How Anti-Corruption compliance can strengthen governance & ethics in Municipalities

IMPSA ConferenceLord Charles Somerset WestSteven Powell25 August 2015

overview

the corruption landscape in africa

results of the ENSafrica ABC survey

local & global anti-corruption legislation

enforcement trends

liability for the acts of 3rd parties

third party due diligence requirements

conclusion

corruption is a global phenomenon

Africa’s least corruptTI Rating Score

31 Botswana (-1) (63)

42 Cape Verde (57)

47 Mauritius (54)

55 Namibia (+2) (49)

55 Lesotho (49)

55 Rwanda (49)

61 Ghana (48)

67 RSA (+5) (44)

three quarters of the African countries scored less than 3 out of 10 – a sign of rampant corruption (oil producers - worst of all)

“Corrupt politicians make the other ten percent look bad.” ― Henry Kissinger

transparency corruption perceptions index 2014

ENSafrica 2015 ABC survey results

88 organisations across Africa participated in survey

South Africa one of 8 corruption hotspots in Africa

24% of organisations have experienced incident of bribery and

corruption in past year

68% of those surveyed believe that third-party business partners

pose the greatest source of bribery risk to their organisations

For detailed results see: https://www.ensafrica.com/news/ENSafricas-

2015-anti-bribery-and-corruption-survey-

results?Id=1933&STitle=forensics%20newsflash

why does anti-corruption compliance matter

ethically & morally – right thing to do, but also legal req

increased global regulatory enforcement activity i.e.

• risk of being penalised is higher than ever

• more and more jurisdictions fining companies that bribe

• reputational harm

• share price and company value can be devastated

• expensive legal and remediation fees

• derivative action risk

• director accountability

• jail time for offending directors

overview of applicable ABC legislation & initiatives

POCA – Prevention of Organised Crime Act

PDA – Protected Disclosures Act

FICA – Financial Intelligence Centre Act

PCCA – Prevention and Combating of Corrupt Activities Act

Plea & sentence agreements – Sec 105 A of Act 51 of CPA of 1977

SCCU – Specialized Commercial Crime Unit

Companies Act – Reg 43 which introduces the OECD

recommendations

the Prevention of Organised Crime Act, (POCA) Act 121 of 1998

introduced asset forfeiture in SA – power to freeze and seize

the proceeds of crime, taking the profit out of the illicit activities

proceeds of the asset forfeiture activities go to Criminal Assets

Recovery Account, (CARA) either for reimbursement to victims

or for utilisation by the state in its efforts to fight crime

also introduced the crime of racketeering

and non drug based money laundering offences

POCA

PDA

the Protected Disclosures Act (Whistle Blowers Act) Act 26

of 2000, protects employees from discrimination in

circumstances where they blow the whistle on corruption

the PDA provides for damages for whistleblowers who are

subjected to an “occupational detriment”

but criticised – paper protection and many whistleblowers

are subjected to victimisation in SA (and elsewhere)

Dodd Frank Legal reforms in the US

FICA

aims to combat money laundering activities and financing of

terrorist and related activities

obligation to report suspicious transactions is on “accountable

institutions” and “reportable institutions”

“accountable institutions” obliged to know their clients

the FIC channels STR’s to the appropriate bodies to investigate

or take action

Sec 105 A of CPA – plea bargains

Sec 105 A of the Criminal procedure Act 51 of 1977 was introduced to allow the state & defence to enter into plea & sentence agreements

to address the backlog of cases (white collar crime matters take years to investigate and prosecute)

In terms of sentencing guidelines – where the value involved exceeds R500, 000.00 a mandatory 15 year jail term is applicable

however, this long term imprisonment cab be negotiated into a reduced sentence via 105 A

based on successful intervention in New York City

PCCA (Act 12 of 2004) defines categories of corrupt activities (Including foreign bribery)

creates reporting obligation if you know or suspect acts of corruption or fraud, theft, extortion, forgery and uttering, where the value exceeds R100,000.00, it is a criminal offence if you fail to report to SA Police Services (up to 10 years imprisonment)

prohibits cross border acts of corruption (extra territorial jurisdiction for SA courts)

provides a black list for companies convicted of corruption

Prevention and Combating of Corrupt Activities Act

the specialized commercial crime courts

dedicated commercial crime courts - established in all of the major centres to improve conviction rates in white collar crime matters

staffed by expert prosecutors

presided over by magistrates and judges who have sufficient white collar crime expertise to understand the often complex fraud and corruption cases

the conviction rate in these courts has consistently remained higher than 90%

indicative of the success of this initiative

OECD recommendations on reducing corruption – Reg 43

Section 43 of the regulations to the

companies act requires the establishment of

a social and ethics committee

applicable to:

every state owned company

every listed public company

companies that satisfy the public interest criteria

Section 43 of the 2011 regs to the Companies Act 2008

The Social and ethics committee of the company shall monitor the company’s progress and standing regarding:

the implementation of the OECD recommendations on preventing corruption:

Not offer, promise or give undue pecuniary or other advantage to public officials or the employees of business partners.

Develop and adopt adequate internal controls, ethics and compliance programmes or measures for preventing and detecting bribery, developed on the basis of a risk assessment addressing the individual circumstances of an enterprise, in particular the bribery risks facing the enterprise (such as its geographical and industrial sector of operation)

Prohibit and discourage facilitation payments

Perform due diligence on agents and intermediaries

Enhance the transparency of their activities in the fight against bribery, bribe solicitation and extortion

Promote employee awareness of and compliance with company policies and internal controls, ethics and compliance programmes or measures against bribery, bribe solicitation and extortion

not make illegal political donations

The committee must ensure company adheres to UN Global compact principles – Principle 10 is reducing corruption

OECD recommendations

what does this mean in practical terms?

a stand alone anti-bribery policy (Municipalities have focused historically on fraud risk – this must be overhauled and extended

internal controls should be put in place to prevent bribery

based on a risk assessment

Includes processes to perform due diligence on business partners, agents & intermediaries (failure to conduct DD is regarded as wilful blindness)

training & communication

on-going monitoring of bribery risk

the US Foreign Corrupt Practices Act of 1977

US Federal law with two main components

• “Anti-Bribery” Provisions

• Illegal to corruptly offer, promise, or give anything of value, directly or indirectly, to a foreign official for the purpose of obtaining or retaining business

• “Accounting” Provisions

• Publicly traded companies must maintain accurate books and records and devise and maintain internal controls designed to provide reasonable assurances that financial transactions are properly recorded

FCPA – Books and records offence

The provisions of the Act relating to bookkeepingand internal controls (“accounting provisions”)receive less publicity but are much more likely toform the basis of a government proceeding againstcompanies subject to the Act

The most common FCPA enforcement mechanismis a civil action by the Securities and ExchangeCommission (“SEC”) under the accountingprovisions and not a criminal charge by theDepartment of Justice (“DOJ”) or even a civilaction by the SEC under the anti-bribery provision

a company may be liable if it’s records:

omit a transaction, such as a bribe, illegal commission or other improper payment

disguise records to conceal improper activity or fail to identify the improper nature of the recorded transaction

issuers are required to maintain a system of internal accounting controls to provide reasonable assurances that transactions are executed in line with management authorisation.

FCPA accounting provisions

the US govt is the most robust anti-corruption compliance enforcer

The US govt has collected over R5 billion dollars in penalties and

settlements from corrupt companies over the past six years

many multinational organizations have settled enforcement

actions with the US government

Often related to acts of bribery in developing markets in Africa,

Asia and Latin America.

parent company is held accountable for bribes paid by third

party intermediaries (TPI’s)

since 2008 to date- the US Govt has collected almost $5 billion in fines

Enforcement action 2008 - 2013

The new Corporate FCPA Top 10 List now reads as follows:

Company Total

Resolution DOJ

Component SEC

Component Date

1 Siemens

AG* $800,000,000 $450,000,000 $350,000,000 12/15/2008

2 Alstom S.A. $772,290,000 $772,290,000 -- 12/22/2014

3 KBR/Hallibur

ton $579,000,000 $402,000,000 $177,000,000 02/11/2009

4 BAE

Systems** $400,000,000 $400,000,000 -- 02/04/2010

5 Total S.A. $398,200,000 $245,200,000 $153,000,000 05/29/2013

6 Alcoa $384,000,000 $223,000,000 $161,000,000 01/09/2014

7 Snamprogett

i/ENI $365,000,000 $240,000,000 $125,000,000 07/07/2010

8 Technip S.A. $338,000,000 $240,000,000 $98,000,000 06/28/2010

9 JGC Corp. $218,800,000 $218,800,000 -- 04/06/2011

10 Daimler AG $185,000,000 $93,600,000 $91,400,000 04/01/2010

top ten FCPA cases

FCPA Enforcements • Wide-spread international focus – significant portion of the DOJ/SEC settlements

initiated/concluded during H1/2012 involved improper conduct occurring in China• Enforcement actions against companies from 2006 to 2011

the anti-corruption legislative regime in USA

the Foreign Corrupt Practices Act (FCPA)

the UK has also promulgated strong extra-territorial anti-corruption laws

United Kingdom Bribery Act of 2010 (UKBA) – came into effect in

July 2011 - provides:

corporate liability for companies that fail to prevent bribery

forces organisations associated with UK to proactively take

steps to manage the corruption risk, by way of policies,

procedures, controls, due diligence procedures, monitoring

enactment of Crime and Courts Act 2013 in UK authorizes SFO

to enter Deferred Prosecution Agreements ("DPAs")

UKBA Compliance: Ministerial guidelines “adequate procedures”

proportionate procedures: Procedures to prevent bribery by persons associated with the organisation are proportionate to the bribery risks it faces and the nature, scale and complexity of the organisation’s activities

top level commitment: Top level management must be committed to preventing bribery by persons associated with the organisation

risk assessment: The organisation assesses the nature and extent of its exposure to potential external and internal risks of bribery on its behalf by persons associated with it

UKBA Compliance: Ministerial guidelines

due diligence: Apply due diligence procedures in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks

communication (including training): Bribery prevention policies and procedures are embedded throughout the organisation through internal and external communication, including training

monitoring and review: The organisation monitors and reviews policies and procedures designed to prevent bribery by persons associated with it

Brazil has initiated strong action against bribery

Brazil promulgated a new extra-territorial anti-corruption law, in early 2014,

targets companies that pay bribes with heavy fines of between 0.2 % & 20 % of its gross revenue plus damages

significant efforts are being undertaken by companies domiciled or engaging in business in Brazil to comply with the new law

China has initiated a crackdown on corruption

China, has embarked on an anti-corruption crackdown, initially targeting the pharmaceutical industry

in July 2013, Chinese authorities accused GSK of funnelling up to 3 billion yuan (287 million pounds) to doctors and officials to encourage them to use its medicines in a case that rocked the pharmaceutical industry

a Chinese government official stated that it had “noted the international trend of governments imposing heavy fines against corrupt companies and was contemplating doing the same”

in 2014, GSK fined nearly $500 million

liability for the acts of third parties

FCPA, UKBA, and most other anti-corruption laws prohibit making corrupt payments both directly and indirectly through third-party agents, distributors, consultants, intermediaries, or other third parties

companies can be held responsible for the actions of a third party when they:

authorize or instruct the third party to make improper payments to foreign officials, or

make payments to a third party, knowing (or willfully blind) that money will be paid directly (or indirectly) to a government official

(over 70%) of U.S. enforcement actions involve bribe payments made by agents, consultants and other third parties

liability for the acts of third parties actions

the notion that one is not responsible for bribe payments made by third parties no longer valid

proof of “actual knowledge” of a bribe payment is not required

knowledge is satisfied when a person is aware of a high probability of the existence of a particular circumstance

companies and their employees cannot consciously disregard or deliberately ignore suspicious facts before entering into or during a third-party contract

knowledge can be established by failing to conduct due diligence,

enforcement authorities take the position that the knowledge element has been satisfied due to willful blindness/conscious disregard

resellers

vendors

marketing and other “consultants”

export and other “agents”

sales, licensing and other representatives

lawyers

accountants

JV partners

acquisition targets

who are third-party intermediaries TPI’s

due diligence process

due diligence - simply means researching a TPI/BP to identify potentially negative information regarding a TPI’s or BP’s reputation and to determine whether they are qualified to do business with your organisation

why conduct due diligence? - when you hire a TPI or BP, the U.S. Government will assume that you knew the TPI’s or BP’s reputation and qualifications and you become liable for their actions on your behalf

the DOJ regards the failure to perform due diligence as “willful blindness” you did not ask because you didn’t want to know

eg – “we don’t pay bribes, but what the consultants get up to is their business, we don’t want to know”

key compliance controls

pre – approval for providing anything of value (+ training)

• Gifts

• Travel

• Entertainment

• Per diems

due diligence

• Employees

• Agents, business partners and other TPI’s

anti bribery warranties and covenants in contracts with TPI’s

3 layers of scrutiny• line• legal• compliance

compliance must keep records – evidence of compliance

• sponsorships

• donations

• corporate responsibility programmes

• books and records• monitoring

• training & • communication

concluding thoughts

corruption levels in SA are almost out of control – “almost anything can be acquired at a price’

corruption in municipalities can be mitigated by robust compliance procedures

it is imperative that employees and business partners are screened and trained

ANTI BRIBERY COMPLIANCE DUE DILIGENCE on business partners is vital to avoid corrupt business partners – if done properly it can save municipalities millions in wasted costs

anti-bribery compliance policies, controls and procedures are critically important

A very simple conclusion ….

“If you think compliance is expensive, try non - compliance”

Former U.S. Deputy Attorney General Paul McNulty.

Questions

Steven Powellspowell@ensafrica.com

+2721410 2553

+828201036