The ITAR and the FCPA: What You Disclose May …ITAR violations through successor liability and settled with DDTC. • DOJ/SEC: Titan entered a guilty plea, $13M criminal fine for

October 7, 2014

The ITAR and the FCPA:

What You Disclose May Hurt You

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Presenters

Mark Srere

Bryan Cave LLP

Susan Kovarovics

Bryan Cave LLP

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Agenda

• Background on the FCPA

• Background on ITAR

• ITAR Part 129 brokering provisions and Part 130

provisions

• Enforcement actions involving FCPA and ITAR

• Compliance tips

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Foreign Corrupt Practices Act

Background

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Structure of FCPA

Antibribery Provisions

• Prohibits bribery of foreign

government or political officials

for the purpose of obtaining or

retaining business or securing

any improper business

advantage

• Mainly enforced as criminal

violations by the Department of

Justice

Books and Records Provisions

• Requires SEC-registered or

reporting issuers to make and

maintain accurate books and

records and to implement

adequate internal accounting

controls

• Mainly enforced as civil violations

by the Securities and Exchange

Commission

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Antibribery Prohibited Acts

• It is unlawful for

– an ―issuer,‖ ―domestic concern,‖ or ―any person acting within

the territory of the United States‖

– with ―corrupt intent‖

– directly or indirectly

– to offer, pay, promise to pay, or authorize payment

– of ―anything of value‖

– to a ―foreign official‖

– for the purpose of obtaining or retaining business or securing

any improper business advantage

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To Whom Do the Antibribery

Provisions Apply?

• Any ―issuer‖ that files reports to the SEC or trades equity or debt on a U.S. exchange

– Includes any foreign company that trades, for example, American Depository Receipts (ADRs), on a U.S. exchange.

• Any ―domestic concern‖

– Includes U.S. citizens, nationals, and residents as well as any entity (corporation, partnership, etc.) that is organized under the laws of the United States or a U.S. territory or that has its principal place of business in the United States.

• Any ―person,‖ including an organization, wherever located, that, while in the territory of the United States, does any act in furtherance of the prohibited conduct

– Government argues minimum contacts include emails, telephone calls, transfers through correspondent bank accounts in U.S. intermediary banks

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Why Is This Important?

• Violations of anti-corruption and related laws can result in – Serious criminal penalties, including jail sentences

for individuals

– Serious civil penalties for both company and individuals

– Debarment from and termination of government contracts

– Costly internal investigations

– Bad publicity and reputational consequences

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Penalties for Violation of FCPA

Provisions

• Significant Monetary and Criminal Penalties

– Antibribery Violations

o Fines up to $2 million per violation

o Culpable individuals may face fines of up to $250,000 per

violation and/or imprisonment for up to five years

– Books and Records and Internal Control Violations (Willful)

o Corporate fines in excess of $25 million for a company

o Fine up to $5 million and/or imprisonment for up to 20 years for

culpable individuals

– Alternative Fines Statute, 18 U.S.C. § 3571(d)

• Collateral Consequences

Top Ten FCPA Enforcement Actions

1. Siemens (Germany): $800 million in 2008

2. KBR / Halliburton (USA): $579 million in 2009

3. BAE (UK): $400 million in 2010

4. Total S.A. (France) $398 million in 2013

5. Alcoa (USA) $384 million in 2014

6. Snamprogetti Netherlands B.V./ENI S.p.A (Holland/Italy): $365 million

in 2010

7. Technip S.A. (France): $338 million in 2010

8. JGC Corporation (Japan) $218.8 million in 2011

9. Daimler AG (Germany): $185 million in 2010

10. Weatherford International (Switzerland): $152.6 million in 2013

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Dodd-Frank Whistleblower Provisions

• Whistleblowers who

– ―Voluntarily‖ provide the SEC with

– ―Original information‖

– That leads to a ―successful enforcement‖ action in a federal

or administrative court

– That results in monetary sanctions greater than $1,000,000

• Are entitled to a mandatory award from the SEC between

10 and 30% of the monetary sanctions

• September 2014 developments:

– $30 million award to foreign national whistleblower

– Award given to company compliance professional

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International Traffic in Arms

Regulations Background

International Traffic in Arms

Regulations (ITAR)

• Administered by the U.S. Department of State, Directorate of

Defense Trade Controls (DDTC)

• Enforced by Homeland Security, Immigration and Customs

Enforcement (ICE) and the FBI

• 22 CFR Parts 120-130

• Requires registration for manufacturing defense articles,

exporting defense articles and provision of defense services,

or brokering defense articles and defense services

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ITAR

• Controls the temporary and permanent export and

temporary import of

– Defense articles

– Technical data

– Defense services

• Exports require a license to all countries unless an

exemption applies

• Regulates brokering of defense articles, technical

data and defense services

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ITAR Part 129 Brokering

Provisions and

Part 130 Reporting Provisions

ITAR Part 129

• ITAR regulates brokering of defense articles and

defense services

• Part 129 imposes registration, prior approval,

reporting and record keeping requirements

• Part 129 may apply to sales agents or other parties

with whom you are dealing

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ITAR Part 129

• Applies to any person described below who engages in

the business of brokering activities:

– U.S. persons wherever located

– Foreign persons located in the United States

– Foreign person located outside the United States where the

foreign person is owned or controlled by a U.S. person

• Brokering activities: Any action on behalf of another to

facilitate the manufacture, export, permanent import,

transfer, reexport, or retransfer of a U.S. or foreign

defense article or defense service, regardless of its origin.

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ITAR Part 129

• What actions are covered?

– Financing, insuring, transporting, or freight forwarding defense articles and defense services; or

– Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.

– BUT, brokering activities are ―not limited to‖ these actions.

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ITAR Part 130

• Part 130 reporting requirements are

independent of Part 129 brokering

• Even if foreign party is not a ―broker‖ engaged

in ―brokering activities‖ under Part 129, still

need to report political contributions, fees or

commissions in accordance with Part 130

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ITAR Part 130

• ITAR Part 130 requires reporting on the payment of

certain political contributions, fees and commissions

– Political contributions in an aggregate of $5,000 or more

– Fees or commissions in an aggregate of $100,000 or more

• A Part 130 Statement must be submitted with all

ITAR license applications and agreements submitted

for approval

– Also applies to FMS transactions

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ITAR Part 130

• Reporting requirement triggered for transactions involving – exports of defense articles or services

– valued in an amount of $500,000 or more

– for use of the armed forces of a foreign country or international organization

– Covered by an ITAR license, TAA, MLA, WDA or in an FMS transaction

• Reporting must cover payments by the license applicant or FMS supplier, as well as payments by any vendors to such party if the vendor furnishes defense articles or services valued in an amount of $500,000 or more which are supplied to or for the use of the armed forces of a foreign country or international organization

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ITAR Part 130

• Under the ITAR, disclosure of information to DDTC about payments is mandatory if Part 130 criteria are met

• Under the FCPA, disclosure of information about payments (or offers to pay) is not required

– Yet consideration should be given to what may need to be disclosed to DDTC (and how might that information be shared with other government agencies)

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Enforcement Actions Involving

FCPA and ITAR

BAE Systems plc – March 2010; May

2011

• Pleaded guilty to conspiring:

– to defraud the U.S. by impairing and impeding its lawful

functions

– to make false statements about its FCPA compliance

program; and

– to violate the Arms Export Control Act (AECA) and ITAR

• $400 million (criminal fine); independent compliance

monitor for 3 years

• Civil agreement with DDTC for $79 million in civil

penalties and remedial compliance measures

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BAE’s FCPA Violations

• BAE took steps to conceal payments to shell companies and third party ―marketing advisors‖ that likely went to bribes. Total payments ultimately exceeded £135M and $14M.

• BAE paid in excess of £10M and $9M to a Swiss intermediary and was aware that this money would likely go to a Saudi official to win an $80B contract.

• In its guilty plea, BAE admitted that it had averred to the Department of Defense that it was not knowingly violating the FCPA or other foreign anti-bribery laws, even as conducting the above suspect activities.

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BAE’s ITAR Violations

• 2,591 violations of ITAR parts 129 and 130

• As part of its guilty plea, BAE admitted that it:

– knowingly and willfully failed to identify commissions paid to 3rd parties for assistance in soliciting, promoting or otherwise securing sales of defense items

– failed to identify the commission payments paid through a shell company in order to keep the fact and scope of its external advisors from public scrutiny

– caused the filing of false applications for export licenses by failing to tell the export license applicant or the State Department of £19 million it paid to an intermediary with high probability that this would benefit BAE

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Lessons from BAE

• ITAR Part 130 requires the reporting of all

commissions, including those knowingly paid as

bribes

• While the government could not secure a conviction

for bribery under the FCPA, it was able to use ITAR

Part 130 to get a criminal conviction for failing to

properly report these bribes

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L-3 Communications Corp. – 2005

• In 1998, Titan Aerospace allegedly paid bribes to secure a contract in Benin. In 2003, Lockheed attempted to acquire Titan, but backed out after learning of the bribes during M&A due diligence and reported the bribes to DOJ.

• In 2005, Titan was acquired by L-3, which inherited the ITAR violations through successor liability and settled with DDTC.

• DOJ/SEC: Titan entered a guilty plea, $13M criminal fine for FCPA and tax violations and $12.5M to SEC for disgorgement and interest, plus compliance monitor/probation

• DDTC: L-3 $1.5M civil penalty for ITAR violations plus 3-year consent agreement

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L-3’s Violations

• L-3 admitted to the following:

– Violating the bribery provisions of the FCPA by paying in excess of $3.5M in commissions to an advisor to the president of Benin which commissions were used in a re-election campaign.

– Internally recording the payments as "consulting services" and breaking them into smaller increments to make them appear paid out over time, violating the FCPA books and records provision.

– Failing to report the commissions on 3 separate export license applications and making false statements that no commissions were paid, violating the ITAR.

– Improperly deducting the bribes on its taxes.

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Lessons from L-3

• Government sought multiple avenues for prosecution

of the same activity (paying bribes) using different

laws and regulations (FCPA, ITAR and tax laws).

• DOJ and DDTC each extracted different concessions

as part of their plea agreement/settlement.

• M&A due diligence is an important piece of avoiding

successor liability.

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Weatherford International Ltd. – Nov.

2013

• FCPA penalties (DOJ and SEC):

– One subsidiary pleaded guilty and also DPA

– $87.2 million (criminal); $65.6 million (civil, including

$1.875MM penalty to SEC for failure to cooperate early)

• Export penalties (BIS and OFAC):

– Two subsidiaries pleaded guilty and also DPA

– $50 million BIS (civil sanction); $48 million (penalty pursuant

to DPA); $2 million (criminal fine)

– Joint with a $91 million OFAC penalty

• Compliance monitor for 18 months and reporting

duties for another 18 months

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Weatherford’s FCPA Violations

• Failed to establish an effective system of internal

accounting controls designed to detect and prevent

corruption, including FCPA violations

– Permitted long-running bribery in Africa and Middle East

• Used joint venture, freight forwarder, distributor,

kickbacks (Oil-for-Food), improper travel and

entertainment to pay bribes

• Failed to investigate allegation of bribes on ethics

questionnaire

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Weatherford’s Export Violations

• 1998 to 2007

• Exporting or re-exporting oil and gas drilling

equipment to, and conducting business operations in,

sanctioned countries without U.S. authorization

– Cuba, Iran, Sudan, and Syria

• Used subsidiaries in Canada, UAE and UK

• Violations of both the EAR and OFAC regulations

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What to Expect

• FCPA investigations are here to stay

• Increased cooperation among Justice, State,

Treasury and Commerce Departments

• Continued efforts to use ITAR Parts 129 and 130 to

identify potential bribery concerns

• Additional scrutiny on individual license applications

for Part 130 statement

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Compliance Tips

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Compliance Tips

• Identify brokers in your transactions

– They may not all be independent sales agents

• Determine when your company’s or your affiliates’

activities may be considered brokering under Part

129

• Ensure adequate internal tracking and reporting of

payments related to defense trade projects

– Include mechanism on procurement side to capture Part 130

information from vendors supplying $500,000 or more for a

particular defense trade project

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Compliance Programs

• One size does not fit all

• Requires a careful analysis of your business and an

identification of your risks

• Risk of multiple enforcement requires consideration of other

anti-corruption laws like the UK Bribery Act

• Best practices are evolving

• Counsel or the head of compliance should be sure to stay on

top of best practices and consider whether they are appropriate

for his or her company

• Build in cross-over between FCPA and ITAR compliance

programs—at least in your training

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Essential Elements

• Commitment from senior management and a clearly articulated policy against corruption – tone at the top

• Code of conduct and compliance policies and procedures

• Oversight, autonomy, and resources

• Risk assessment

• Training and continuing advice

• Incentives and disciplinary measures

• Third-party due diligence and payments

• Confidential reporting and internal investigation

• M&A pre-acquisition due diligence and post-acquisition integration

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When Should a Company Conduct

Due Diligence?

• Due diligence is the key to any anti-corruption

compliance program

• It is a must for:

– New and existing agents, third-party relationships,

distributors

– Joint ventures and business partnerships

– Major investments

– Mergers and acquisitions

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Key Considerations for Due Diligence

on Agents and Third Parties

• Determine the qualifications and associations of the

agent/third party

– Especially relationships with foreign officials

• Understand the business rationale for retaining the

agent/third party

– Review how the agent was chosen

– Review compensation

• Continuously monitor/audit the agent/third party relationship

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Due Diligence Considerations

for Agents

• Territory’s reputation for corruption

• Industry’s reputation for corruption

• Agent’s integrity, reputation, competence, and ability

• Agent’s relationship with government officials

• Reasonableness and method of payment to Agent

• Compliance with local law

• Anticorruption safeguards in contractual agreements

• Continuing oversight of agent’s activities

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You See…

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Prosecutors See…

QUESTIONS?

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Contact Information

• Mark Srere, Partner, Washington, DC

[email protected] T: 202-508-6050

• Susan Kovarovics, Partner, Washington, DC

[email protected] T: 202-508-6132