Henri Belolo recently died. Not familiar with the name; you most certainly will be familiar with his most famous creation – The Village People. According to his obituary in the New York Times (NYT), “Belolo had been a music producer and executive in Morocco and France in 1977 when one night he and the composer Jacques Morali, his business partner, were at the Anvil, an after-hours gay nightclub in the West Village of Manhattan. They noticed a bartender who doubled as a dancer wearing a headdress and loincloth. As they watched, the man, Felipe Rose — who was wearing that outfit to honor his Native American father — attracted the attention of a man dressed as a cowboy.”
Belolo and Morali immediately saw the connect as “the characters of America. The mix, you know, of the American man.” Out of a chance encounter and vision came the Village People, a police officer, an Indian, a construction worker, a leather-clad biker, a cowboy, a cop and a sailor all became a hugely successful group at the end of the Disco Era, largely through their signature hit Y.M.C.A. The Village People were far different from anything else in mainstream music from 1977 to the early 1980s.
The Village People inform today’s topic of how business ventures are different risks than third-parties. 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 under compliance requirements such as those mandated by the Foreign Corrupt Practices Act (FCPA). 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, such as China and India, where there have been a number of FCPA enforcement actions involving US companies entering these markets via a JV. They 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, end up buying out the foreign partner so that they bring theJVinto 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 themdoing bribery and corruption; it is nowyoudoing the bribery and corruption.
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. Mike Volkov has said, “by definition 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 you resolve final disputes? All of these questions should be considered from the compliance 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 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 its 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 JVs, 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 will help facilitate a discussion that maybe people will begin to think about more of the issues, more of the risk parameters and perhaps put a better risk management strategy in place.
While you are considering all this, my suggestion would check out the follow Village People set list, all from YouTube.
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 firstname.lastname@example.org.
© Thomas R. Fox, 2019