1. © 2006 Morrison & Foerster LLP All Rights Reserved Internal Investigations By Outside Counsel: Implications for Anti-Corruption Enforcement JAMES E. HOUGH American Bar Association’s “The Role of Lawyers, the Bar, and the Bench in Preventing and Combating Corruption within the Justice System” February 19, 2007

2. 1 Internal Investigations By Outside Counsel WH0 conducts corruption-related investigations ? WHAT is investigated ? WHEN are investigations performed ? WHY are investigations conducted ?

3. 2 Internal Investigations: WHO? Global companies whose home jurisdictions prohibit foreign corrupt payments. Thirty-six “supply-side” countries now prohibit use of corporate funds to pay bribes to foreign officials.

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5. 4 Examples of Companies Subject to Prohibitions on Foreign Bribery USA UK Netherlands USA South Korea Germany France Switzerland Japan

6. 5 EXAMPLES OF APPLICABLE SANCTIONS COUNTRYPRISON (maximum penalty) FINES for natural persons (NP) and legal person (LP) OTHER SANCTIONS upon criminal conviction JAPAN3 yearsNPs: JPY 3 million (THB 949,282 ) LPs: JPY 300 million (THB 94,937,554 ) Not directly on foreign bribery offence convictions KOREA5 yearsNPs: KRW 20 million (THB 749,377) or twice the amount of profit if > KRW 10 million LPs: KRW 1 billion or twice the amount of profit if profit > KRW 500 million (THB 18,738,378) Not directly on foreign bribery offence conviction to date, but under consideration (disbarment from public procurement) UNITED KINGDOM6 months (summary) 7 years (indictment) THB 320,962 (summary) NO upper limit (indictment) NPs: disqualification of directors from certain functions LPs: Not directly on foreign bribery offence conviction UNITED STATES15 yearsNPs: Up to USD 100,000 (THB 3,729,861) LPs: Up to USD 2 million (THB 74,606,384); actual fine up to 2x the benefit sought Civil penalties up to USD 10,000 (THB 341,253; additional SEC fine; debarment from U.S. government procurement

7. 6 Internal Investigations: WHAT U.S. FOREIGN CORRUPT PRACTICES ACT Anti-Bribery Provisions  Apply to all U.S. companies (including officers, directors, employee, agents and shareholders) and all U.S. nationals  Apply to non-U.S. companies and nationals who act in U.S. Accounting/Books and Records Provision  Applies only to U.S. “issuers”  Affect foreign subsidiaries and affiliates of issuers

8. 7 Internal Investigations: WHAT Primarily Fact Investigation  Collecting, reviewing and preserving evidence E-mail and electronic data Hard copy documents  Conducting interviews Key executives Staff Consultants, agents and/or customers

9. 8 Internal Investigations: WHEN Whistleblower allegations  SOX provides protections and incentives M&A due diligence Auditor questions Investigations already underway by authorities

10. 9 Internal Investigations: WHY? “... Foreign bribery is a difficult offense to detect, since it is committed in secret and involves two satisfied parties....” OECD Mid-Term Study of Phase 2 Reports, p. 92 (available at: http://www.oecd.org/dataoecd/19/39/36872226.pdf)

11. 10 Internal Investigations: WHY Reduces exposure to government action Puts company in better position to respond to charges/lawsuits Prevents future wrongdoing Provides information that management needs to fulfill responsibilities

12. 11 Internal Investigations: WHY Advantages of outside counsel: Increased control over information discovered  U.S. law: Attorney-Client Privilege; Work Product Protection Independence from management  Ethical obligations  Avoids conflicting interests Credibility if company decides to self- report

13. 12 Internal Investigations: WHY Voluntary disclosure to government over improper conduct discovered by internal investigation  U.S. reporting FCPA violations made both to DOJ and SEC Criminal case against company by DOJ less likely Lowers or eliminates SEC penalty

14. 13 Self-Reporting Example: Schnitzer Steel Korean subsidiary made over $1.8M in improper payments to customers, many of whom were Chinese state-owned entities Self-reported to DOJ and SEC Reported both bribery of foreign government officials, and books and records violations Korean subsidiary entered guilty plea; Schnitzer Steel entered deferred prosecution agreement with DOJ Schnitzer Steel and Korean subsidiary paid over $15M to settle matter

15. 14 Self-Reporting Example: Baker Hughes Paid $75,000 through an agent to Indonesian tax official to reduce assessed tax Self-reported Company, CFO, Controller charged by SEC $30 million estimated cost of remediation required by government

16. 15 RECENT FCPA ENFORCEMENT ACTIONS YearCompany/IndividualHow discovered problem? Self-reported?Action by Government Agency (SEC/DOJ) 2004ABB, Ltd.M&A due diligenceYes$5.9M in civil disgorgement and prejudgment interest; retain outside FCPA compliance monitor; $10.5M criminal fine; subsidiary entered guilty plea 2004Schering-Plough Corp.Internal investigationYes$500,000 civil fine; retain independent consultant 2004GE InVision Technologies, Inc.M&A due diligenceYes$589,000 civil disgorgement; $500,000 civil fine; non-prosecution agreement with DOJ; $800,000 criminal fine; continued cooperation with DOJ and adopt FCPA compliance program 2005Micrus CorporationInternal investigationYesNon-prosecution agreement with DOJ; $450,000 fine; retain independent consultant 2005Titan Corp.M&A due diligenceYes$15.5M in civil disgorgement and prejudgment interest; $13M criminal fine; company plead guilty; agreed to retain independent consultant

17. 16 RECENT FCPA ENFORCEMENT ACTIONS YearCompany/IndividualHow discovered problem? Self-reported?Action by Government Agency (SEC/DOJ) 2005Monsanto CompanyRoutine internal auditYesNon-prosecution agreement with DOJ; $1.5M civil fine; appoint independent consultant 2005Diagnostic Products Corp. and DPC (Tianjin) Co. Ltd. ("DePu") Internal investigationYes$2.04M in civil disgorgement + $750,000 in prejudgment interest; $2M criminal fine; DePu entered guilty plea 2005Yaw Osei Amaoki (former regional director for ITXC Corp.) Internal investigationYesCase by SEC pending 2006Schnitzer Steel and SSI International Far East Ltd. ("SSI Korea) Internal investigationYes$6.27M in civil disgorgement by Schnitzer + $1.45M in prejudgment interest; deferred prosecution agreement with DOJ by Schnitzer Steel; retain independent consultant; SSI Korea plead guilty and $7.5M criminal fine 2006Statoil, ASANorwegian press report triggered U.S. investigation Nodeferred prosecution agreement with DOJ; $21M total fine in civil and criminal penalties; retain independent consultant

18. 17 Internal Investigations: WHY U.S. Law: incentives to disclose if find problems Governments increasingly likely to share information with authorities where corrupt activity took place  OECD Convention incorporates “Mutual Legal Assistance”  UN Declaration Against Corruption and Bribery in International Business Transactions

19. 18 THANK YOU James E. Hough Morrison & Foerster LLP