When you bring two entities together to operate jointly, there are several difficult issues to analyze. For the US company operating under the FCPA, there must be an adequate business justification for a joint venture with a specific partner, all in writing and approved by an appropriate level of the organization. Mike Volkov has noted this is where the due diligence process comes into play. The due diligence process should be built on principles like those involving third parties. The procedure should be robust, documented and address all potential risks involved. A company should use its due diligence review of the JV partner to proper assess and uncover any corruption risk. Using this due diligence and its evaluation, you can then move to contractual clauses, certifications, representations and warranties from a JV partner or insist on other remedial measures to minimize its risk exposure.

Dennis Haist, the General Counsel and Chief Compliance Officer at Steele Compliance Solutions, Inc. in an article entitled, “Guilt by Association: Transnational Joint Ventures and the FCPA laid out some of the specifics that you should ask for in a due diligence review of prospective JV partners.

  1. Entity information
  • Entity name, DBA, previous names, physical address and contact information, website address.
  • Legal structure, jurisdiction of organization, date organized and whether the entity is publicly traded.
  • Entity registration number(s), and dates and places of registration; number of years in business.
  • Entity tax licenses, business licenses, or certificates or commercial registrations.
  • Description of business, customers, industry sectors.
  • Names, addresses and jurisdictions of formation for all companies or other affiliated entities, and ownership interest in each.
  • Names and contact information for main point of contact.
  • Names and contact information for entity’s outside accountants/auditors and primary legal counsel.
  1. Ownership information
  • Name, address, nationality, percentage of ownership and date of acquisition for each parent company up to ultimate parent.
  • Name, nationality, ID type/number, percent ownership and date of acquisition for all shareholders and owners.
  • Identity of any other persons having a direct or indirect interest in the entity’s equity, revenues or profits.
  • Identity of any other person able to exercise control over the entity through any arrangement or relationship.
  • Information on any direct or indirect ownership interest by any government, government employee or official; or political party, party official or candidate, and employee of any state-owned enterprise.
  1. Management information
  • Name, address, nationality, ID type/number and title for each member of the entity’s governing board.
  • Name, address, nationality, ID type/number and title for each officer of the entity.
  • Information on any other business affiliations of principals, owners, partners, directors, officers or key employees who will manage the business relationship.
  • Information on whether any principals, owners, partners, directors, officers or employees, currently or in the past, have been officials or candidates of a political party or been elected to any political office.
  1. Government relationships
  • Information on whether any principals, owners, partners, directors, officers or employees hold any official office or have any duties for any government agency or public international organization.
  • Information on whether any owners, directors, officers or key employees have an immediate family member who is an employee, contractor or official of the foreign government, or a public international organization.
  • Information on whether any employee of, or contractor or consultant to, any government entity or public international organization will benefit from the joint venture.
  • Approximate percentage of entity’s overall annual sales revenue derived from government sales.
  1. Business conduct
  • Information on whether the entity has ever been barred or suspended from doing business with a government entity. Information on whether any principals, owners, partners, directors, officers or employees are identified on any government designated nationals, blocked persons, sanction, embargo or denied persons lists.
  • Information on whether the entity, its principals, owners, partners, directors, officers or employees have ever been charged with, convicted of, or alleged to have been engaged in fraud, bribery, misrepresentation and/or any other criminal act.
  • Information on whether the entity, its principals, owners, partners, directors, officers or employees have been investigated for violating the FCPA or any other anti-corruption law.
  • Information on whether the entity has a compliance program which includes the prevention of bribery and information on the training of employees.
  1. References
  • Three or more unrelated business references, including a bank and existing client.
  1. Certification/authorization/declaration
  • Certification of accuracy.
  • Authorization to conduct due diligence, authorization for third parties to release data and consent to collection of data.
  • Anti-corruption compliance declaration.

In addition to asking for all this information, you must take care to document the entire process that your company goes through in the investigation and creating a foreign joint venture. (Dcoucment Document Document) It is equally important to remember that obtaining this information is only one step. A company must evaluate the information and follow up if responses to such inquiries warrant such action. A paper program is simply not good enough and can lead to serious consequences if Red Flags are not reviewed and cleared. This evaluation should also be documented so that if a regulator ever comes knocking you can demonstrate what you asked for, why, the response, your follow up and the details of your evaluation.

Finally, never forget the human factor. It is important to perform an in-person interview of your proposed joint venture partner. It is important that you meet them, see their facilities and assess them up close and personal. A US business looking to engage a joint venture partner must consider the people who make up its joint venture partner. As Mike Volkov has noted, “These people, in turn, act together or can be influences together, as part of the joint venture’s culture. This is what I mean by the human factor. A global company cannot ignore the human factor of its joint venture partner. It has to assess the culture, and more importantly, the key personnel who are part of the joint venture partner – the leaders, the go-to-people who get the job done, and the overall environment in which they operate.” As you will have to mesh what may be two very different cultures and understandings of compliance, it is important to assess how your potential joint venture partner will take these obligations before, rather than after you ink the JV agreement.

Three Key Takeaways

  1. Joint Venture due diligence must focus on the unique risks.
  2. Ask for a detailed list of information from your potential JV partner.
  3. Be sure to do onsite investigation of your potential joint venture partner.

 

This month’s podcast series is sponsored by Michael Volkov and The Volkov Law Group.  The Volkov Law Group is a premier law firm specializing in corporate ethics and compliance, internal investigations and white collar defense.  For more information and to discuss practical solutions to compliance and enforcement issues, email Michael Volkov at mvolkov@volkovlaw.com or check out www.volkovlaw.com.

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