Global regulations that impact the shipping industry

Publication | March 2015

Introduction

Businesses today face an increasingly complex framework of established and evolving legislation and civil, criminal and regulatory risk and this is no different in the shipping world. Jurisdictions such as the US, are realising that national boundaries are, perhaps, no longer a barrier to enforcing global standards.

In this article, we review two pieces of US legislation that impact the shipping industry, with contributions from Matthew Hodkin on the Foreign Account Tax Compliance Act (FATCA), and from Felice Galant on the Foreign Corrupt Practices Act (FCPA).

FATCA is here

FATCA was introduced by US legislation in 2010. Its aim was to oblige foreign (i.e. non-US) financial institutions to disclose information about US persons holding funds with them. Although, generally speaking, non-US institutions could not be required to disclose information to a foreign tax authority, the innovation introduced by FATCA was to provide that, if the financial institution did not provide the information on a voluntary basis, it would receive certain US-sourced payments under deduction of a 30 per cent withholding tax.

Imposing such a withholding tax may have created difficulties under international law and the double tax treaties entered into by the US. However, initial objections to the scope of FATCA on this basis were overridden as national tax authorities, following a lead set by the UK, France, Germany, Italy and Spain, realised that the information being provided might be equally as useful in their hands. Now, therefore, there exists a network of bilateral automatic information-sharing agreements between the US and over 30 jurisdictions, with another 40-plus jurisdictions having agreed, in principle, to share information. These jurisdictions include traditional bastions of banking secrecy, such as Liechtenstein and Switzerland.

This means that those with money in offshore bank accounts are increasingly unlikely to be able to keep that fact secret. It also means that, because of the withholding tax risk, we are increasingly seeing requirements in lending transactions for the parties to supply information to each other in order to comply with what are now domestic reporting requirements of the financial institutions involved.

Multilateral information sharing is on its way

The OECD has proposed a similar reporting standard to FATCA, this time to work on a multilateral basis (rather than simply being a mechanism to get information to the US). Under this new regime, financial institutions would be required to report to their domestic tax authorities the tax residence details of account holders. This information would then be shared between the tax authorities who had signed up to the automatic information sharing standard. The departure here, like with FATCA, is that the information is to be reported and shared automatically on a global scale.

Again this creates a regulatory issue for banks, who have to gather the information and report it, and others who face further regulation in addition to “know your client” and money laundering regulations. The long-term aim is to push those jurisdictions that wish to preserve banking secrecy (and, therefore, potentially facilitate tax evasion) to a position where they are no longer able to deal with institutions in “compliant” jurisdictions without having payments reported.

The OECD has expressed a desire for early adoption of this standard and more than 60 countries have committed to early adoption.

The FCPA

The long jurisdictional reach of the FCPA and its broad interpretation by US regulators can expose businesses in the shipping industry to significant potential FCPA liability. This most often occurs through the conduct of third party agents and local partners acting on a company’s behalf. Careful and thorough pre-relationship due diligence on such third parties, and training of company personnel to spot potential red flags, are critical to protect against, or at least minimize, FCPA risk.

The Elements of an FCPA Anti-Bribery Violation

The FCPA prohibits covered individuals or companies, and their officers, directors, employees, and agents, from offering, or providing, “anything of value” to a “foreign official”, to influence that or another official to assist with obtaining or retaining business or securing a business advantage. The US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are responsible for FCPA enforcement.

Persons subject to the FCPA include: (1) all US companies, citizens, or residents; (2) any non-US company listed on a US stock exchange; and (3) any non-US company or individual who executes any part of a bribery scheme within the US. Payments made by a third party on a covered person’s behalf can also trigger FCPA liability. Such third parties have included agents, subsidiaries, intermediaries, local partners, and joint venture partners, among others.

The FCPA also has “books and records” and “internal controls” provisions, which require issuers to maintain books and records that accurately reflect their transactions and assets. They further require that issuers maintain a system of internal accounting controls. While the DOJ and SEC cannot pursue books and records claims against non-issuers, they are considered corporate “best practices”.

The FCPA applies to conduct that occurs inside and outside the US. Companies and their officers, directors, employees, and agents may be prosecuted if they bribe a foreign official using the US mails, wires, or interstate or international travel. FCPA liability can arise even where the problematic conduct takes place entirely outside the US.

Each element of an FCPA bribery offense is far-ranging. The term “foreign official” includes any officer or employee of a non-US government or department, agency, or instrumentality of a non-US government (e.g. low-level employees of a government agency, such as window clerks, as well as high-level officials). The term also includes officers, directors, employees, and agents of non-US government-owned or controlled entities. The “anything of value” element is similarly broad, and includes cash, commercial paper (e.g. cheques, promissory notes, or other promise to provide anything of value), in-kind transfers, employment opportunities, donations, gifts, meals, drinks, entertainment, travel, hotel arrangements, or anything else that could objectively be considered to have value.

The requirement that the payment be made to obtain or retain business or secure a business advantage is also broad. It includes any type of business advantage, such as an exemption from tax (or a reduction thereof), securing or maintaining a contract (including receipt of confidential information to do so), the waiver of a legal requirement, and other preferential treatment. The “corrupt intent” element requires proof that the payment or offer was made to induce the foreign official to misuse his position. Disregarding or being wilfully blind to conduct that may signal a violation of the FCPA may also satisfy this element.

The facilitating payment exception

The FCPA’s facilitating exception excludes from its prohibitions so-called facilitating, or “grease” payments. These payments are generally small sums paid to expedite a routine, non-discretionary act that the official is required to perform in the ordinary course. It could include, for example, a small payment to expedite the issuance of a permit to which the paying party is otherwise entitled. Payments, even small ones, for the waiver of a legal requirement or reduction of taxes, do not fall within the facilitating payment exception. Because of how narrow the exception is, many companies prohibit or strictly limit them.

It is important to remember that the local laws of most countries do not recognize a facilitating payment-type exception.

Penalties

The penalties under the FCPA can be substantial. The criminal penalty for a bribery violation is up to $2 million (or twice the pecuniary gain) per violation for companies, and up to $250,000 per violation (or twice the pecuniary gain) as well as up to five years’ imprisonment, for individuals. An FCPA violation may also result in (1) debarment from government contracts; (2) the imposition of a corporate monitor; (3) reputational damages; and (4) litigation.

Consequently, companies (including financial institutions) should takes all steps necessary to minimize FCPA exposure. They should have in place robust, written anti-corruption policies and procedures and create a zero tolerance culture. They should conduct due diligence on third parties to the degree appropriate for the risk involved. The amount of due diligence should take into account the type of services, the historical corruption of the country in which the services will be performed, and whether any of the services are government-facing or require government approvals. Companies should ensure that all payments made by the company or on its behalf are supported by complete and accurate documentation. They should have internal controls sufficient to identify any potentially suspicious or improper payments. They should test those controls. Companies should train their personnel, and where appropriate, third party contractors, on all relevant anti-corruption laws, and maintain anonymous hotlines for company personnel to use.

Our global regulation and investigations practice was established earlier this year to help clients navigate the evolving global and cross-border regulatory, compliance and government enforcement environment. We offer a global platform that crosses industry sectors, practice areas, national boundaries and areas of regulation. This enables us to recognise local legal and cultural issues with sensitivity and to adopt a co-ordinated approach to multi-jurisdictional issues, employing our significant experience and resource across the globe.


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