Phillip Kerr died last week. There are just a handful of writers I religiously rush to the bookstore to purchase new works when they are released. Kerr was one of them as he wrote one of the greatest modern day noir series which featured Berlin detective Bernie Gunther. There were several things that made Kerr’s works and Gunther stand out. The first was the laconic Gunther who was molded straight out of Sam Spade and Phillip Marlow. Second was the historical sweep of the 13 Gunther novels, which started with the rise of Hitler and the defeat of Germany, to continuing the Cold War in Europe and the Americas. The final thing was the moral dilemmas which Kerr always placed Gunther square in the middle of. As Kerr said of Gunther, as noted in his obituary in The Guardian, “Each book was aimed at painting Gunther into a corner “so that he can’t cross the floor without getting paint on his shoes”.”

As a historian, I loved the historical sweep of Kerr. In a Crime Fiction Lover article, it noted his first three novels are collectively known as ‘The Berlin Trilogy’ and were the novels, March Violets; The Pale Criminal; and A German Requiem. The books begin in 1936 and finish in 1947. In them, Kerr “introduced Bernie Gunther, an investigator with the Kriminalpolizei who has an instinct for justice but must carry out his work during the political turbulence of the 1930s in Germany. As Hitler comes to power, Gunther and his colleagues must join the Sicherheistdienst – the intelligence arm of the SS.” Kerr later placed Gunther in even greater moral ambiguity in investigating murder and mayhem during World War II (WWII) and in both Europe, Cuba and South America up until 1957, the year of his last novel Greeks Bearing Gifts, which will be published next week. Kerr showed “his readers what the War was actually like for a detective whose conscience could not be part of Hitler’s programme, but who as a German detective was forced to work in amongst some of the worst perpetrators.”

Kerr’s work demonstrated there was much more nuance in his mining of history. I thought about that sentiment in the context of business ventures, whether joint ventures (JVs), partnerships, franchises, team agreements, strategic alliances or one of the myriads of business relationships a US company can form outside the US. These types of business ventures are very different than the usual risk presented by third-parties under compliance requirements such as those mandated by the Foreign Corrupt Practices Act (FCPA). The problem 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.

Problems continue to exist in places like China and India where there have been a number of FCPA enforcement actions involving US companies which enter these markets via JVs. The companies have some sort of arms-length business relationship with a Chinese or Indian company; then they move to a JV relationship and as the final step they end up acquiring the foreign partner to merge into the parent company. By the time the merger is complete, the corruption is so established and ingrained that it continues. By then it is no longer “them” engaging in bribery and corruption but “you”.

Consider the business risk for JVs. 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. Michael Volkov has 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 issue is in JV governance. Will it be 50/50 ownership between the US company and a foreign partner or something else? If its 50/50 how will you split the Board or other governing body? How will disputes be resolved? All of these questions should be considered from the FCPA perspective.

Next, what are the incentives of all the parties and what roles will the business people take regarding business operations? 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 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 it is 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. If they are outside the classic agent/distributor situation a business needs to take a hard look at the nature of the business venture, how it is operating, why the people have gotten together, the intricacies of the business and finally apply a risk analysis to the entire transaction.

In addition to the “follow the money” issues present in every business relationship, the franchisee may 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 its full compliance tool kit in managing the relationship. Putting compliance requirements in a franchise agreement and sitting back will simply not suffice. There must be active management of the compliance risk going forward on an ongoing basis.

The bottom line is that many compliance practitioners have not thought through the specific risks of business ventures such as JV’s, franchises, strategic alliances, teaming partners or others as opposed to sales agents or representatives on the sales side of the business. Now is the time to facilitate discussions to consider the issues, risks parameters and perhaps put a better risk management strategy in place.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

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