments spanned Siemens' business groups to include transactions as varied as an infrastructure project in Argentina, telecommunications projects in Bangladesh and Nigeria, and the installation of electricity lines in China, to the construction of power plants in Israel, the design and construction of municipal transit systems in Venezuela, and the sale of medical devices in China, Russia and Vietnam. The DOJ and SEC also charged Siemens with books-and-records and internal controls violations related to payments to the Iraqi government in connection with contracts secured by Siemens under the auspices of the United Nations Oil-for-Food Program (OFFP). WilmerHale served as counsel to Siemens in connection with the OFFP investigation.

The Siemens settlement is notable because of the sheer scope of the improper payments at issue and the size of the penalties that were imposed as a result--$450 million in criminal fines to the DOJ and $350 million in disgorgement to the SEC. According to the government's papers, the improper payments implicated virtually all aspects of Siemens' operations, including its headquarters, subsidiaries and regional operating companies. While the Siemens settlement is unprecedented given the magnitude of the fines that were imposed, there are several other notable aspects to the case, including that it marks the first time the DOJ has ever charged a company with a criminal failure to maintain adequate internal controls.

First Ever Criminal Charge for Internal Controls Violations by a Company

The FCPA's internal controls provision, 15 U.S.C. § 78m(b)(2)(B), requires issuers to design and maintain a system of internal accounting controls that provide reasonable assurances that, among other things, transactions are carried out in accordance with management's authorization and permit preparation of accurate financial statements. To be held criminally liable, a company must "knowingly circumvent or knowingly fail to implement a system of internal accounting controls."2 While the SEC previously has alleged civil internal controls violations in a number of instances and the DOJ has commented on control failures, the DOJ had not previously brought a criminal internal controls charge against a company.3 The DOJ's charges against Siemens therefore provide important guidance as to the DOJ's views on the elements of an adequate FCPA compliance program.

According to the DOJ's charging papers, Siemens merely adopted a "paper program" largely limited to the distribution of anti-corruption circulars and the promulgation of FCPA policies. Critically absent was a sufficient "tone at the top" emphasizing adherence to those policies. The DOJ specifically noted that Siemens' Executive Committee "provided few strong messages regarding anti-corruption compliance."4 Likewise, the DOJ alleged that senior management "made no clear statement that Siemens would rather

lose business than obtain it illegally."5 The failure to establish an adequate "tone at the top" was particularly problematic at Siemens because, according to the DOJ, improper payments to foreign officials were systemic throughout the company before Germany adopted foreign anti-bribery laws in 1999 and before Siemens was listed on a US securities exchange in 2001.

The DOJ also premised its criminal internal-controls allegations on specific structural and substantive deficiencies. Those deficiencies, which provide salient lessons for all companies, arose in the following areas:

Siemens allegedly failed to establish a "sufficiently empowered and competent" compliance department. First, the DOJ alleged that the Corporate Compliance Department was severely understaffed in relation to the number of employees at Siemens. To support this allegation, the DOJ cited a 2005 benchmarking analysis conducted by Siemens that compared its compliance infrastructure to that of General Electric. The comparison identified "serious deficiencies" in compliance resources, but no action was taken to remedy the situation. In fact, the DOJ's charging papers specifically and disapprovingly noted that a plan to further analyze the deficiency remained in draft form for the 16 months that preceded the government's investigation. Second, regional compliance officers (who assisted the Corporate Compliance Department) had full-time responsibilities other than compliance and received minimal training or direction regarding their compliance responsibilities. Finally, the DOJ cited an "inherent conflict in [the] mandate" of the Corporate Compliance Department given that it was charged with preventing compliance breaches as well as defending the company against government investigations.

While Siemens did adopt some policies, the DOJ alleged that it lacked sufficient anti-bribery compliance policies and procedures to control significant FCPA risks. For example, until recently, Siemens had in place "principles and recommendations"--but not mandatory policies--on engaging business consultants. In addition, those recommendations included no guidance on how due diligence should be conducted. When mandatory policies on consultants ultimately were adopted in 2005, the policies largely were not implemented by regional compliance personnel. Senior-level compliance personnel then knowingly failed to remedy the issue.

The DOJ alleged that Siemens failed to appropriately investigate and respond to corruption issues in multiple markets. In support, the DOJ cited the fact that an external auditor's discovery that approximately $5 million in cash was transported to Nigeria by Siemens' telecommunications group resulted in Siemens conducting a one-day investigation. That investigation confirmed potential bribery violations and possible systemic issues, yet no additional follow-up was conducted, no employees were disciplined, and the matter never was referred to the Board or the Audit Committee. For three years thereafter, the involved employees continued to pay bribes through a series of slush funds, with those payments ceasing only after arrests were made by German prosecutors--those arrests ultimately triggered the recently settled investigations involving the DOJ and SEC.

According to the DOJ's allegations, Siemens failed to discipline culpable employees involved in various corruption investigations. As a result, several employees who admitted paying bribes to foreign officials were provided with standard severance packages for early retirees.

The DOJ alleged that despite numerous instances of corruption in multiple Siemens business groups, the company lacked a mandatory FCPA training program until 2007.

The structural and substantive deficiencies highlighted by the DOJ's charging papers identify areas where the US government will expect companies to implement robust internal FCPA controls. And, as the settlement illustrates, it is imperative that the effectiveness of internal controls be consistently and thoroughly monitored, particularly at companies with historical instances of corruption and within those companies conducting business in higher risk regions or industries.

While JPMorgan Chase has garnered the most attention around this issue, probably because of its notorious spreadsheet tracking of sons and daughters hires to develop business in China, there are multiple US companies under scrutiny for similar conduct. The FCPA Blog has reported that Credit Suisse, Goldman Sachs, Morgan Stanley, Citigroup, and UBS are all under investigation by the SEC for their hiring practices around the sons and daughters of foreign government officials. BNY Mellon has the honor of being the first company to reach resolution on this issue.

This is an important issue for many companies going forward and since this is the initial enforcement action on this issue, I am going to take a deep dive into the matter over the next couple of days. Today, I will discuss the facts of the case and tomorrow I will discuss not only the lessons to be learned from this FCPA enforcement action but also how the Chief Compliance Officer (CCO) or compliance practitioner can use those facts to graft a hiring program around the sons and daughters of foreign government officials which will not violate the FCPA.

In its Press Release, the SEC noted, “The Securities and Exchange Commission today announced that BNY Mellon has agreed to pay $14.8 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.” Andrew J. Ceresney, Director of the SEC Enforcement Division, was quoted in the Press Release as stating, “The FCPA prohibits companies from improperly influencing foreign officials with ‘anything of value,’ and therefore cash payments, gifts, internships, or anything else used in corrupt attempts to win business can expose companies to an SEC enforcement action. BNY Mellon deserved significant sanction for providing valuable student internships to family members of foreign officials to influence their actions.” Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, said, “Financial services providers face unique corruption risks when seeking to win business in international markets, and we will continue to scrutinize industries that have not been vigilant about complying with the FCPA.”

The Cease and Desist Order (Order) entered found that BNY Mellon violated the anti-bribery and internal controls provisions of the Securities Exchange Act of 1934. BNY Mellon, “Without admitting or denying the findings, the company agreed to pay $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty. The SEC considered the company’s remedial acts and its cooperation with the investigation when determining a settlement.”

The underlying facts and BNY Mellon’s conduct as laid out in the Order provide some clear guidance for the CCO or compliance practitioner regarding what will be a violation of the FCPA in terms of hiring sons, daughters and close family relatives going forward. It should be noted that two of the hires were sons of foreign governmental officials and one was a nephew. However, the first important lesson under this enforcement action is around the parties involved. Although not identified by country, the foreign governmental entity involved was a Middle Eastern Sovereign Wealth Fund. If there was any question as to whether foreign sovereign wealth funds were covered under the FCPA, that answer is now clear, they are covered. All corporate actions should be cloaked with this knowledge going forward.

The Order also specified how the hiring of the relatives led directly to BNY Mellon obtaining and retaining business. One foreign government official, (Official X), “made a personal and discreet request that BNY Mellon provide internships to two of his relatives: his son, Intern A, and nephew, Intern B. As a Middle Eastern Sovereign Wealth Fund department head, Official X had authority over allocations of new assets to existing managers such as the Boutique, and was viewed within BNY Mellon as a “key decision maker” at the Middle Eastern Sovereign Wealth Fund. Official X later persistently inquired of BNY Mellon employees concerning the status of his internship request, asking whether and when BNY Mellon would deliver the internships. At one point, Official X said to his primary contact at BNY Mellon that the request represented an “opportunity” for BNY Mellon, and that the official could secure internships for his family members from a competitor of BNY Mellon if it did not satisfy his personal request.”

There were clear statements by the BNY Mellon official involved that hiring this son and nephew were being done to obtain or retain business. As reported in the Order:

• BNY Mellon was “not in a position to reject the request from a commercial point of view” even though it was a “personal request” from Official X. The employee stated: “by not allowing the internships to take place, we potentially jeopardize our mandate with [the Middle Eastern Sovereign Wealth Fund].”

• Another employee was quoted as saying, ““I want more money for this. I expect more for this. . . . We’re doing [Official X] a favor.”

Yet another employee was quoted as saying, “I am working on an expensive ‘favor’ for [Official X] – an internship for his son and cousin (don’t mention to him as this is not official).”

• Finally, to demonstrate the nefarious nature of the arrangement and lack of transparency in the entire process, this final BNY Mellon employee said, ““[W]e have to be careful about this. This is more of a personal request . . . [Official X] doesn’t want [the Middle Eastern Sovereign Wealth Fund] to know about it.” The same employee later directed his administrative assistant to refrain from sending email correspondence concerning Official X’s internship request “because it was a personal favor.”

The second foreign government official, (Official Y), “asked through a subordinate European Office employee that BNY Mellon provide an internship to the official’s son, Intern C. As a senior official at the European Office, Official Y had authority to make decisions directly impacting BNY Mellon’s business. Internal BNY Mellon documents reflected Official Y’s importance in this regard, stating that Official Y was “crucial to both retaining and gaining new business” for BNY Mellon. One or more European Office employees acting on Official Y’s behalf later inquired repeatedly about the status and details of the internship, including during discussions of the transfer of European Office assets to BNY Mellon. At the time of Official Y’s initial request, a number of recent client service issues had threatened to weaken the relationship between BNY Mellon and the European Office.”

When it came to hiring Official Y’s son there were some equally damning communications at BNY Mellon that were featured in the Order.

• The BNY Mellon sovereign wealth fund relationship manager said, “that granting Official Y’s request was likely to “influence any future decisions taken within [the Middle Eastern Sovereign Wealth Fund].”

• The same person also worried aloud that if BNY Mellon did not hire the son, it “might well lose market share to a competitor as a result.”

• He went on to write ““Its [sic] silly things like this that help influence who ends up with more assets / retaining dominant position.”

• Finally, he noted that to accede to Official Y’s request was the “only way” to increase business share.

Added to all of this was that none of the three individuals met the BNY Mellon requirements for its internship program; they met neither the academic or professional requirement to obtain an internship. BNY Mellon not only waived its own hiring requirements, it did not even go through the pretense of meeting with them or interviewing them. Finally, these three individuals were provided with “bespoke internships were rotational in nature, meaning that Interns A, B and C had the opportunity to work in a

number of different BNY Mellon business units, enhancing the value of the work experience beyond that normally provided to BNY Mellon interns.”

The penalty was also interesting. As set out in the order BNY Mellon agreed to the following penalty amount: “disgorgement of $8,300,000, prejudgment interest of $1,500,000 and a civil money penalty in the amount of $5,000,000, for a total payment of $14,800,000.” The SEC noted the cooperation efforts of the bank in stating, “Respondent acknowledges that the Commission is not imposing a civil penalty in excess of $5,000,000 based upon its cooperation in a Commission investigation.” Further, BNY Mellon engaged in extensive remediation. The Order stated, “Prior to the investigation by the Commission of the Interns, BNY Mellon had begun a process of enhancing its anti-corruption compliance program including: making changes to the Anti-Corruption Policy to explicitly address the hiring of government officials’ relatives; requiring that every application for a full-time hire or an internship be routed through a centralized HR application process; enhancing its Code of Conduct to require that every year each employee certifies that he or she is not responsible for hiring through a non-centralized channel; and requiring as part of a centralized application process that each applicant indicate whether she or a close personal associate is or has recently been a government official, and, if so, additional review by BNY Mellon’s anti-corruption office is mandated.”