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.

The first full day of the SCCE 2017 Compliance and Ethics Institute (CEI) featured a talk by Eugene Soltes, an associate professor at Harvard Business School and author of “Why They Do It”. For this book Soltes spent over seven years interviewing some 50 prominent white-collar criminals to learn what made them tick, why they blew it all, and what, if anything, distinguishes them from us. He eventually got to know Ponzi schemers Bernard Madoff and Allen Stanford, former Tyco Chief Executive Officer (CEO) Dennis Kozlowski, Enron Chief Financial officer (CFO) Andy Fastow, ImClone CEO Samuel Waksal, McKinsey partner Anil Kumar, KPMG partner Scott London, and many others.

The book came from a rather innocuous source, the television show on MSNBC called Lockup – which he described as a cross between a reality and documentary show. The programs were about criminals, mostly violent offenders, but it got Soltes to wondering about nonviolent offenders, what made them do what they did to break the law and get convicted and why they did the acts which got them convicted. He wrote down the ten questions that came to mind and sent letters to several prominent white-collar criminals.

What I found most interesting was that many of the felons he interviewed could not accurately describe why they engaged in the conduct they did. Most of them were well to do, successful professionals who did not need the money. Why did they engage in the conduct? There was some rationalization along the lines of the fraud triangle’s three sides. But many seemed to point towards what fraud examiner Jonathan Marks says is really a Pentagon shaped fraud symbol where arrogance comes into play. Simply put the persons Soltes interviewed never thought they would get caught. Moreover, it never even entered their consciousness that they could be caught. Yet Soltes found they are largely like us.

In an interview in Fortune online by Roger Parloff, Soltes noted, “The main challenge that not just managers face, but that we all face as humans, is that we’re not hardwired to detect harm that we’re doing when the harm is distant. It’s not enough to know the difference between right and wrong. One should feel that one’s actions are harmful to avoid going forward. So take something like insider trading. You don’t see the victims. It’s impossible in many instances to identify who those victims are. So, it’s not surprising that if you engage in insider trading, there’s not going to be any internal alarm screaming out that you’re engaging in some extraordinarily heinous crime.”

Soltes went on to say, “There’s a trait associated with being a leader of any large firm. We have people who are CEOs and CFOs come regularly to Harvard Business School and there’s a lot of similarities. You don’t become head of large firm by luck. There are some characteristics of temperament that allow you to get there. Temperament, discipline, and self-control are crucial.I see momentary lapses of self-control and restraint as being one of the things that undermined the executives in my book. They showed discipline and self-control for decades. But we all have momentary lapses.”

For the compliance professional, the question is how does this impact a bestpractices compliance program? There is one school of thought that says 5% of your employee base can never be reached through training. Basically, they must be written off as you will never be able to communicate ethical values to them. If you accept this as true, the response is that another part of your compliance program must compensate for this deficiency. The way to make up for this is to have a more robust hiring program, focusing on the compliance and ethical background of your high-risk candidate, meaning those which could put your company at risk for compliance violations, stealing money through fraud or other conduct which might damage the reputation of your organization.

This is also where the process of compliance is so important. It means having internal controls in place to pick up and detect such conduct. It also means having oversight or a second set of eyes as process validation of your program going forward. It can also mean putting a process in place where the person who is about to engage in illegal conduct can be made to see how their actions going forward will have consequences. Soltes said that a compliance process can help them to be in a place that they not only need to be in but want to be. He pointed to the recent Nobel Prize award to behavioral economist Richard Thaler to illustrate the point that in many ways compliance and ethics programs are behavioral engineering, helping to nudge people to act as they see themselves; basically, as honest hard working individuals.

It was this final takeaway that I found so powerful. Your compliance program is not simply a set of rules and regulations but one that influences behavior. This insight explains why there should not be a compliance defense appended to anti-corruptions laws such as the Foreign Corrupt Practices Act (FCPA). For it is only in the operationalization of compliance that a program moves towards this type of influencing. Just as Thaler’s research informs the modern compliance program, Soltes work also demonstrates that is through the doing of compliance that a program can function on all levels.

 

 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, 2017

Just as the FCPA enforcement field is covered with actions centering around mergers and acquisitions, there are multiple actions involving joint ventures (JVs). JVs continue to plague many US companies up to this day. In many ways, JVs present more difficult issues for the compliance practitioner than mergers and acquisitions because of the control issues present in JVs with foreign governments or state owned enterprises ownership.

In an article in the Virginia Law & Business Review, entitled “Traversing the Minefield: Joint Ventures and the Foreign Corrupt Practices ActDaniel Grimm explained that JVs can provide a variety of benefits to a company desiring to enter an international market. Some of the benefits can include; satisfying a local content or partner requirement, a method of international expansion under “which outside investors benefit from the knowledge of local firms while retaining “some operational and strategic control” over the enterprise”; all with a lower overall cost for both resources and integration than required through a traditional corporate merger. Yet these same benefits can also bring greater FCPA risks.

Mike Volkov in an article entitled, “Digging Down on Joint Ventures and FCPA Compliance” noted that when you create a JV, there are a number of difficult issues to analyze. Initially, is the requirement of adequate due diligence. This is more difficult than in a traditional merger. Next is the set of governance issues surrounding control of the JV. If your JV partner is a state-owned enterprise, the issues become even more complex.  The interactions between the company and the state-owned enterprise within the joint venture itself should be regulated so that they are not perceived as intended to improperly influence the state owned enterprise, “either directly or in other areas of interaction.” Even if JV involves a private, as opposed to state-owned partner, the compliance issue then becomes the controlling the actions of the JV sales people, JV staff responsible for regulatory interactions, and JV-retained third party agents and distributors.

A new JV creates a new set of risks for the company subject to the FCPA. In the JV context, the company has, by definition, less control.  As a result, these issues need to be addressed in the formation of the JV. The issue becomes even more difficult when the company entering the JV has less than 50 percent control.  Grimm noted that “An issuer with a minority stake in another entity is required to “proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances,” to cause the entity to comply with the books and records and internal controls provisions of the FCPA. Relevant circumstances include “the relative degree of the issuer’s ownership” and “the laws and practices governing the business operations of the country” in which the entity is located.”

As early as 2002, in the SEC FCPA enforcement action involving BellSouth, which owned only 49% of a JV in in Telefonia Celular de Nicaragua, S.A. (“Telefonia”), a Nicaraguan corporation that relinquished operational control to an indirect, wholly-owned BellSouth subsidiary. Relying on the FCPA’s good faith influence requirement for an issuer holding a minority stake in another entity, the SEC alleged that BellSouth “held less than 50 percent of the voting power of Telefonia, but through its operational control, had the ability to cause Telefonia to comply with the FCPA’s books and records and internal controls provisions.”

There are multiple types of FCPA liability to a parent for the actions of a JV in which it is a partner. These can include directly liability such as with Halliburton and its former subsidiary KBR in the TSJK JV involved in bribery and corruption in Nigeria. Halliburton paid a total FCPA penalty of $579MM to the US and $25MM to the Nigerian government of the actions of its subsidiary, KBR.

In addition to the traditional direct liability, JVs can be a source of vicarious liability. Grimm noted that “A business entity may, depending on the circumstances, be held vicariously liable for FCPA violations committed by a joint venture, a joint venture partner, or an agent acting on behalf of a joint venture. Vicarious liability traditionally applies in situations where a business entity authorized, directed, or controlled acts that violate the FCPA’s anti-bribery provisions.” It could also violate the accounting provisions around keeping accurate books and records and effective internal controls. This was the situation involving 2016 enforcement action involving Anheuser-Busch InBev, in India, where the company paid $6 million to settle charges that it violated the FCPA and impeded a whistleblower who reported the misconduct.

Mike Volkov identified other risks that a company must seek to avoid. These include the transfer of things of value to a state-owned enterprise for benefits of someone outside the joint venture. A company must avoid payments for which there is no legitimate business purpose to the state-owned enterprise in the joint venture itself; as they will be deemed to be illegal benefits to the state-owned enterprise outside the joint venture. In this case, the joint venture becomes a vehicle by which to disguise bribery payments for benefits to those outside the joint venture.

Any company which operates a JV with foreign governments or state-owned enterprises holds the same FCPA risk as the JV partner itself; the risks become apparent relating to the operation of the joint venture itself. This means that if the joint venture interacts with foreign government officials or employee of a state-owned enterprise and leverages its state-owned enterprise relationships for an improper benefit either contracts and/or regulatory licenses, permits or customs approvals; it could well be subject to FCPA scrutiny. Unfortunately, it is often difficult to regulate a JVs interactions with foreign government officials, particularly when your partner is a state-owned enterprise, or where your company is relying on the local company for its local contacts and expertise for business development and/or regulatory knowledge and experience in the country where the JV operates.

The bottom line is JVs present a unique set of FCPA risks for the compliance practitioner. You will need to incorporate risk manage techniques in all phases of the JV relations; pre-formation, the JV agreement and in operations after the JV has begun operation. The compliance obligations and compliance process are ongoing.

Three Key Takeaways

  1. Joint Ventures present unique FCPA risks.
  2. Control is only one issue a compliance practitioner must consider in evaluating joint venture risks.
  3. Companies continue to have significant FCPA risks from joint ventures.

 

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.

I am writing this today from the Society of Corporate Compliance and Ethics (SCCE) 2017 Compliance and Ethics Institute (CEI). This is the largest annual gathering of compliance professionals anywhere and it is already off to a great start on the Sunday pre-conference events. I participated in two such events the Speed-Networking and Speed-Monitoring and my participation in both events informs today’s blog post.

In both sessions I met with some compliance professionals who were either new to the field or were one-person compliance shops in their organizations. They were struggling with where to go for resources and support. In speaking with both groups of folks, I tried to drive home a couple of key components of the SCCE 2017 CEI and beyond that which I believe are central to the experience of compliance professionals literally across the world.

The compliance profession is different than any other corporate profession that I have been a part of or have observed. The first is that there are no trade secrets in compliance to protect. The principals of a best practices compliance program are well-known. Whether you follow the Ten Hallmarks of an Effective Compliance Program, the Six Principles of Adequate Procedures, the US Sentencing Guidelines or some other recognized standard; every compliance practitioner has access to them. You can always adapt them to your organization.

The second thing about the compliance profession is that you are never alone. Unlike other corporate functions where lawyers from major energy companies are all in room, which might draw the attention of the Department of Justice (DOJ) Anti-Trust division, the compliance function is well known for its collaborativeness. A compliance professional can pick up the phone and call another compliance professional who has faced the same or similar situation. Even if this first level of contact does not have the experience required, there will be someone in the concentric circles outward who has faced the same dilemma.

For a new compliance professional the most expeditious thing to do is join your local ethics and compliance organization. For Houston, that is the Greater Houston Business and Ethics Roundtable (GHBER). From the national perspective, the largest organization by far is the SCCE. Membership not only gives you access to a wide range of conferences, resources and tutorials but also membership in a diverse group of like-minded professionals.

Jay Rosen and I were joined by Louis Sapirman, Chief Compliance Officer (CCO) at Dun & Bradstreet, Inc. (DNB), to record our first live podcast of This Week in FCPA. The recording can be found on my Facebook feed and I will post the audio portion as a podcast later this week. Both spoke expressively about not only what they saw at the event but also how this conference allowed them both the opportunity to give back to the profession of which they have both been a part for several years. It was eloquent testament to the character of those in the compliance profession.

My thought to the compliance professional out there is that you are not alone. All you have to do is reach out and there will be someone there to answer your question. I met a female compliance professional from the mid-west who was looking for a female compliance mentor in the Chicago area. I later saw one of my good friends who fits that bill to the letter. I asked her if she would be willing to mentor the woman and she immediately responded yes.

Her response speaks directly to what makes the compliance profession so unique. Immediate outreach followed by immediate acceptance. Compliance professionals are always willing to help out other compliance professionals. This is very different from the mental makeup of the corporate legal department which circles the wagons to fulfill its role to protect the corporation.

The evening’s event was a tailgate held in the section of the conference where the vendors are located. People were encouraged to wear shirts from their favorite teams and many of did. Needless to say, my Astros jersey was well received. But more than using sports favorites to break the ice, the event held more importance for the compliance profession. Unlike many other conferences, at SCCE vendors are viewed as part of the solution to compliance. Many vendors now gear their marketing efforts around the CEI and will announce new products or service offering at the conference. This makes it a quite exciting time, with many innovative practices appearing on the compliance scene.

If you are not at this year’s event, I hope you will mark it down on your calendar. It is scheduled to return to Caesar’s Palace next October from the 14th to the 19th. I hope you will plan to join. I guarantee it will be worth your while. If you are at this year’s event I hope you will join myself and Louis Sapirman Monday as we speak on the convergence of many different forms of compliance such as anti-corruption compliance, export control compliance, anti-money laundering compliance, data protection compliance and finally as we all learned last week that sexual harassment is a compliance issue and how Harvey Weinstein may change the face of compliance as we know it going forward.

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, 2017

One of my favorite words in the context of Foreign Corrupt Practices Act (FCPA) enforcement is dis-link. It a useful adjective in explaining how certain conduct by a company must be separated from the winning of business and more broadly it works on many different levels when discussing the FCPA. This concept of dis-linking was most prominently laid out in Opinion Release 14-02 (14-02). It provided one of the most concrete statements from the DOJ on the unidimensional nature of compliance in the mergers and acquisition context; both in the pre-acquisition and post-acquisition phases.

In this Opinion Release the Requestor was a multinational company headquartered in the United States. The Requestor desired to acquire a foreign consumer products company and its wholly owned subsidiary (collectively, the “Target”), both of which were incorporated and operated in an un-named foreign country. It never issued securities in the United States and had negligible business contacts in the US, including no direct sale or distribution of their products. During its pre-acquisition, due diligence of the Target, Requestor identified several likely improper payments by the Target to government officials of Foreign Country, as well as substantial weaknesses in accounting and recordkeeping. Considering the bribery and other concerns identified in the due diligence process, Requestor also detailed a plan for remedial pre-acquisition measures and post-acquisition integration steps. Requestor sought from the DOJ an Opinion as to whether the Department would then bring an FCPA enforcement action against Requestor for the Target’s pre-acquisition conduct. It was specifically noted that the Requestor did not seek an Opinion from the Department as to Requestor’s criminal liability for any post-acquisition conduct by the Target. 

Pre-Acquisition Due Diligence

In preparing for the acquisition, Requestor undertook extensive due diligence aimed at identifying, among other things, potential legal and compliance concerns at the Target. Requestor retained an experienced forensic accounting firm (“the Accounting Firm”) to carry out the due diligence review. This review brought to light evidence of apparent improper payments, as well as substantial accounting weaknesses and poor recordkeeping. The Accounting Firm reviewed approximately 1,300 transactions with a total value of approximately $12.9 million with over $100,000 in transactions that raised compliance issues. The clear majority of these transactions involved payments to government officials related to obtaining permits and licenses. Other transactions involved gifts and cash donations to government officials, charitable contributions and sponsorships, and payments to members of the state-controlled media to minimize negative publicity. None of the payments, gifts, donations, contributions, or sponsorships occurred in the US, none were made by or through a US entity and none went through a US bank.

The due diligence showed that the Target had significant recordkeeping deficiencies. Further, the records which did exist did not support the clear majority of the cash payments and gifts to government officials and the charitable contributions. There were expenses that were improperly and inaccurately classified. The accounting records were so disorganized that the Accounting Firm was unable to physically locate or identify many of the underlying records for the transactions. Finally, the Target had not developed or implemented a written code of conduct or other compliance policies and procedures, nor did the Target’s employees show an adequate understanding or awareness of anti-bribery laws and regulations.

Post-Acquisition Remediation

The Requestor presented several pre-closing steps to begin to remediate the Target’s weaknesses prior to the planned closing in 2015. Requestor aimed to complete the full integration of the Target into Requestor’s compliance and reporting structure within one year of the closing. Requestor presented an integration schedule of the Target into the acquirer which included various risk mitigation steps, communications and training on compliance procedures and policies, standardization of business relationships with third parties, and formalization of the Target’s accounting and recordkeeping in accordance with Requestor’s policies and applicable law.

DOJ Analysis

The DOJ noted black-letter letter when it stated, ““It is a basic principle of corporate law that a company assumes certain liabilities when merging with or acquiring another company. In a situation such as this, where a purchaser acquires the stock of a seller and integrates the target into its operations, successor liability may be conferred upon the purchaser for the acquired entity’s pre-existing criminal and civil liabilities, including, for example, for FCPA violations of the target. However, this is tempered by the following from the 2012 FCPA Guidance, “Successor liability does not, however, create liability where none existed before. For example, if an issuer were to acquire a foreign company that was not previously subject to the FCPA’s jurisdiction, the mere acquisition of that foreign company would not retroactively create FCPA liability for the acquiring issuer.””

As none of the payments were made in the US, none went through the US banking system and none involved a US person or entity that this would not lead to a creation of liability for the acquiring company. Moreover, there would be no continuing or ongoing illegal conduct going forward because “no contracts or other assets were determined to have been acquired through bribery that would remain in operation and from which Requestor would derive financial benefit following the acquisition.” Therefore, there would be no jurisdiction under the FCPA to prosecute any person or entity involved after the acquisition.

The DOJ also provided this additional information, “the Department encourages companies engaging in mergers and acquisitions to (1) conduct thorough risk-based FCPA and anti-corruption due diligence; (2) implement the acquiring company’s code of conduct and anti-corruption policies as quickly as practicable; (3) conduct FCPA and other relevant training for the acquired entity’s directors and employees, as well as third-party agents and partners; (4) conduct an FCPA-specific audit of the acquired entity as quickly as practicable; and (5) disclose to the Department any corrupt payments discovered during the due diligence process. See FCPA Guide at 29. Adherence to these elements by Requestor may, among several other factors, determine whether and how the Department would seek to impose post-acquisition successor liability in case of a putative violation.”

Discussion

The DOJ communicated several important messages through 14-02. First it demolished the myths of springing liability to an acquiring company in the FCPA context and buying a FCPA violation, simply through an acquisition; there must be continuing illegal conduct for FCPA liability to arise. Most clearly beginning with the 2012 FCPA Guidance, the DOJ and SEC have communicated what companies need to do in any M&A environment. While many compliance practitioners had only focused on the post-acquisition integration and remediation; the clear import of 14-02 is to re-emphasize the importance of the pre-acquisition phase.

Due diligence must begin in the pre-acquisition phase. The steps taken by the Requestor in this Opinion Release demonstrate some of the techniques you can use in the pre-acquisition phase include (1) having your internal or external legal, accounting, and compliance departments review a target’s sales and financial data, its customer contracts, and its third-party and distributor agreements; (2) performing a risk-based analysis of a target’s customer base; (3) performing an audit of selected transactions engaged in by the target; and (4) engaging in discussions with the target’s general counsel, vice president of sales, and head of internal audit regarding all corruption risks, compliance efforts, and any other major corruption-related issues that have surfaced at the target over the past ten years.

Whether you can make these inquiries or not, you will also need to engage in post-acquisition integration and remediation. 14-02, taken together with the steps laid out in the 2012 Guidance, has provided the post-acquisition actions a compliance professions needs to take after the transaction is closed. If you cannot perform any or even an adequate pre-acquisition due diligence, the time frames you put in place after the acquisition closes will need to be compressed to make sure that you are not continuing any nefarious FCPA conduct going forward.

But it all goes back to dis-linking. If a target is engaging in conduct that violates the FCPA but the target itself is not subject to the jurisdiction of the FCPA, you simply cannot afford to allow that conduct to continue. If you do allow such conduct to continue your company will be actively engaging and participating in an ongoing FCPA violation. That is the final takeaway from this Opinion Release; it is allowing corruption and bribery to continue which brings companies into FCPA grief. Opinion Release 14-02 provided you a roadmap of the steps you can take to prevent such exposure.

Three Key Takeaways

  1. In the M&A context, the key is to dis-link any illegal conduct going forward.
  2. Opinion Release 14-02 provides the clearest roadmap for pre-and post-acquisition compliance actions in the M&A context.
  3. Never forget the Opinion Release procedure. It has been used successfully in two important M&A matters (08-02 and 14-02).

 

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.