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.

In this episode, I visit with Doreen Edelman, a partner at Baker Donelson on the top FCPA enforcement action of 2017, the Telia Company matter. We discuss the background facts of the case; we explore the amount of the fines and penalties, were they too high or were they too low; we consider the involvement of senior management right up to the CEO and the Board’s role; we explore the multiple lessons for the compliance professional, the CCO, senior management and the Board of Directors. We conclude with what the enforcement action means going forward and the increase in international enforcement, cooperation and investigation in anti-corruption.

Doreen Edelman can be reached at dedelman@bakerdonelson.com.

Doreen blogs on export control and trade issue concerns at Export Control Matters.

In this episode, I have back James Koukios, a partner in the law firm of Morrison and Foerster. We review some of the top FCPA and international anti-corruption cases and issues which have occurred over the summer of 2017. The topics are based on the firm’s most excellent monthly newsletter Top Ten International Developments for Anti-Corruption, which is available at no charge on the firm’s website. In this podcast, we discuss topics from the following newsletters:

From the June newsletter 

  1. The Supreme Court decision in Kokesh-what does it mean for prosecutors, what does it mean for compliance practitioners and does it change the calculus around self-disclosure?
  2. DOJ Continues to Pursue “Declinations with Disgorgement.” What does this mean for companies going forward? Should it encourage or discourage self-disclosure?
  3. DOJ Files Forfeiture Complaint in connection with Alleged Malaysia Bribery Scheme. How does this tool relate to anti-corruption enforcement? Why is it such a powerful tool for prosecutors?

From the July newsletter

  1. The Halliburton FCPA enforcement action. What does it mean for the compliance practitioner?
  2. Three Long-Standing Corporate FCPA Investigations End without Charges. What can be learned from these cases about enforcement going forward?
  3. Dimitri Harder was sentenced to Five Years’ Imprisonment for FCPA Violations. What was the basis of the sentence? Do you see anything in this sentencing unusual?
  4. Was the Second Circuit decision in the FOREX trading case a setback for International Law Enforcement Cooperation? What is compelled testimony? What are the implications for international cooperation going forward?

From the August newsletter

  1. Following Undercover Investigation, DOJ Charges Retired U.S. Army Colonel with Conspiring to Bribe Haitian Officials. How do undercover operations work in the FCPA and what they might mean going forward?
  2. UK Financial Reporting Council Announces Plans to Require Increased Anti-Corruption and Bribery Disclosures. What does this mean for US companies doing business in the UK?

Check out the firm’s newsletter or better yet subscribe to it.

The top compliance roundtable podcast is back with a wealth of new topics.

  1. Matt Kelly opens with a discussion of the Equifax data breach and its implications for the compliance profession.

For Matt Kelly’s posts on the Equifax data breach and cybersecurity, see the following:

Vendor, Cybersecurity Risk, Ugh

Clayton, Congress Talk Cybersecurity

  1. Jonathan Armstrong considers the Uber situation in London where it recently lost it license to do business from the regulator Transportation for London (TfL). He discusses a prior case that he handled which had similar issues.
  2. Jay Rosen considers the massive FBI undercover operation resulting in 10 arrests in college basketball for corruption regarding high school recruits.
  3. Tom Fox sits in for Mike Volkov, who is on assignment this week. He discusses the top FCPA enforcement action of all-time, the recently announced Telia enforcement action.

For Tom Fox’s posts on the Telia enforcement action, see the following:

The Telia FCPA Resolution, Part I – Introduction

The Telia FCPA Enforcement Action: Part II – The Bribery Schemes

The Telia FCPA Enforcement Action: Part III – The Individuals

Telia FCPA Enforcement Action: Part IV – Getting Some Monies Back

Telia FCPA Enforcement Action: Part V-Lessons Learned

The gang is back with rants which follow the discussions.

The members of the Everything Compliance panel include:

  • Jay Rosen– Jay is Vice President, Business Development Corporate Monitoring at Affiliated Monitors. Rosen can be reached at JRosen@affiliatedmonitors.com
  • Mike Volkov – One of the top FCPA commentators and practitioners around and the Chief Executive Officer of The Volkov Law Group, LLC. Volkov can be reached at mvolkov@volkovlawgroup.com.
  • Matt Kelly – Founder and CEO of Radical Compliance, is the former Editor of Compliance Week. Kelly can be reached at mkelly@radicalcompliance.com
  • Jonathan Armstrong – Rounding out the panel is our UK colleague, who is an experienced lawyer with Cordery in London. Armstrong can be reached at armstrong@corderycompliance.com

Today, I want to consider some of the key FCPA enforcement actions involving mergers and acquisition. These cases and the 2012 Guidance have made clear that Justice Department and SEC will vigorously prosecute companies which allow bribery and corruption to continue after a merger or purchase occurs. The key point to remember is that if a company was engaging in bribery and corruption before it was acquired and continues to do so after the transaction is completed, it is now you which is engaging in bribery and corruption, not them. 

Syncor International Corporation (2002)

  1. Allegations- Cardinal Health, Inc. acquired Syncor International Corporation, a radiopharmaceutical company based in California. Between 1997 and 2002, Syncor’s Taiwanese subsidiary made improper commissions payments totaling $344,000, to physicians who were employed by state-owned hospitals to influence the doctors’ decision to buy Syncor products and services. Another $600,000 in corrupt payments were made through Syncor’s foreign subsidiaries in Mexico, Belgium, Luxembourg, and France. All payments were authorized by and with the knowledge and approval of Syncor’s Founder and Chairman.
  2. Penalties-Syncor Taiwan Inc., a wholly owned subsidiary of Syncor International Corporation, pled guilty to substantive violations of the FCPA’s anti-bribery and books and records provisions, was sentenced to 3 years of supervised probation and ordered to pay a US $2 million fine. The company also agreed to pay a $500,000 civil penalty and to cease and desist in future violations and was required to retain an independent consultant to review and make recommendations concerning the company’s compliance policies and procedures. At the time, it was the largest penalty ever obtained by the SEC in an FCPA case.
  3. Key Lessons Learned- This was the first time the DOJ charged a foreign company under the 1998 amendments, for taking acts place in the US (i.e., Chairman’s approval). Parent liability was established through the foreign subsidiary’s books and records and employees of a state-owned entity are instrumentalities of the government. This case also demonstrated how a government investigation can slow the closing of an acquisition as the acquisition by Cardinal Health was delayed until the investigation was concluded and agreements were struck with the DOJ and SEC. The acquirer brought Syncor for a lower price than originally negotiated.

Titan Corporation (2005)

  1. Allegations- This case involved the acquisition of Titan Corporation, by Lockheed Martin Corporation but perhaps most importantly, the acquisition ultimately failed. Titan employed a consultant and paid $3.5 million to a known business advisor of the President of Benin. Of the $3.5 million paid to the advisor, approximately $2 million were indirect contributions to the President’s re-election campaign. At the direction of a Titan senior officer, at least two payments of $500,000 each were wired from Titan’s bank account in San Diego, California, to the agent’s account in Monaco. The remaining payments were made to the agent in cash. Payments were characterized on Titan’s books and records as “social program payments” that were required by its contract with the government, the company also falsified documents to enable its agents to under-report local commission payments in Nepal, Bangladesh, and Sri Lanka. Finally, Titan falsely reported to the US government commission payments on equipment exported to Sri Lanka, France, and Japan.
  2. Penalties- Titan pled guilty to substantive violations of the FCPA’s anti-bribery and books and records provisions, as well as a tax violation, was sentenced to 3 years of supervised probation and ordered to pay a $13 million fine. SEC alleged violations of the FCPA’s anti-bribery and books and records provisions. Titan agreed to pay the SEC and additional $15.5 million in disgorgement and prejudgment interest penalties and a $13 million penalty, which was satisfied by payment of the criminal fines. Titan was required to retain an independent consultant to review its compliance procedures and to adopt its recommendations. Finally, the SEC issued a 21(a) Report criticizing Titan’s proxy statement for incorporating what it deemed false FCPA representations and warranties. Most importantly for Titan, its acquisition by Lockheed-Martin ultimately failed.
  3. Key Lessons Learned-some of the basic tenets of a compliance program were laid out in this enforcement action. They included: a company must conduct meaningful due diligence with respect to foreign agents and consultants and must ensure that the services alleged to be performed are provided. Internal controls must be designed to detect “red flags,” such as offshore payments and inconsistent invoices. From the M&A perspective, representations and warranties in a merger agreement must be accurate (or qualified) when included in a proxy statement. There can be a risk of additional prosecution under the International Traffic in Arms Regulations (ITAR) and possible suspension of export privileges, potential US and foreign tax exposure and possible contractor debarment issues by the Department of Defense. Ultimately and most importantly from the business perspective, the merger failed when Titan was unable to meet contractual agreement to settle with the US government by a certain time.

Latin Node (2009)

  1. Allegations-In June 2007, eLandia acquired Latin Node, which provided wholesale telecommunications services to several developing countries by leasing lines from local phone companies, in Latin America for $20 million. In August 2007, during a post-acquisition financial integration review, eLandia discovered evidence that Latin Node had paid approximately $2.25 million in bribes to Honduran and Yemeni government officials between March 2004 and June 2007. Subsequently, eLandia voluntarily reported the payments to DOJ, eventually paying a $2 million fine and placing Latin Node into bankruptcy and thereby losing its entire investment.
  2. Penalties-Latin Node pled guilty to a one-count criminal information as part of a plea agreement with the government. Under the agreement, Latin Node agreed to pay a $2 million criminal fine, a $400 special assessment and agreed to continue its cooperation with the government. Four Latin Node executives were charged with criminal conduct for their actions. They were Jorge Granados, 54, the company’s former CEO; Manuel Caceres, 64, a former vice president; and Juan Pablo Vasquez, the chief commercial officer; and Manual Salvoch, the company’s former CFO. All four pled guilty.
  3. Key Lessons Learned-This was the first FCPA enforcement action based entirely on pre-acquisition conduct that was unknown to the buyer when the transaction closed. The purchaser’s entire $22+ million investment in Latin Node was wiped out due to inflated acquisition price of corrupt company and investigation costs. All of this demonstrated the need for rigorous pre-acquisition due diligence in addition to the post-acquisition integration. It also exposed individuals to the real possibility of jail time for their actions.

There have been several M&A cases since these three but they set the model for the DOJ’s prosecution going forward. Every compliance practitioner should be aware of these cases and communicate to management that one of the most well settled areas of FCPA enforcement is around M&A. Simply put if you do not engage in appropriate pre-acquisition due diligence and there continues to be ongoing bribery and corruption after you acquire an entity, your company will bear the brunt of any prosecution. 

Three Key Takeaways

  1. FCPA enforcement in the M&A space is one of the most well settled areas of enforcement.
  2. Failure to perform pre-acquisition due diligence can significantly devalue a purchased asset.
  3. Always remember that if bribery continues after an acquisition it is no longer them engaging in bribery and corruption but you who are engaging in bribery and corruption.

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.