In the final episode of this month’s series of One Month to More Effective Compliance for Business Ventures, I sat down with this month’s podcast sponsor, Mike Volkov, CEO of the Volkov Law Group to explore the key insight from this month’s series. It is that business ventures, whether joint ventures (JVs), partnerships, franchises, team agreements, strategic alliances or one of the myriad types of business relationships a US company can form outside the US are different than the usual risk presented by third parties. The problems for companies is that they tend to treat business venture risk the same as third party risk. They are different and must be managed differently.

These problems continue to exist in places like China and India where there have been a number of FCPA enforcement actions involving U.S. companies which enter these market via joint ventures. They have some sort of arms-length business relationship with a Chinese or Indian company; then they move to a joint venture relationship; and as the final step they end up buying out the foreign partner so that they bring the joint venture into the company. By the time of the full merger into the US organization, the corruption is so established and ingrained that it continues. Then it is no longer them doing bribery and corruption; it is now you doing the bribery and corruption.

Volkov explained it begins with the business reason for setting up the JV. The US company wants a connected, well-placed partner who can gain them influence in the foreign market. That foreign partner may be a government official, employee of a state-owned enterprise, or a state-owned enterprise itself. He noted “by definition then the JV relationship you are creating has risks in terms of why you are even doing business with them or even bringing them to the joint venture.” The next problem is in JV governance.

The first problem was why the JV was created but the next is how it will be created? Will it be 50/50 ownership between the US and foreign partner or something else? If its 50/50 how will you split the Board or other governing body. How will resolve final disputes? All of these questions should be considered from the FCPA perspective.

Next, what are the incentives of all the parties and what were the roles that everybody was going to take on regarding the business operation. Volkov said “if you have a 50/50 joint venture then you would have a situation where the joint venture itself retains third parties or distributors.” Whose third-party risk management program will be followed? What if red flags arise, who and more importantly, how will they clear them going forward.

Next is the JV going to use lobbyists and consultants to facilitate the JV operations. The foreign partner may want to hire without such third parties with no US partner input. The bottom line is that this is an incredibly high risk which requires more than just third party risk management strategies because you need to get into the guts of the business; how it was created, how it operates and then how is it going to operate.

A different situation comes into play with franchisors and international franchising. Here the issue may be one of control and you must look at the nature of the relationship between the parties in a franchise relationship. Most franchise agreements raise significant FCPA risks. They are outside the classic agent/distributor situation a business needs to take a hard look at the nature of the business venture or how it is operating, why the people have gotten together, next look at the intricacies of the business; and finally apply a risk analysis to the entire transaction.

In addition to the following the money issues present in every business relationship, the franchisee may also hire its own third parties, have its own interactions with foreign government regulators, need to train on compliance programs and of course have its own compliance program in place. Yet how many international franchisors have thought through all of these compliance requirements. Regarding franchising, it is both structure and oversight that are required. A company must use it full compliance tool kit in managing the relationship. Sitting back, putting compliance requirements in a franchise agreement will simply not suffice. There must be active management of the compliance risk going forward on an ongoing basis.

The bottom line is that may compliance practitioners have not thought through the specific risks of business ventures such as joint ventures, franchises, strategic alliances, teaming partner or others as opposed to sales agents or representatives on the sales side of the business. I hope that this series will help facilitate a discussion that maybe people will begin to think about more of the issues and more of the risk and perhaps put a better risk management strategy in place.

Three Key Takeaways

  1. Business ventures bring different FCPA risks from third parties.
  2. JVs have both external compliance risks and corporate governance risks.
  3. Use your compliance tool kit for business ventures in managing the FCPA risk for franchises.

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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