Issue Presented 

Can a company change the terms of a contract to benefit a private citizen who becomes a foreign government official? 

Facts

In the facts of Opinion Release 14-01, the Requestor had purchased Foreign Company A in 2007, from the Foreign Shareholder when he was a private citizen. To guarantee Foreign Shareholder’s participation, the parties’ agreement contained a five-year lock-in period that prohibited Foreign Shareholder from selling his interest prior to January 1, 2012. The Agreement did, however, allow Foreign Shareholder to leave Foreign Company A before the end of the five-year period if he were appointed to a minister level position or higher in the Foreign Country’s government.

In December 2011, Foreign Shareholder became a foreign government official under the FCPA when he was appointed to serve as a high-level official at Foreign Country’s central monetary and banking agency (“Foreign Agency”). Foreign Agency is responsible for bank and financial industry regulation and monetary policy. Upon his appointment, the Foreign Shareholder ceased to have any role or function at Foreign Company A, other than as a passive shareholder.

The now the foreign government official desired to sell his final interest in the company. However, under the formula for the repurchase of his interest, said interest was at zero value, primarily due to the financial crisis of 2008-9. Apparently the now foreign government official threatened to either sue or sell his interest to a third party and the Requestor decidedly did not want either eventuality. The parties agreed to another form of valuation and sought approval from the DOJ through its Opinion Release procedure regarding how to pay the now foreign government official under this new valuation.

Representations by the Parties

The foreign government instrumentality involved did not regulate the Requestor but the Requestor has done business with it in the past and would continue to do so. The now foreign government official informed the DOJ that he had not in the past “influenced or sought to influence, any decisions by Foreign Agency, Foreign Country’s government, or any third party with respect to” the entities in question and would not do so in the future. Additionally, the Requestor provided separate internal communications to the employees of the entity in question to the effect that their former owner was now a foreign government official and that “he is prohibited from participating in any discussion, consideration, or decision, or otherwise influencing any decision relating to the award of business” to the entity in question.

There were three additional representations, which I found significant, they were:

  • Requestor obtained a representation the foreign government official disclosed his ownership interest and the proposed sale of the shares in the entity in question to the relevant government authorities and the relevant department at Foreign Agency, and the relevant government authorities informed him that they approved or did not object to the sale of the shares.
  • Foreign Shareholder warranted that any payment to him to purchase the shares would be made to him solely as consideration for the shares, not in his official capacity or in exchange for any present or expected future official action.
  • The Requestor has received written assurance from local counsel in Foreign Country that the purchase of the shares was lawful in Foreign Country.

DOJ Analysis

In its analysis, the DOJ focused on several factors. First, “legitimate business considerations, prompted and justified therenegotiation of the buyout formula contained in the 2007 Agreement.” The retention of a global accounting firm to serve as the independent and binding arbiter of the value of the Shares provided assurance that the payment reflects the fair market value of the Shares, rather than an attempt to overpay Foreign Shareholder for a corrupt purpose. Equally important was the transparency involved as there was disclosure by the government official to his government of the relationship and pending sale. Lastly, both the Requestor and the foreign government official involved had averred that he would not assist the US Company in obtaining or retaining business. Based upon the facts presented the DOJ did not see a FCPA violation.

Additional Considerations

For the compliance practitioner, there are several key points to consider. The first point is found in a footnote and it reads, “Following Requestor’s initial submission, the Department sent Requestor a letter seeking additional information on July 25, 2013. Requestor provided a partial response by letter on September 19, 2013, which was accompanied by significant backup documentation. Thereafter, the Department and counsel for Requestor had several follow up discussions to clarify certain issues. On February 13, 2014, Requestor provided a final submission that addressed the last outstanding issues raised by the Department.” This is the first time there was a time line laid out in an Opinion Release. This gives a compliance practitioner some idea of the time frames involved in the process.

The second is the use of representations and warranties by the parties. In Opinion Release 13-01 a key component was an opinion from the Chief Legal Office of the foreign official’s country that the conduct in question would not violate that country’s laws. However in 14-01, the DOJ accepted representations that the foreign official in question would not pass on business in which he either had an interest or help the Relator to ‘obtain or retain’ business with the agency at which the foreign official now worked. This type of evidence is something that a company should now consider when designing protocols to satisfy issues similar to those presented in 14-01.

Next is the quality and quantity of payment(s) to be made to the now foreign official to cash him out and purchase his interest. Here the parties agreed to an independent valuation by an internationally recognized accounting firm. This provides some type of arms-length analysis. It also provides a market based approach to the payment issue so that there is evidence of true (or perhaps truer) market value, not some arbitrary number agreed to by the parties.

Finally, all the parties seemed to have documented everything. This clearly states to me the need for documentation, which can be reviewed and assessed by a regulator. As I often say the three most important things in FCPA compliance are: Document, Document and Document. I believe that Opinion Release 14-01 makes this point even clearer.

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