It is likely that Australia will eventually join the United Kingdom (UK) in outlawing facilitation payments when a review of Australia’s foreign bribery laws is completed.

Australia’s foreign bribery laws were originally modelled on the United States Foreign Corrupt Practices Act and currently provide a defence to bribing a foreign public official if the value of the benefit is of a minor nature and it is provided for the sole or dominant purpose of expediting or securing the performance of a routine government action of a minor nature.  However, global tolerance for this form of legal bribery is fast waning and the Australian Government is actively considering outlawing facilitation payments whilst it is concurrently in the process of being reviewed for its compliance with the United Nations Convention against Corruption (UNCAC), which relevantly does not recognise facilitation payments.

The primary factors driving a likely change of Australia’s laws are compliance with its international obligations under UNCAC and the OECD Convention and the recognition that international standards are changing.  In particular, the Australian Government has recognised the UK Bribery Act as a game changer because it exposes Australian businesses caught by the UK laws to the risk-management complexity posed by inconsistent legal standards.  If Australia’s laws are harmonised with international best practice then this reduces the cost and complexity of compliance systems and leaves Australian businesses in no doubt about their obligations wherever they do business.

The proposed change should not have any material impact on Australian business.  A government discussion paper notes that the extent to which Australian businesses currently claim the tax deduction available for lawful facilitation payments is relatively low.

If Australia strives to be a leader in the Asia Pacific region, then it must demonstrate a real commitment to anti-bribery best practice.  As part of its foreign aid policy Australia requires anti-corruption action plans and is currently giving priority to the establishment of plans in Indonesia, the Philippines, East Timor, Papua New Guinea, the Solomon Islands and Vanuatu.  Yet Australia also recognises that facilitation payments are generally detrimental to good governance, particularly in developing countries.  Therefore, if Australia is to demonstrate real anti-corruption leadership, it seems inevitable that it must consign facilitation payments to the past.

The review is at the consultation stage and there is currently no timetable for reform.

TRACE  works with partner law firms in over 130 countries to offer expertise in local anti-bribery laws, information on gifts and hospitality regulations, and local restrictions and requirements on the use of third party intermediaries.  Minter Ellison is TRACE’s partner firm in Australia.

Alstom subsidiaries debarred from development bank projects.  On 22 February 2012, a Negotiated Resolution Agreement was reached between Alstom and the World Bank.  This settlement includes (1) the debarment of Alstom Hydro France and Alstom Network Schweiz AG and their affiliates for a period of three years, and (2) payment of approximately USD 9.5 million in restitution by the two companies.  The period of debarment could be reduced to 21 months with enhanced oversight if all conditions are complied with.  Although the parent company, Alstom SA and its affiliates, are conditionally not to be debarred,  Alstom Hydro France and Alstom Network Schweiz are subject to cross-debarment by other development banks. The penalties are based on a finding that Alstom made an improper payment of a USD 145,000 (110,000 Euro) consultancy fee to an entity controlled by a former senior government official in Zambia in 2002.  Alstom did not admit the allegations.  The full Compendium summary for this case is accessible here.

No DOJ prosecution of Allianz.  On 22 February 2012, attorneys from the Department of Justice stated that the investigation into whether Allianz SE violated the FCPA or other bribery laws in Indonesia had been closed, and that the DOJ did not intend to take any enforcement action.  The investigation began when an employee alerted outside auditors of perceived corruption, precipitating disclosure by Allianz to the Frankfurt Prosecutor’s office.  Although the DOJ has closed its investigation, the SEC is still negotiating a settlement with Allianz  on other charges.  The full Compendium summary for this case is accessible here.

Recent Enforcement Developments

Government moves to dismiss largest FCPA Sting prosecution.  On 21 February 2012, the government filed a motion in the US District Court for the District of Columbia to dismiss with prejudice all remaining claims in the case, which began in January 2010 with the sensational arrest of twenty-two individuals.  The defendants were accused of participating in a scheme to bribe the defense minister of the African nation of Gabon, but in fact the arrangement, and the underlying contracts for the sale of police and military equipment, were fictitious. Three defendants reached plea agreements with the prosecution.  In order to ensure manageable trials for the remaining nineteen defendants, the judge in the case separated them into smaller groups.  The first trial, of four defendants, ended in mistrial in July 2011.  Charges were dismissed as against one defendant in April 2011, and two defendants in the second trial, which ended in January 2012, were acquitted.  A mistrial was declared with respect to three other defendants when the jury could not reach a verdict.  Now, less than one month before the third trial was scheduled to begin, the government has dropped the entire case, citing “the impact of certain evidentiary and other legal rulings in the first two trials” as well as cost, as its motives for seeking to close the case.  Recent reports in the press had brought to light some apparent professional missteps in the conduct of the Sting operation.  The Compendium summary may be accessed here.

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Earlier this year, TRACE expanded the tools and services available to companies in need of cost-effective compliance tools by introducing a software solution that tracks incoming and outgoing gifts, hospitality and travel.  Companies will now have access to a tailored website which collects key information across their worldwide operations and highlights bribery risks and compliance weaknesses.  This software solution was designed by TRACE specifically for corporate legal and compliance departments concerned with effectively implementing robust anti-bribery compliance programs and continuously monitoring these programs for evolving risks.  This software is included in TRACE membership at no additional charge and can be licensed to non-member companies for $10,000.

The impetus for developing this anti-bribery software solution was twofold.  First, as with many of the tools and services TRACE offers, we listened to our members who expressed a desire for “off-the-shelf” software to track corporate gift giving.  Many of these companies were relying on reports generated from accounts payable software to flag problematic transactions.  However, accounts payable software is not designed to uncover risks specific to bribery and corruption (for example, by identifying whether a recipient is a government official).  Furthermore, these systems capture only gifts and hospitality expenditures for which reimbursement is sought, and sometimes long after the gift is made.

Second, TRACE closely monitors bribery enforcement actions and noted the heightened expectations of regulatory authorities regarding effective compliance programs.  Not long ago, “tone-at-the-top” and clear policies prohibiting bribery were the gold standard for compliance programs.  Now, enforcement actions brought for violations of the U.S. Foreign Corrupt Practices Act and other anti-bribery laws show that regulators expect to see a dynamic culture of compliance where ongoing risk assessments inform and influence anti-bribery policies and procedures.  In addition, they want to see that compliance with anti-bribery policies and procedures is the duty of individuals at all levels of the company, and that appropriate disciplinary action is taken when violations are detected.

In response to this, the TRACE Gifts, Travel & Hospitality Tracking Software enables companies to generate reports – risk assessments – that aggregate data across an enterprise to detect bribery risks, such as:

• A concentration in gifts from or to a particular government official, government agency or customer or
• An uptick in gift giving in connection with material corporate events, such as the closing of a public tender or  the award of a large contract

In addition, the software:

• Detects violations of internal policies and procedures, such as failing to receive appropriate approvals for gift requests or failing to provide a legitimate business purpose for a proposed gift
• Tracks both outgoing and incoming gifts and hospitality to address the UK Bribery Act (which prohibits both paying and receiving a bribe), as well as our members’ concerns that incoming gifts can improperly influence decision-making by their employees; and
• Reduces the risk of bribery by reinforcing the importance of company policies and procedures to employees at all levels, reminding them that gifts, travel and hospitality is a significant risk area for bribery.

The TRACE Gifts, Travel & Hospitality Tracking Software is a practical solution that we believe sets the standard for collecting key information regarding both incoming and outgoing gifts, hospitality and travel across an enterprise.  To learn more about TRACE, please visit www.TRACEinternational.org.

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The membership fee for TRACE is US$15,000 and includes:

• Access to our online Resource Center, which includes summaries of local anti-bribery laws in over 130 countries and other topics such as:
  • Country Bulletins answering the twenty-one questions that companies should ask before retaining an intermediary in a particular country;
  • Country-specific gifts and hospitality guidelines; and
  • Benchmarking surveys and “best practices” research.
• Attendance at the annual TRACE Forum for in-house counsel and compliance officers.
• Anti-bribery workshops held at locations around the world for local employees and intermediaries.
• Access to international anti-bribery experts at designated “TRACE Firms” in over 130 countries.  In addition, we are hosting our first ever Global Anti-bribery In-house Network (GAIN) in April of this year, giving TRACE members an opportunity to meet the law firms that support TRACE worldwide and to hear about challenges specific to the over 130 countries we cover.  In turn, our partner firms will hear how they can best support TRACE members in their international operations.  Each TRACE member company may send one representative to GAIN for no fee; additional member company representatives may attend for a $1,000 fee.
• Multilingual online anti-bribery training.
• Access to a list of pre-vetted third party intermediaries.
• Access to our new Gifts, Travel & Hospitality Tracking Software.

In addition to the above, through March 1, 2012, one person from each member company is eligible for complimentary enrollment in TASA, the TRACE Anti-bribery Specialist Accreditation program.  Please visit TASA- TRACE Anti-bribery Specialist Accreditation – Courses – Recorded Courses for a list of courses.

How?  By moving to risk-based due diligence.  Companies should assess the risk profile of each relationship, in order to establish the appropriate level of review before the review gets underway.  Criteria such as the purpose for which the intermediary is being retained, its level of interaction with government officials, the proposed compensation (both amount and structure), the volume or value of sales, and the countries in which the intermediary operates will inform the level of risk. For intermediaries that fall into the higher risk category, higher cost is to be expected.   The company must collect more information and conduct a more in-depth review in order to avoid the potentially high fines, reputational damages, and criminal penalties that could ensue if an adequate, appropriate investment in due diligence is not made.

But what about third-party relationships that do not fall into the high-risk category?  Lower risk should translate into lower cost.  In fact, there are many circumstances under which a lower level of review warranted, and this is where companies can save money.  Two categories of intermediaries are appropriate for lower-cost due diligence:  truly low-risk intermediaries, and intermediaries in need of pre-vetting.  Suppliers, and service providers such as realtors, law firms, accounting and public relations firms, resellers and non-commission sales representatives (with no government customers), charities that fall within a company’s established charitable giving program, are all likely to be low-risk relationships.

In some instances, companies need quick, cost effective due diligence as a way to pre-vet intermediaries for a number of reasons, including a high-volume of  intermediaries that haven’t previously undergone due diligence; companies that are working with a potential joint venture partner or acquisition; time-sensitive intermediaries for which an initial lower level of due diligence will allow results to be obtained more quickly than would be possible with a higher level of review; intermediaries bidding for a specific contract or project; and finally, for multiple intermediaries under consideration in a potential new market.

Additional information about a risk-based approach to due diligence can be found in the _TRACE Due Diligence Guidebook.  In addition to explaining the purpose and process of due diligence, the Guidebook offers a rational, graduated system for assessing the risks posed by each intermediary relationship and the information that should be collected at each level.

As part of a risk-based due diligence approach, TRACE offers _TRACEcheck, a streamlined due diligence tool designed for lower-risk commercial intermediaries or for pre-vetting intermediaries.  A TRACEcheck report contains key ownership, personnel and reputational information about an intermediary.  TRACEcheck is available to both TRACE members and non-members.

Healthcare markets are expanding.  Immense populations in Asia, Eastern Europe, Latin America and Africa that were once largely overlooked by western pharmaceutical and medical device companies are now becoming affluent enough to buy western drugs and devices.  As markets expand, companies are increasingly taking clinical trials abroad in support of both research and early marketing efforts.   Overseas, they find receptive population centers, readily-available expertise, improving facilities and far lower costs than in the West.

Unfortunately, this favorable environment – more eager and less expensive – carries new risks.  The health care industry faces tremendous challenges when clinical trials are held abroad:

• at the approval stage, local regulations and international standards for good clinical practice must be satisfied, and equipment and supplies must be imported into the country.
• when engaging a Primary Investigator (PI) – often a government official –  and a Clinical Research Organization (CRO) to conduct the trial, and putting together an Independent Review Board (IRB) to oversee and approve the process.
• when using, upgrading or building a clinical facility, usually one that is owned by the government and operated by government employees.
• when trying to ensure high standards for informed consent.

There are a number of measures companies can take in order to avoid pitfalls.  First, the CROs, the pharmaceutical companies and the medical device manufacturers should ensure the best possible understanding of local laws and regulations.  Ignoring local regulations and succumbing to pressure to bring in supplies or sign agreements at the last moment are great ways for companies to get themselves into trouble at the outset.  Companies should set the right tone, both within their own ranks and externally, by publicizing their unwillingness to compromise on compliance.

Companies should vet each other and third party participants in the trial process thoroughly.  In the relationship between the CRO and the pharma and medical device companies, coordinated compliance efforts would improve standards while reducing overall costs.  Once it has been instituted and tailored to each location, a coordinated system would create a common basis for multiple trials, improving the overall level of expertise, enhancing trust between the parties, and increasing the likelihood that compliance measures will be followed.  Click here for an article by TRACE president Alexandra Wrage about international clinical trials and the compliance risks they involve.

Prosecutions arising from clinical trials have been extremely rare thus far, but enforcement agencies are watching the industry closely.  It will be up to health care companies to coordinate their efforts for the good of the industry’s reputation.

TRACE is an industry leader in compliance benchmarking and is establishing a clinical trials “best practices” group for pharma and medical device companies and CROs.   The group will discuss concerns about anti-bribery flashpoints in clinical trials, share and disseminate best practices and work to establish a common standard for compliance in the field in order to ensure transparency and reduce duplicative practices. 

Please contact us at clinicaltrials@TRACEinternational.org if you are interested in participating.  We will hold an initial organizational call in early March.

Recent Enforcement Developments

Fourth Innospec employee charged with corruption.  The UK Serious Frauds Office filed charges on filed on 10 February 2012 in Southwark Crown Court against Miltiades Papachristos, formerly the Asia-Pacific Regional Sales Director for Innospec Ltd.  Papachristos, a dual UK and Greek citizen, is charged with bribing public officials in Indonesia in order to secure or reward the grant of contracts between Innospec and the government of Indonesia.  Innospec Ltd. was charged by the SFO in February 2010 with conspiracy to corrupt Indonesian officials, and the company later pleaded guilty to charges in the U.S. regarding bribery schemes in Iraq, and violation of the U.S. embargo on Cuba. Three other individuals have been charged in the Indonesia case:  Paul Jennings, David Turner, and Dennis Kerrison.  The Compendium summary of this case can be accessed here.

Government moves to dismiss all charges against O’Shea.  On 9 February 2012, the Department of Justice filed a motion to dismiss all remaining charges against John Joseph O’Shea, who had been acquitted in January of substantive FCPA violations.  The remaining charges included conspiracy, obstruction of justice and money laundering; all of the charges had arisen from O’Shea’s alleged participation in the bribery of Mexican government officials in order to secure contracts with the Comisión Federal de Electricidad, a state-run power company, while O’Shea served as general manager of the Texas business unit of the US subsidiary of a Swiss company. The Compendium summary of this case can be accessed here.

Guilty plea from Haiti Teleco official.  On 8 February 2012, Patrick Joseph entered a plea agreement with the Department of Justice, for his role in the Haiti Teleco bribery case.  Joseph was the Director General of the state-owned Haitian telecommunications company.  The indictment accuses him of accepting bribes from two companies in exchange for granting various advantages to those companies.  The Compendium summary of this case can be accessed here.

The TRACE Compendium is a compilation of summaries of international anti-bribery enforcement actions.  It is open to the public and free of charge.  Compendium  summaries are searchable by company name, year of enforcement action, location of company, enforcing authority, industry type, and other categories.  You can search the Compendium by clicking here.

James M. Klotz, Miller Thomson LLP

Canada has been criticized for a number of shortcomings in its foreign anti-corruption legislation, the Corruption of Foreign Public Officials Act (“CFPOA”).  The most glaring of these shortcomings is the lack of nationality jurisdiction.

When Canada signed the OECD Convention, it specifically excluded itself from the requirement to include nationality jurisdiction provisions in its law.  Canada is the only OECD country to have done so.  As a result, Canada must rely on territorial jurisdiction only over the foreign bribery offence.  Canada explained to the OECD that it was generally Canada’s policy to only apply extraterritorial jurisdiction where there is an express treaty obligation to do so.  In Canada’s view, the OECD Convention does not expressly require the adoption of extraterritorial jurisdiction.  It has been Canada’s position that its territorial basis for jurisdiction is sufficiently effective to combat foreign bribery.  It should be noted however, that the OECD concluded that jurisdiction in Canada is in fact much narrower than for most other Convention parties.

The Canadian test for territorial jurisdiction comes out of the case of R. v. Libman.  In Libman, the defendant used a “boiler-room” telemarketing operation in Canada to convince U.S. residents into investing in a worthless Central American mining company. He was charged with both fraud and conspiracy to commit fraud. The Court set a test for finding territorial jurisdiction under Canadian criminal law – there must be a “real and substantial link” between the offence and Canada before criminal liability will be imposed in this country.  The Court proposed a two-stage test to determine if the crime was committed in Canada:  It must take into account all relevant facts that take place in Canada that may legitimately give this country an interest in prosecuting the offence. It must then consider whether there is anything in those facts that offends international comity.  This means that a portion of the illegal activities will have to have been committed in Canada or have a real impact on Canadians.

Following Libman, the involvement of a Canadian company or wholly owned subsidiary of a Canadian company may be sufficient to trigger the application of the CFPOA.  Canadian companies may also be held liable for the acts of agents or contractors if such agent or contractor plays an important role in managing the company’s activities, or if an officer of the company knows about the agent or contractor’s conduct and does not take all reasonable measures to stop it. Unfortunately, there is room for a defense that would not exist if the legislation included a nationality clause.  The argument will be that there is no “real and substantial connection” of the crime to Canada.  While there is an excellent argument that Canada, by virtue of signing the various international conventions against bribery, intended to recognize nationality jurisdiction de facto, it remains to be seen if the courts will agree.

If Canada had wanted to be explicit, it could have made (and can still make) the appropriate statutory change to the CFPOA.  In 2010, the government introduced a Bill that would have included nationality jurisdiction, but unfortunately, for reasons unrelated to the CFPOA, the Bill died, and has not as of today, been reintroduced.  Hopefully, the fact that the Bill was introduced once, suggests that it will again return and become law.  The alternative will be that we have to wait until the Crown loses the first few cases before a legislative change occurs.

Companies, especially those new to anti-bribery compliance, or just beginning to expand internationally, are not always aware of the local law pitfalls that await them when operating overseas. A grasp of both local regulations and custom not only ensures compliance with the letter of the law and reduces the risk of prosecution, but also gives employees ammunition when faced with inappropriate demands. A refusal to engage in an activity because of illegality may not solve the problem for the employee, but it is a good first line of defense. As is knowing that they are in the right when an official questions compliance with a regulation in an attempt to extort a payment, or a third party insists on a certain level of compensation because it is “customary.”

Finding useful in-country resources and identifying fully-vetted, reliable local counsel with experience in this field can be challenging, especially for companies new to a territory.  The Global Anti-bribery In-house Network (GAIN) conference on April 23^rd and 24^th in Washington, DC, will bring together in-house compliance professionals and representatives from TRACE partner law firms worldwide. The program will focus on new anti-corruption initiatives, local compliance challenges, and practical advice and solutions when operating in high-risk countries. GAIN is open to both TRACE member and non-member companies. For additional information, go to https://secure.traceinternational.org/Trace/Events/GAIN.html.

Potential compliance challenges abound in China.

That probably doesn’t sound like much of an insight. But think about China’s compliance landscape as a rainforest.

Compare how densely abundant a rainforest is versus, say, a forest of saguaro cactus: both have lots of plants but the density of the rainforest makes it harder to see the path beneath one’s feet.

China is a compliance rainforest.

Garden variety seeking-a-license-mustn’t-pay-a-bribe compliance is straightforward enough. Companies know how to deal with those situations. It’s the way that schemes can pop out like a praying mantis and snag you that makes China a challenge. Just recently we’ve had projects where clients were minding their own business, selling their products, protecting their IP – and then suddenly found themselves with tricky compliance issues.  Fortunately, they have savvy in-house counsel who spotted the potential compliance issues and sought to avoid the snares awaiting them.

What tips can you learn from the China-savvy, discerning, in-house counsel?

• Commercial sales terms and practices are a potential minefield. A US-based company sells its products to Chinese quasi-state-owned agencies. They sell the product for a standard price. At the end of the product cycle, they take back the depleted product for recycling with no added charge paid by either party. One of their potential customers approaches them with the clever idea of raising the seller’s standard price and then paying a rebate to the customer when the seller receives the depleted product for recycling. Rebates are commercially reasonable, right?  Except when they’re paid in cash. Off of an inflated price. And where the customer is an SOE or quasi-governmental body, FCPA red flags are raised. The situation also presents serious commercial bribery risks under PRC law. As discussed here, arguably the chief compliance enforcement risk your company faces vis-à-vis PRC regulators in 2012 is with commercial bribery.  Tip: Check out whether your company is offering rebates or discounts to its China customers and verify whether the arrangements meet US and PRC compliance requirements.

• Everyone knows that China has faced challenges in enforcing its IP protection regime.  We’ve heard about the counterfeit raids that are conducted on behalf of companies — from Disney to producers of industrial products — against producers or sellers of knock-offs.  Those counterfeit raids are often conducted by various local authorities (trademark authorities, copyright authorities and even local police if it involves criminal charges). The way it works is that in most cases your company will hire a local investigation firm to conduct a preliminary investigation into the counterfeiter and then request the competent local authority to conduct a raid against the counterfeiter. In some cases, the local firm may pay some amount to the local authorities such as for overtime, transportation, meals, etc.  The local firm may ask your company to reimburse them as part of the cost of the project.  But what if the funds were advanced directly to the police officers? And there is no published regulation or notice about the existence of this practice? And no documentation supporting the legitimacy of the payments (and the absence of corrupt intent) here? It could look like your agent (the local firm) is providing an improper benefit to government officials to take action on your behalf.  Tip: when hiring a local firm to assist with an investigation involving collaboration with government agents, confer in advance about costs for which the agency may seek reimbursement and how to handle and document them appropriately.

K&L Gates in China is one of more than 130 partner firms around the world providing anti-bribery compliance advice to TRACE on a pro bono basis.   Partner firms summarize local laws on the use of third party intermediaries and gifts, hospitality and travel, and support TRACE’s training efforts worldwide.