As I conclude this section on joint ventures, I want to emphasize again the risk they pose under the FCPA. Mike Volkov has stated, “A joint venture requires the integration of disparate company cultures. It can be successful, and is usually one of the significant reason for the joint venture itself.” Both parties should assess each other and decide that the joint venture is a good fit, meaning that each side will benefit. Too much time is spent on looking at the joint venture partner’s compliance toolbox (e.g. policies, procedures, and controls), and not enough time is spent on identifying compliance strengths and weaknesses. You must bring it all together with one format.

While the 2012 FCPA Guidance only provided that “companies should undertake some form of ongoing monitoring of third-party relationships”. This means that you must have an experienced compliance and audit team, actively engaged in the corporate office and in the business units, to ensure that financial controls and compliance policies are followed and that remedial measures for violations or gaps are tracked, implemented and rechecked, as additional detection and prevention. Caldwell noted it is a more encompassing “sensitization” to anti-corruption compliance that is needed. There are several ways for you to do so in a joint venture relationship. 

The starting point for the both the compliance and business management of a joint venture, is a Relationship Manager for every joint venture with which your company does business. The Relationship Manager should be a business unit employee who is responsible for monitoring, maintaining and continuously evaluating the relationship between your company and the joint venture. Some of the duties of the Relationship Manager may include:

  • Point of contact with the joint venture for all compliance issues;
  • Maintaining periodic contact with the joint venture;
  • Meeting annually with the joint venture to review its satisfaction of all company compliance obligations;
  • Submitting annual reports to the company’s Compliance Oversight Committee summarizing services provided by the joint venture;
  • Assisting the company’s Compliance Oversight Committee with any issues with respect to the joint venture.

Just as a company needs a subject matter expert in compliance to be able to work with the business folks and answer the usual questions that come up in the day-to-day routine of doing business internationally, joint ventures also need such access to such a resource. A joint venture may not be large enough to have its own compliance staff so a company should provide such a dedicated resource to joint venture, if so required. I do not believe that this will create a conflict of interest or that there are other legal impediments to providing such services. The US partner can also include compliance training for the joint venture, either through onsite or remote mechanisms. The compliance professional should work closely with the Relationship Manager to provide advice, training and communications to the joint venture. 

A company should have a Compliance Oversight Committee review all documents relating to the full panoply of a joint venture’s compliance program. It can be a formal structure or some other type of group but the key is to have the senior management put a ‘second set of eyes’ on any joint ventures. In addition to the basic concept of process validation of your risk management of joint ventures, this is a manner to deliver additional management of that risk going forward.

After the commercial relationship has begun the Compliance Oversight Committee should monitor the joint venture on no less than an annual basis. This annual audit should include a review of remedial due diligence investigations and evaluation of any new or supplemental risk associated with any negative information discovered from a review of financial audit reports on the joint venture. The Compliance Oversight Committee should review any reports of any material breach of contract including any breach of the requirements of the Company’s of joint venture’s Code of Ethics. In addition to the above remedial review, the Compliance Oversight Committee should review all compliance-impacted payments by the joint venture to assure such payment are within the company guidelines and are warranted by the contractual relationship with the joint venture. Lastly, the Compliance Oversight Committee should review any request to provide the joint venture any type of non-monetary compensation and, as appropriate, approve such requests.

A key tool in managing the affiliation with a joint venture post-contract execution is auditing. Audit rights are a key clause in any compliance terms and conditions and must be secured. Your compliance audit should be a systematic, independent and documented process for obtaining evidence and evaluating it objectively to determine the extent to which your compliance terms and conditions are followed. Noted fraud examiner expert Tracy Coenen described the process as (1) capture the data; (2) analyze the data; and (3) report on the data, which is also appropriate for a compliance audit. 

In addition to monitoring and oversight of your joint ventures, you should periodically review the health of your joint venture management program. The robustness of your joint venture management program will go a long way towards preventing, detecting and remediating any compliance issue before it becomes a full-blown FCPA violation. As with all the steps laid out, you need to fully document all steps you have taken so that any regulator can review and test your metrics. The Evaluation of Corporate Compliance programs lays out what the DOJ will be reviewing and evaluating going forward for your compliance program. You should also use these metrics to conduct a self-assessment on the state of your compliance program for your joint ventures. 

Three Key Takeaways

  1. It all starts with a Relationship Manager.
  2. Have company oversight of all joint ventures. Couple this with a Compliance Oversight Committee for a second set of eyes.
  3. Audit, monitor and remediate (as appropriate) your joint ventures on an ongoing basis.

 

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.

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 Matt Kelly and I discuss the Treasury Department’s recently released A Financial System That Creates Economic Opportunities-Capital Markets report. The report has multiple proposals, including multiple ideas about rolling back Sarbanes-Oxley compliance, especially for smaller public companies. In this podcast, we discuss the three most significant ones for the compliance practitioner.

  1. Exempt more companies from audits of internal financial control. Companies with market cap below $75 million are currently exempt from the SOX 404(b) requirement that an annual outside audit of internal control over financial reporting. The Trump Administration proposes raising that exemption ceiling to $250 million in market cap.
  2. Doubling the lifespan of Emerging Growth Companies. Congress created a new class of public filers in 2012, “emerging growth companies,” that are exempt from numerous corporate governance and compliance rules for the first five years of their lives; to 10 years.
  3. Ending “social disclosure rules” required under the Dodd-Frank Act. The Dodd-Frank Act imposed several required disclosures such as the Conflict Minerals Rule, the CEO Pay Ratio Rule, and the Mine Safety Rule.

For more on this subject, see Matt’s blog post Treasury Report Eyes SOX Compliance

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?

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