Originally published January 11, 2011

Keywords: SEC, Foreign Corrupt Practices Act, DOJ, RAE Systems Inc., compliance, anti-corruption, bribery,

A recent Securities and Exchange Commission (SEC) and Department of Justice (DOJ) settlement provides companies with guidelines to follow in order to limit exposure under the Foreign Corrupt Practices Act (FCPA). On December 10, 2010, the SEC and DOJ announced a settlement in their FCPA enforcement action against RAE Systems, Inc. In its action against RAE, the SEC alleged that the company, through its Chinese joint venture entities, made payments of approximately $400,000 to Chinese officials, which allegedly resulted in RAE-affiliated entities winning contracts worth approximately $3 million in revenues. The SEC further alleged that RAE lacked sufficient internal controls and failed to act on red flags raised by the conduct of its Chinese joint venture partners. As part of the settlement, RAE agreed to disgorge the $1,147,800 of profits collected and pay prejudgment interest.

Perhaps more importantly, RAE also agreed to undertake certain measures aimed at ensuring future compliance with the FCPA. These provisions largely mirror those agreed to by Panalpina and other defendants in a November 2010 settlement of a major FCPA case brought by the DOJ and provide companies with a guideline of the current "best practices" used by the DOJ and SEC in assessing FCPA compliance. These guidelines are a valuable tool available to companies seeking to assess the strength of their existing compliance provisions and to limit their risk of FCPA exposure. Among other things, the guidelines require that companies:

  • Develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA and other anti-corruption laws. This policy should be memorialized in a written compliance code.
  • Ensure that senior management provides strong, explicit and visible support and commitment to the compliance policy.
  • Develop standards designed to reduce the prospect of violations of the anti-corruption laws. These standards should apply to all directors, officers, employees and, "where necessary and appropriate, outside parties" acting on behalf of the company. These outside parties could include agents, intermediaries, consultants, representatives, distributors, teaming partners, consortia and joint venture partners. The standards and procedures should include policies relating to:
    • gifts;
    • hospitality, entertainment and expenses;
    • customer travel
    • political contributions;
    • charitable donations and sponsorships;
    • facilitation payments; and
    • solicitation and extortion.
  • Develop compliance standards and procedures, "including internal controls, ethics and compliance programs on the basis of a risk assessment addressing the individual circumstances of the company, in particular the foreign bribery risks facing the company." This risk assessment should examine, among other factors, the company's:
    • geographical organization,
    • interactions with various types and levels of government officials,
    • industrial sectors of operation,
    • involvement in joint venture arrangements,
    • importance of licenses and permits in the company's operations,
    • degree of governmental oversight and inspection, and
    • volume and importance of goods and personal clearing through customs and immigration.
  • Review compliance procedures at least annually and update the standards as appropriate.
  • Assign implementation and oversight responsibilities to one or more senior executives who have "direct reporting obligations to independent monitoring bodies, including internal audit, [the] Board of Directors, or any appropriate committee of the Board of Directors." The official(s) should also possess the proper autonomy from management and the resources and authority to maintain that autonomy.
  • Develop financial and accounting procedures and internal controls designed to ensure the maintenance of accurate books, records and accounts to prevent their use in foreign bribery.
  • Implement policies to effectively communicate anti-corruption policies to directors, officers, employees and, in appropriate cases, agents and business partners. These policies should include
    • periodic training for all such relevant parties and
    • annual certification for all such relevant parties.
  • Establish or maintain an effective system for providing legal guidance to directors, officers and employees, providing internal reporting of potential violations and responding to reports of potential violations.
  • Implement disciplinary procedures to address violations of the anti-corruption laws and the company's compliance codes and procedures.
  • Exercise appropriate due diligence and implement compliance requirements to ensure proper oversight of agents and business partners. These requirements should include:
    • performing risk-based due diligence for "the hiring and appropriate and regular oversight of agents and business partners";
    • informing agents and business partners of the company's commitment to follow the laws against foreign bribery and of the standards, procedures and other measures the company has in place to detect and prevent bribery; and
    • seeking a reciprocal commitment from agents and business partners.
  • Include standard provisions in agreements and contracts with agents and business partners that are designed to prevent violations of the anti-corruption laws. These provisions might include, depending on the circumstances:
    • anti-corruption representations and undertakings;
    • rights for the company to conduct audits of the books and records of the agent of business partner;
    • rights for the company to terminate its relationship with an agent or business partner as a result of any breach of anti-corruption laws.
  • Conduct periodic review and testing of the standards, procedures and codes developed to comply with the FCPA and other anticorruption laws in order to improve the effectiveness of these standards, procedures and codes in deterring and detecting violations of the antitrust laws and the company's anti-corruption code.
  • Upon discovery of credible evidence of a violation of the anti-corruption laws, promptly report such conduct to the SEC.

As the DOJ and the SEC continue to aggressively enforce the anti-bribery provisions of the FCPA, companies must increasingly monitor their compliance programs to ensure they meet regulators' suggested "best practices" to reduce FCPA exposure. The RAE and Panalpina settlements provide guidelines against which companies can compare their existing compliance polices.

To learn more about our FCPA capabilities, please visit White Collar Defense & Compliance, Securities Litigation & Enforcement and Global Tradepractices.

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