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Overview of the Regulatory Environment for US-listed Firms Doing Business in Europe Meeting with the Association of Corporate Counsel Europe Chapter March.

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Presentation on theme: "Overview of the Regulatory Environment for US-listed Firms Doing Business in Europe Meeting with the Association of Corporate Counsel Europe Chapter March."— Presentation transcript:

1 Overview of the Regulatory Environment for US-listed Firms Doing Business in Europe Meeting with the Association of Corporate Counsel Europe Chapter March 27, 2008

2 1 Summary For a company that is listed on US stock exchanges and does business throughout the world, compliance with the following legislative regimes must be assured: 1.The Securities Act of 1933 and the Securities Exchange Act of 1934 Contains anti-fraud and other provisions of general application Obligates auditors to react to signs of “illegal activities” Provides a right to private suits (including class actions) by shareholders 2.The Foreign Corrupt Practices Act (1977) Anti-corruption rules Separate “books and records” rules 3.Sarbanes-Oxley (2002) Requires certification of financial statements (Section 302) Requires certification of internal controls (Section 404) 4.The French "blocking statute"

3 2 Introduction The Securities Act and the Securities Exchange Act, the Foreign Corrupt Practices Act and Sarbanes-Oxley : Taken together, these separate pieces of legislation – and their implementation by the Securities & Exchange Commission and others – provide a virtual charter of “corporate governance”

4 3 1- The Securities Act of 1933 and Securities Exchange Acts of 1934 The anti-fraud provisions (Section 10b and Rule 10b-5) Make it illegal to engage in any “scheme or artifice to defraud” Provide for civil litigation by shareholders who claim that their decision to buy or sell was influenced by false statements Frequently raised in class actions Also provide basis for SEC action The auditor provisions Section 10A requires an auditor to withhold certification of financial statements, and to demand an investigation of, any signs of an “illegal act Not limited to material events

5 4 2- The Foreign Corrupt Practices Act Anti-corruption rules An anti-bribery statute A “books and records” statute Federal statute passed by post-Watergate Congress in 1977 to prohibit bribery of foreign government officials for the purpose of obtaining or retaining business Enforceable by Department of Justice and SEC Enforcement activity has dramatically increased in recent years

6 5 2- The Foreign Corrupt Practices Act To Whom Does the FCPA Apply? U.S. citizens, nationals and residents, U.S.-based corporations/partnerships, wherever conduct occurs Any issuer under the federal securities laws Any entity (whether U.S. or non-U.S.) that has a class of securities (including ADRs) registered pursuant to Section 12 of the 1934 Act or is required to file periodic reports pursuant to Section 15(b) thereof Issuer can be liable for any subsidiary’s bribery if issuer authorized, directed or was “willfully blind” to the activities of the subsidiary Issuer can be liable for any subsidiary’s inaccurate books and records if the subsidiary’s books roll up Any person or entity committing an act in the U.S.

7 6 2- The Foreign Corrupt Practices Act FCPA anti-bribery provisions make it unlawful to Corruptly make (or offer or promise to make) a payment or gift of money or anything of value Directly to: Non-U.S. government officials (including employees of state enterprises) Foreign political parties, candidates or officials Officials of public international organizations, e.g., UN

8 7 2- The Foreign Corrupt Practices Act FCPA anti-bribery provisions make it unlawful to (continued) Or indirectly to such persons through an intermediary while “knowing” the payment or gift will be passed on If purpose is to obtain a quid pro quo, i.e., To influence official act or decision To induce official to act or not act In order to: Obtain business; or Retain business; or Direct business; or “Secure an improper advantage” Bottom line: Avoid giving benefits that may have appearance of impropriety

9 8 2- The Foreign Corrupt Practices Act Retention of Third Parties Intermediaries Agents Consultants Distributors Liability if covered person or entity “ knows ” improper payments are being made by third party to an official Knowledge includes: “conscious avoidance” “deliberate ignorance” Essential to perform due diligence on third parties Document the due diligence steps Retain investigative agency in appropriate cases

10 9 2- The Foreign Corrupt Practices Act Retention of Third Parties (continued) Written contract with third party Agreement to comply with FCPA Agreement to disclose past or future affiliations with officials Consider requiring annual certification of compliance Require advance approval of travel/entertainment expenses Consider requiring right to inspect third party’s books Prohibit assignment of duties Provide for termination at will for violation of FCPA provisions Permit disclosure of contract by issuer and its affiliates=

11 10 2- The Foreign Corrupt Practices Act Retention of Third Parties (continued) Payments to third party must be commensurate with services provided Payments should be through normal mechanisms and should not conceal the identity of the third-party payee Utilize US banking system to facilitate tracing of payments, or Pay at local bank where work is performed or agent resides; Avoid any payments to Swiss, Liechtenstein or similar accounts Travel and entertainment expenses of third party Require documentation Consider requiring advance approval Obtain opinion from local counsel on legality of relationship

12 11 2- The Foreign Corrupt Practices Act Joint Ventures Liability in majority ownership situations Liability for bribery similar to the parent-sub scenario Liability for books and records is triggered by 50+ percent “ voting power ” with respect to the venture Possible liability if found to be in “ control ” even if lacks such voting power — e.g., rotating CEO positions Non-majority ownership control Veto rights and “ negative control ” Bell South case (ability to control Board decisions) Even if minority interest, duty to take reasonable steps to prevent violations, such as by seeking to require: Compliance programs Investigations of potentially improper payments Adequate financial systems and controls

13 12 2- The Foreign Corrupt Practices Act Joint Ventures (continued) Essential to perform due diligence on partner Document due diligence steps Identify ultimate beneficial owner of partner JV agreements should include FCPA provisions Significant Issues: JVs with state-owned or formerly state-owned enterprises, e.g., Russia and China

14 13 2- The Foreign Corrupt Practices Act M&A Considerations Determine if target company is subject to FCPA, or if continuation of target ’ s business could violate FCPA post-acquisition Necessity of including FCPA in due diligence review “ Tainted ” contracts (FCPA Opinion Procedure Release 2001-01 (May 24, 2001)) Government position that structuring transaction as an asset deal may not avoid historical FCPA liability (Sigma-Aldrich Business Holdings) Titan disclaimers when filing merger agreement as part of merger proxy statement

15 14 2- The Foreign Corrupt Practices Act M&A Due Diligence Due diligence should be tailored to the particular business being acquired and the country in which the target company does business. Among things to consider: Assessment of the risk profile of countries in which the target company or any of its subsidiaries does business Analysis of the risk profile of the industry or business activity involved (for example, is the industry or activity involved one in which a single official or a few key officials may have disproportionate influence, e.g., defense procurement, extraction of oil, gas and other natural resources, privatization of state-owned assets, registration of pharmaceuticals?) Evaluation of the risk profile of any persons associated with the target (have any managers been accused of unethical or criminal conduct?) Review of the internal audit reports and internal investigations conducted by the target ’ s internal audit, corporate security and legal departments, as well as any documents reviewed by the target ’ s outside legal counsel

16 15 2- The Foreign Corrupt Practices Act M&A Due Diligence (continued) Among things to consider: (continued) Identification of the names of all reasonably known officials in the countries in which the target operates, and comparison of the resulting list with the list of the payees of the target company or corporate seller Interview of managers and employees of the target or seller who may have had contact with officials able to influence the target ’ s or seller ’ s business Review of the records, reports and analyses prepared by the target ’ s or seller ’ s external auditors or accounting firms, if commercially feasible Retention of an investigative agency (such as Kroll) to conduct an independent review of possible ways in which bribes may have been paid

17 16 2- The Foreign Corrupt Practices Act Anti-Bribery Violation — Consequences Companies: Civil penalties up to $10K per violation Criminal fines up to $2M per violation Individuals: Civil penalties up to $10K per violation Criminal fines up to $100K per violation Imprisonment for up to 5 years Alternative Fines Act: allows a criminal fine to be up to twice the gross gain or gross loss associated with the conduct

18 17 2- The Foreign Corrupt Practices Act FCPA Books & Records Requirement Issuer must “ make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer ” Issuer must also “ devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances ” that Transactions are executed and access to assets is permitted only in accordance with management authorization and that Transactions are recorded in a way to permit financial statements to be prepared in accordance with GAAP

19 18 2- The Foreign Corrupt Practices Act FCPA Books & Records Requirement (continued) No “ scienter ” requirement Issuer is subject to penalties even if issuer ’ s officers do not know of the inaccuracies Effectively strict liability for inaccurate books of all subsidiaries whose books roll up into issuer ’ s financials Requires issuer to exercise control over books and records of foreign subs and other controlled entities A bribe to a foreign official must be recorded as a bribe, not as a “ fee ” or other seemingly innocuous transaction Records violations can occur in non-bribery contexts

20 19 2- The Foreign Corrupt Practices Act Books and Records Violation — Consequences Companies: Criminal fine up to $25M Civil remedies generally available to SEC (injunctions, cease and desist orders, civil fines, accounting/disgorgement) Individuals: Criminal fine up to $5M Up to 20 years imprisonment Civil remedies generally available to SEC Alternative Fines Act

21 20 2- The Foreign Corrupt Practices Act Collateral Consequences of an FCPA Violation Suspension from government contracting Limit on ability to receive U.S. export license Suspension or debarment from Overseas Private Investment Corporation and Commodity Futures Trading Commission programs OFAC sanctions and penalties Private lawsuits for conspiracy, wire and mail fraud, money laundering, Travel Act and RICO violations Reputational damage

22 21 2- The Foreign Corrupt Practices Act Insights From Recent FCPA Cases (continued) Fines and disgorgement payments are increasing Titan – more than $28 million in fines/disgorgement Vetco Gray - $26 million total criminal penalty for 3 subs ($12 million for 1 sub with prior FCPA conviction) FCPA increasingly intruding into M&A deals FCPA issue caused Titan/Lockheed merger to fail FCPA issues arising in midst of InVision merger with GE led government to require burdensome consent agreements from both companies Issuer liability for incorrect representations and warranties contained in merger agreement filed as an exhibit to a merger proxy statement

23 22 2- The Foreign Corrupt Practices Act Insights From Recent FCPA Cases (continued) Foreign Issuers subject to enforcement actions ABB Ltd. – first case brought by the SEC against a foreign issuer Statoil – first case brought by DOJ against a foreign issuer Norwegian government brought case as well Voluntary Disclosure Schnitzer Steel – deferred prosecution for parent, guilty plea by subsidiary, and $7.5M fine

24 23 3- Sarbanes – Oxley (2002) SEC enforcement proceedings against management Taken together, Sections 302 and 404 of SOX create a regulatory scheme designed to hold senior management responsible for preventing accounting irregularities.

25 24 SEC / Obligations of management - Section 302 Obligation on CEO / CFO to certify that:- they are responsible for maintaining internal controls they have ensured material information is reported to them they have recently evaluated the effectiveness of the company ’ s internal controls they have reported any “ significant deficiencies ” and “ material weaknesses ” in such controls they have reported any fraud “ whether or not material ” involving management or internal controls 3- Sarbanes – Oxley (2002)

26 25 SEC / Obligations of management: Section 404 Requires reporting companies to include in their annual report: A statement of responsibility of management for “ establishing and maintaining an adequate internal control structure and procedures for financial reporting ” An “ assessment … of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. ” The SEC has signaled that it will not walk away from 404: “ SOX 404 is the only standard in the world where both the management of the issuer certifies the effectiveness of, and the auditor tests and attests to, internal controls ” Remarks of SEC Commissioner Campos“SEC Regulation Outside the United States” London March 8, 2007 3- Sarbanes – Oxley (2002)

27 26 SEC / Obligations of management: 302 / 404 Press release re integration of sections 302 and 404: “ We expect the internal control audit to be better integrated with the audit of a company ’ s financial statements. ” “ Both management and external auditors must bring reasoned judgment and a top-down, risk-based approach to the 404 compliance process. ” “ A one-size fits all, bottom-up, check-the-box approach that treats all controls equally is less likely to improve internal controls and financial reporting …. ” 3- Sarbanes – Oxley (2002)

28 27 Was adopted in 1968, and amended in 1980, in the aftermath of the adoption of the Hague Convention on Taking Evidence Prohibits providing either written or oral evidence to a foreign tribunal other than in accordance with French law and treaties (e.g., the Hague Convention) Not a defense for party discovery in US courts per the Aerospatiale decision Until recently, was mostly disregarded in France American courts have noted this failure to prosecute But in March 2007 the Cour d ’ Appel of Paris convicted a Franco- American lawyer for interviewing a potential witness in France for possible use in a US litigation (petition to Cour de Cassation pending) Certainly applies to parties in non-French litigation May apply to so-called “ internal investigations ” 4- The French “Blocking Statute”

29 Annex 1: Summary of Recent FCPA Cases

30 29 Recent Cases: Dow Chemical (2007) Fifth-tier sub allegedly paid $200,000 in bribes to India’s Central Insecticides Board and state officials to get approval of and right to distribute products Books and records and internal controls violations alleged No anti-bribery charge SEC found that no Dow employee knew or approved of improper payments – strict liability Parent settled with SEC: $325,000 civil penalty

31 30 Recent Cases: El Paso (2007) Alleged purchases of crude oil from third parties through UN Oil- for-Food program while knowing/recklessly not knowing third parties passed on $5.5M in illegal surcharges to Iraq Third party representations that not paying surcharges not enough – El Paso failed to conduct due diligence to confirm Charged with FCPA books and records and internal controls violations SEC settlement: $5.5 million disgorgement; $2.25 million civil penalty DOJ non-prosecution agreement settled OFAC and wire fraud charges (guided by new McNulty Memo)

32 31 Recent Cases: Vetco Gray (2007) 4 Vetco International Ltd. subs authorized agent to make about 378 corrupt payments (totaling $2.1M) to Nigerian Customs Service Payments to procure preferential customs treatment for deepwater oil drilling equipment 3 of the subs pleaded guilty to anti-bribery violation and conspiracy: $26M total fine (largest to date in DOJ prosecution) $12M paid by 1 sub with prior FCPA conviction Deferred prosecution agreement for 1 sub: consented to DOJ prior approval of appointments of Executive Chairperson Majority members of Compliance Committee (including chair) Compliance Counsel

33 32 Recent Cases: Statoil (2006) Largest case brought to date against non-U.S issuer Anti-bribery, books and records, and internal controls violations arising out of bribes paid to Iranian oil official via “consulting” agreement Deferred prosecution agreement — $10.5 million fine SEC consent order — $10.5 million disgorgement order Requires compliance consultant for three years

34 33 Recent Cases: AIG (2005) Managing Director of AIG Global Investment Corp. in US indicted by SDNY in 2005 for conspiracy, FCPA, Travel Act and money laundering violations Employee of Omega Advisors pleaded guilty, is cooperating Alleged payments of cash/gifts and promise of profits made to officials in Azerbaijan by co-defendant in unsuccessful effort to obtain control of to-be-privatized state oil company Indictment alleges AIG MD caused AIG to invest in consortium knowing that bribes had been and would be paid — knowledge of past bribes deemed sufficient

35 34 Recent Cases: Titan Corp. (2005) Paid $3.5 million over 3 years to its agent in Africa, a business advisor to country’s president, to support president’s election, in effort to secure telecom contract Payments recorded as consulting services Titan pled to 3 felonies; paid $13 million fine; entered into SEC consent; disgorged $15.5 million; retained a monitor SEC noted in its Section 21(a) Report potential liability for false statements in publicly filed merger documents Lockheed ultimately terminated its merger with Titan

36 35 Recent Cases: Diagnostic Products Corp. (2005) Payments by Chinese subsidiary of US company to doctors at state-owned hospitals to secure business Recorded in books as routine business expenses Parent company halted the practice when it learned Sub pled guilty to FCPA bribery violation and paid $2 million; jurisdiction based on a single fax sent to California Parent settled with SEC: disgorgement of $2.7 million in profits from sub and compliance monitor for 3 years

37 36 Recent Cases: Monsanto (2005) Officer in US authorized Indonesian consulting firm to pay cash to Environment Minister in unsuccessful effort to persuade him to drop required environmental impact statement Recorded in books as consulting payment Separately, Indonesian affiliate companies made $700,000 in improper payments over 6 years to 140 Indonesian officials, including house for wife of senior Agriculture Ministry official Deferred Prosecution agreement: 3 years; paid $1 million SEC consent: payment of $500,000 and compliance monitor

38 37 Recent Cases: InVision/GE (2004) Case involved sales of airline baggage screening devices for airports in Thailand, Philippines and China and evidence of third- party payments to foreign officials FCPA issues arose before closing of InVision merger with GE; GE and InVision both agreed to consent orders; InVision voluntarily disclosed FCPA violations to DOJ; consent agreement delayed InVision’s incorporation into GE unit Failure to conduct due diligence and lack of an FCPA compliance program led to stipulated findings that InVision lacked internal controls as required by FCPA InVision agreed to pay 800K fine and hire monitor

39 38 Recent Cases: Schering-Plough (2004) Officer of sub in Poland made donations to Polish charitable foundation established to restore castles Foundation’s president was also head of a government pharmaceutical board Donations recorded with false purposes (e.g., disease prevention) and officer structured payments to stay within his grant of authority S-P settled with the SEC for books and records and internal controls violations; paid $500,00 and agreed to appointment of an FCPA compliance monitor

40 39 The End

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