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7 january 2008 business finance

The U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are stepping up enforcement of the Foreign Corrupt Practices Act (FCPA), the statute that prohibits bribing foreign government officials, and are targeting compa- nies in every sector that have significant dealings with foreign governments.

Historically, the DOJ and SEC focused on the oil, gas, and construction industries, according to Wendy Schwartz, a partner at Reed Smith LLP in New York, who believes that the wider lens is the natural result of globalization. “As companies in all sectors move toward globalization, regulators are looking at those that deal a lot with overseas governments, where many of what are consid- ered private functions involve government workers, so companies are essentially dealing with a government workforce,” she says.

Chicago-based Aon, one of the three largest global insurance brokerage firms, received a voluntary request from regulators to

review its compliance with anti-bribery laws this past November. Other major insurers could be next in line. “Aon received an informal, voluntary information request from the SEC and DOJ regarding allegations of violations of the FCPA,” says David Prosperi, vice president, global public relations. “We believe that the request was not unique to Aon in our industry. We take all such allegations very seriously, and we intend to comply fully with this request. Our internal investigation is ongoing.”

Shareholder concerns about possible violations of the FCPA have increased during the past several years, especially with regard to mergers and acquisitions. More and more companies are requiring FCPA compliance certification in deals, accord- ing to Schwartz. In fact, such violations have killed deals, such as Lockheed Martin’s planned acquisition of Titan Corp. several years ago. The deal was scuttled during Lockheed Martin’s due diligence process due to allegations that surfaced related to Titan’s activities in Saudi Arabia and the African country of Benin.

What actions should a company take if it receives notification from regulators that it is coming under scrutiny? “If you’re being investigated, the first thing is to hire outside counsel who can do investigation ahead of the government or persuade the govern- ment to hold off until the company can set its own procedures [for an internal investigation], but they really should be assess- ing their compliance procedures and putting good procedures in place before something comes up,” says Schwartz. “Then, if something arises, they’ve already got their best foot forward with the government to show that there are procedures to deal with issues and put them in a forward-looking position where they can conduct their own investigation and consider voluntarily disclo- sures to the government that would head off a full investigation.”

Violations of the FCPA can result in substantial financial pen- alties. This October, Ingersoll-Rand agreed to pay nearly $7 mil- lion in penalties, disgorgement of profit, and interest for improp- er payments to Iraq under the U.N. oil-for-food program, while Willbros Group Inc., an oil and gas pipeline company, agreed to pay in excess of $32 million to settle SEC litigation under the FCPA that was filed against the company late last year for bribery schemes in Nigeria and Ecuador.

“Previously, fines were on the small side because the FCPA itself puts a limit on the amount of penalty,” says Schwartz. “But now you see the DOJ and SEC requiring the disgorgement of profits, and this is a relatively new trend. If this trend sticks, you’ll see much higher fines.”

Reputation, another important factor to consider in financial repercussions, is far less easy to quantify. Companies that value their reputation won’t want this kind of fine to be levied against them. Laurie Brannen

top of mind

global compliance

Steering Clear of Foreign Corruption

Learn more www.searchfinance.com

Source: reed Smith LLP

Six Steps to Better Compliance n Evaluate the countries in which you operate. Refer to the rankings pub- lished by Transparency International that rate levels of corruption in different countries to see the hot spots where payments are expected by local officials.

n Evaluate contracts and third-party distributors and intermediaries in countries where you operate. “Even if the company is complying with the FCPA, the agents representing them may not have as full an understanding,” says Schwartz. Look at the price terms you have with agents to see if there are excessively large discounts or unusual rebates and hidden increases in price that can be used by an agent to pass a little bit along to a government official.

n Train high-level people throughout the company about FCPA and how to spot hidden ways in which money can be passed through third par- ties. Include salespeople and others who have day-to-day interaction with intermediaries.

n Check out the background of any intermediaries you retain to see if they’re reputable. Are they willing to sign an agreement certifying that they’re not making any illegal payments? A refusal would be a red-flag warning.

n Develop an understanding of procedures that relate directly to FCPA for internal auditors. “Traditionally, internal audit folks will not be looking for the kind of violations that are FCPA-based,” says Schwartz. In addition to training internal auditors, consider hiring a forensic accountant.

n Implement robust procedures for reporting bribery. Set up an anonymous tip hot line and use forensic auditors to address sensitive issues that are reported.