TRANSNATIONAL JOINT VENTURES. & the importance of fcpa compliance

Transcription

1 TRANSNATIONAL JOINT VENTURES & the importance of fcpa compliance

2 EXECUTIVE SUMMARY Many of the FCPA investigations pursued by the DOJ/SEC in recent years involve transnational joint ventures. Prior to entering into a transaction with a foreign third party, companies must take reasonable and deliberate steps to ensure FCPA compliance. This article provides an overview of the current FCPA regulatory environment, as well as details the factors that increase compliance related risk. It includes an outline of the basic elements of third party due diligence, and recommendations regarding the role and responsibilities of in-house counsel in joint venture transactions. 2 transnational joint ventures & the importance of fcpa compliance

3 CONTENTS EXECUTIVE SUMMARY... 2 INTRODUCTION... 4 THE STAKES KEEP RISING... 6 TEN CHARACTERISTICS THAT INCREASE FCPA RISKS... 7 LIABILITY FOR THIRD-PARTY CORRUPTION... 9 BASELINE DUE DILIGENCE QUESTIONS... 9 KEY CONSIDERATIONS FOR IN-HOUSE COUNSEL ABOUT STEELE CIS steele compliance & investigation services 3

4 INTRODUCTION Beginning in 2010, the DOJ and SEC reaffirmed their commitment to FCPA enforcement. The renewed focus included the creation of specialized enforcement units, the targeting of specific industry sectors, such as medical devices and pharmaceuticals, solicitation of tips from whistleblowers regarding potential violations and the frequent pursuit by the SEC of disgorgement. As an example of the DOJ and SEC s continued enforcement activity, in May 2013, Paul G. Novak, a former consultant with Willbros International received 15 months in prison and an order to pay a $1 million fine. Novak pleaded guilty to one count of conspiracy to violate the FCPA as well as one violation of the Act relating to his role in a scheme to pay $6 million in bribes to government and political party officials in Nigeria 1. To complicate the compliance landscape further, the passage of the Dodd-Frank Act provides whistleblowers with the financial incentive to report potential violations of the FCPA s accounting related provisions. In fact, the SEC s Office of the Whistleblower announced in August 21, 2012, the first payout from a new program that rewards people who provide information that leads to a successful enforcement action 2. Many of the cases pursued by the DOJ/SEC involve transnational joint ventures, defined generally as the entry by one company, referred to here as a multinational, into a foreign market through a joint venture arrangement with a foreign firm. Transnational joint ventures have several characteristics that elevate the FCPA risk to the multinational - regardless of whether the multinational has a majority or minority equity interest in the joint venture. Even non-equity licensing or product-development joint ventures may involve an FCPA risk if there is joint venture connection to foreign officials. In the November 2012, the criminal division of the DOJ, and the enforcement division of the SEC released A Resource Guide to the U.S. Foreign Corrupt Practices Act. In that document, they provided companies with guidance on a number of FCPA related topics including successor liability on which the Guide notes the following: successor liability applies to all kinds of civil and criminal liabilities, and fcpa violations are no exception. The Guide subsequently details the following reasons to conduct pre-acquisition due diligence, as well as improve compliance programs and internal controls post acquisition: 1. Due diligence helps an acquiring company to accurately value the target company. Contracts obtained through bribes may be legally unenforceable, business obtained illegally may be lost when bribe payments are stopped, there may be liability for prior illegal conduct, and the prior corrupt acts may harm the acquiring company s reputation and future business prospects. Identifying these issues before an acquisition 1 The FCPA Blog, Novak Jailed in Willbros Case, May 6, U.S. Securities and Exchange Commission, SEC Issues First Whistleblower Program Award, (August 21, 2012), 4 transnational joint ventures & the importance of fcpa compliance

5 allows companies to better evaluate any potential post-acquisition liability and thus properly assess the target s value. 2. Due diligence reduces the risk that the acquired company will continue to pay bribes. Proper pre-acquisition due diligence can identify business and regional risks and can also lay the foundation for a swift and successful post-acquisition integration into the acquiring company s corporate control and compliance environment. 3. The consequences of potential violations uncovered through due diligence can be handled by the parties in an orderly and efficient manner through negotiation of the costs and responsibilities for the investigation and remediation. Finally, comprehensive due diligence demonstrates a genuine commitment to uncovering and preventing FCPA violations. The Guide also states that in addition to considering a company s due diligence of third parties, the DOJ and SEC also assesses whether the company has informed third parties of the company s compliance program and commitment to ethical and lawful business practices, and where appropriate, whether it has sought assurances from third parties, through certifications and otherwise, of reciprocal commitments. Finally, the Guide includes clear and compelling commentary regarding how the DOJ/SEC determines whether to launch an enforcement action relating to successor liability: In a significant number of instances, doj and sec have declined to take action against companies that voluntarily disclosed and remediated conduct and cooperated with doj and sec in the merger and acquisition context. and doj and sec have only taken action against successor companies in limited circumstances, generally in cases involving egregious and sustained violations or where the successor company directly participated in the violations or failed to stop the misconduct from continuing after the acquisition. 3 Third party due diligence is critical as the cases pursued by the DOJ and SEC show that most FCPA offenses involve intermediaries 4. Not surprisingly, in the event that a violation of the Act occurs, the DOJ will seek to hold the US based company directly responsible. Early involvement by in-house counsel in partner selection and joint venture formation, along with the deployment of effective compliance controls, are crucial to minimizing regulatory risk. This article assumes that in-house counsel are familiar with the prohibitions contained in the FCPA and that their companies have implemented or are in the process of implementing compliance and ethics program provisions to address third-party FCPA risk. The specific guidance provided in this article can serve as a checklist when addressing foreign joint venture partner FCPA risk. 3 A Resource Guide to the U.S. Foreign Corrupt Practices Act (By the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission), November 2012, page 28 4 A Resource Guide to the U.S. Foreign Corrupt Practices Act (By the Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission), November 2012, page 60 steele compliance & investigation services 5

6 THE STAKES KEEP RISING As mentioned previously, the Dodd-Frank Act authorizes a reward of between 10 and 30 percent of monetary penalties exceeding $1 million that the government recovers because of a whistleblower s assistance leading to a successful prosecution of securities laws violations, including violations of the accounting provisions of the FCPA 5. In light of the large fines, penalties and disgorgement amounts recovered in recent FCPA enforcement actions and the incentive provided under the Dodd-Frank Act to report suspected violations directly to regulators, companies may see an increase in whistleblower allegations provided directly to regulators compared to the number of internal hotline calls received. Organizations with a presence in the United Kingdom undoubtedly face increased risk of regulatory scrutiny associated with the UK Bribery Act, In many respects, the Bribery Act is more stringent than the FCPA, as it prohibits corrupt payments not only to public officials, but to private parties as well. The Act contains a new strict criminal liability offense for failure to prevent bribery by a person associated with the organization. The only defense to this offense will be to prove the existence of adequate procedures to prevent such payments from occurring. In March 2011, the UK Ministry of Justice issued guidance on the meaning of adequate procedures. 6 Principles 3 and 4 of the guidance require organizations to have due diligence policies and procedures that cover all parties to a business relationship, including all forms of joint venture and similar relationships. 5 Dodd-Frank Wall Street Reform and Consumer Protection Act, HR4173, 105th Cong 922 (2010) 6 Ministry of Justice, Bribery Act 2010, Guidance about procedures which relevant commercial organisations can put in place to prevent persons associated with them from bribing. (March 2011), 6 transnational joint ventures & the importance of fcpa compliance

7 TEN CHARACTERISTICS THAT INCREASE FCPA RISKS Identifying these risk factors requires close examination by in-house counsel of the nature and structure of the joint venture and its governing documents. Examples of characteristics that increase FCPA risks include the following: 1 Sharing of risk and reward by the joint venture participants. In its basic form, a transnational joint venture may involve the cooperative pooling of resources by the participants, and the sharing of the rewards of the joint venture. The multinational will therefore benefit from any business obtained or retained, or any permits, licenses, permissions or other advantages granted to the joint venture through improper payments to foreign officials. A joint venture with a local company may be a foreign government requirement to participate in that government s tendering process. It is not uncommon for a foreign public tender process to restrict bidders to local companies or joint ventures that include a local company. The local company will likely use this requirement to negotiate an equal or majority equity interest and management control over the joint venture, adversely impacting the multinational s ability to control compliance. 2 3 The foreign joint venture partner is often selected based upon its local knowledge and connections. The multinational s international business units will likely propose a strong local partner who is well connected within the country, with knowledge of how things are done to enhance the likelihood of business success. Quite often, in-house counsel will be brought into the discussions only after preliminary negotiations have taken place, and perhaps even after the development of a term sheet, or letter of intent. Terms relating to compliance may not appear in any of these preliminary documents, complicating future negotiations. 4 A foreign official may have recommended the foreign joint venture partner. Unless the prospective partner was only one entity on a formal list of prequalified local partners, such a recommendation should raise a red flag, as discussed further below. 5 If a joint venture entity is to be formed, it is likely to be formed under the laws of the entered market. Such laws may dictate a certain percentage equity interest by the foreign partner and the appointment of local personnel to officer and management positions. steele compliance & investigation services 7

8 6 Typically, the foreign joint venture partner is assigned responsibility for dayto-day interactions with local government officials. It may object to securing secondary approval by the Western European or US expatriates to the joint venture, and attempt to block such a requirement. 7 The foreign joint venture partner may receive a sponsor or management fee, which may be used for improper purposes. Such fees may simply be based upon a percentage of joint venture revenue or profit, and often are not required to correspond to defined tasks, or specific efforts or hours. 8 The books and records of the joint venture, or portions of them, may be prepared in the local language and accounting conventions. If the foreign joint venture partner receives the sponsor or management fee discussed above, an audit of the associated payments may prove difficult. 9 The multinational may not employ personnel with requisite language skills in the foreign country. The risks created by the lack of effective oversight by the multinational extend not only to potential FCPA violations, but also to other corrupt acts, including kickbacks, fraud and theft. 10 The joint venture may have local bank accounts that do not require dual signatures to disburse funds, precluding a reasonable level of control over the use of joint venture funds. 8 transnational joint ventures & the importance of fcpa compliance

9 LIABILITY FOR THIRD-PARTY CORRUPTION The FCPA prohibits indirect corrupt payments (and offers, promises or authorization to pay), and imposes liability for knowing that a third party will make a corrupt payment. Knowledge means either being aware of such conduct or substantially certain that such conduct will occur, or consciously disregarding a high probability that a corrupt payment or offer will be made 7. When entering into a joint venture with a foreign partner in a country known for corruption, in-house counsel must be concerned that the multinational does not take a head in the sand approach to its due diligence. To avoid criminal liability under the UK Bribery Act, companies will need to establish and maintain clear and effective anti-bribery adequate procedures. 8 Likewise, ensuring that the multinational has a majority or equal equity interest in the joint venture, and the corresponding right to mandate certain joint venture agreement terms, management policies and procedures, and the audit of joint venture activities, can mitigate bribery and corruption related risks. BASELINE DUE DILIGENCE QUESTIONS The first step in most due diligence processes involves the completion of a questionnaire by the third party. The due diligence questionnaire requires the third party to provide sufficient information to initiate the due diligence process. Notwithstanding the burden placed on the prospective joint venture partner, many companies tend to err on the side of caution by gathering more information than may be necessary. A due diligence questionnaire should capture the following information on the prospective joint venture partners and their principals: 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 7 The United States Department of Justice, Foreign Corrupt Practices Act, 1977, 8 Ministry of Justice, Bribery Act 2010, Guidance about procedures which relevant commercial organisations can put in place to prevent persons associated with them from bribing. (March 2011), steele compliance & investigation services 9

10 Names and contact information for primary point of contact Names and contact information for entity s outside accountants/auditors and primary legal counsel 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 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 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 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 10 transnational joint ventures & the importance of fcpa compliance

11 BUSINESS CONDUCT Information on whether the entity has ever been barred or suspended from doing business with government entities Information on whether any principals, owners, partners, directors, officers or employees appear on any government list as a designated national, blocked person, sanctioned or denied person 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 US Foreign Corrupt Practices Act or any anti-corruption law Information on whether the entity has a compliance program in place to prevent bribery as well as information on how the company ensures employee compliance REFERENCES Three or more unrelated business references, including a bank and an existing client. 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 steele compliance & investigation services 11

12 KEY CONSIDERATIONS FOR IN-HOUSE COUNSEL In-house counsel should make senior management aware of the heightened FCPA risk associated with transnational joint ventures. To address and mitigate these risks, counsel should request early involvement in joint venture discussions - well before a commitment to a new foreign partner is extended. Follow this checklist of actions and agreement provisions to minimize your risk of violating the FCPA. For all transnational joint ventures, regardless of whether the multinational has a controlling equity interest, consider the following: Determine who recommended the prospective joint venture partner if the companies have not worked together previously. Question the circumstances and reasoning behind the recommendation, particularly if the entity or principals were recommended by a foreign government official or third party, such as a consultant or agent, who may have a relationship with foreign officials. Consider requesting the completion a comprehensive due diligence questionnaire by the prospective foreign partner and its principals, which includes consent to an independent investigative due diligence process. Any refusal to describe its ownership structure, the details of its business, and to answer basic questions relating to the absence of bribery, corruption and relationships with foreign officials or political parties, should be considered a red flag. Recommend that the multinational conduct enhanced investigative due diligence on the prospective joint venture partner and principals (with the exception of a prospective joint venture partner with a reputation for integrity, and that operates in a country with a low rate of corruption). The due diligence effort should include a global database check and open source investigation as well as a field investigation. The global database check should include all designated nationals and blocked persons lists; all sanction and embargo lists; politically exposed persons (PEP) databases, and other global government enforcement and regulatory agency lists; the open source investigation should include media and deep web research in the local language and English. Field investigations are also necessary to determine the reputation of the prospective partner and principals, the ownership of the entity, any violations of law (if legally obtainable), which database checks and open source investigations may not reveal. If personal information is to be collected on the principals, in-house counsel needs to ensure that the information can be collected and transmitted to the jurisdiction of the multinational without violating privacy laws, such as those enacted by EU countries to comply with the EU Directive on Data Protection. For joint ventures in which the multinational has a controlling or equal equity interest, or is otherwise able because of financial or technical contributions to negotiate favorable terms in the joint venture governing documents and joint venture agreement, it is advisable to: 12 transnational joint ventures & the importance of fcpa compliance

13 1. Include anti-bribery and corruption representations, warranties and covenants relating to the FCPA, as well as national and local anti-corruption laws of the foreign country, including laws enacted to comply with the UN Convention Against Corruption, the OECD Anti-bribery Convention and the Bribery Act 2010, if applicable. 2. Include a right of immediate termination for breach of the warranties or covenants relating to FCPA/Antibribery and corruption, and a requirement for annual recertification of compliance with such provisions by joint venture partners and joint venture officers, managers and employees. Since termination of a joint venture may not be the most desirable result, consider including other remedies such as the right to conduct an independent investigation, removal and replacement of offending joint venture employees, and financial penalties to the foreign partner. 3. Require that the joint venture follow generally accepted accounting principles (GAAP), properly identify and characterize all financial transactions, keep books and records in the English language (or multinational s home language), and conduct an annual audit by an agreed upon independent accounting firm. 4. Include the right to conduct ongoing audits of the joint venture books. Consider negotiating the right to audit the foreign joint venture partner s use of any management or sponsor fees paid by the joint venture. An ideal situation would involve the funding by the joint venture of a full-time senior financial manager, staffed by an expatriate with auditing experience, chosen by the multinational. This individual could also be designated as the second signature on joint venture checks and fund transfers. 5. Prohibit the creation of any funds without the approval of the joint venture s governing body (supermajority approval in the case of minority interest by the multinational). 6. Include the right of the designated representative of the multinational to attend any meetings with foreign officials, and provide for funding by the joint venture of an independent translator, retained by the multinational. 7. If the foreign joint venture partner has day-to-day management responsibilities, require dual signatures for checks and electronic funds transfers drawn on the joint venture s bank accounts. 8. Require that the joint venture conduct investigative due diligence on agents, consultants and other third parties retained by the joint venture. Require that contracts with such third parties be approved by the joint venture s governing body or a committee of such body (supermajority approval in the case of minority interest by the multinational). 9. Require the implementation of a code of business conduct by the joint venture, and the implementation of an anonymous reporting mechanism for joint venture employees. Ensure that a designated representative of each partner receives hotline related reports. If the multinational has a minority equity interest in the joint venture, it steele compliance & investigation services 13

14 may still be possible to implement basic ethics and compliance controls by negotiating for supermajority approval of certain actions, such as the appointment of joint venture officers and managers, the engagement of agents and consultants, and the engagement of the independent auditor. If the multinational is unable to achieve what it believes to be reasonable ethics and compliance controls over joint venture operations, or the results of due diligence produce unresolved red flags, in-house counsel should advise senior management of the compliance risks that the joint venture may represent to the multinational, and recommend passing on the opportunity. Acting on the foregoing recommendations, including the requirement that senior representatives of the multinational conduct in-country monitoring of joint venture compliance and ethics procedures, should provide reasonable assurance to the multinational s board that measures exist to prevent and detect violations of the FCPA. As the information above indicates, third-party due diligence may also enhance compliance with other laws and regulations that may apply to the multinational, such as those relating to export control. In addition, an effective compliance program may also help multinationals minimize the risk of fraud. When Nokia and Motorola entered into the cellular phone business with the Uzan family companies in Turkey, they had no idea that the business venture would ultimately cost them over $4 billion and result in years of protracted international litigation. There is the distinct possibility that investigative due diligence may have uncovered information that the Uzan family presented not only a compliance risk, but also a serious financial risk as well 9. As the November 2012 Resource Guide shows, the DOJ/SEC understands the inherent risks associated with transnational ventures, and expects companies to pay close attention to FCPA compliance - both pre and post-acquisition. To reduce the risk of non-compliance with FCPA, multinationals must place increased emphasis on due diligence of their foreign third party intermediaries, such as agents, distributors, resellers and other foreign business partners such as joint ventures partners, or acquisition targets. A robust due diligence program helps lower the probability that intermediaries engaged by the multinational will violate the FCPA when selling the company s products or services, or obtaining permits, licenses and clearances required to conduct business in foreign countries. nd Cir. 2003) 9 Motorola Credit Corporation and Nokia Corporation v. Kemal Uzan, Cem Cengiz Uzan, Murat Hakan Uzan, Melahat Uzan, et al., 322 F.3d 130 (2 14 transnational joint ventures & the importance of fcpa compliance

15 ABOUT STEELE CIS STEELE Compliance and Investigation Services (CIS) is a global business advisory and compliance intelligence firm offering comprehensive third-party due diligence solutions that help organizations comply with regulatory requirements and align with current best practices. With more than 20 years of experience, STEELE CIS provides Fortune 1000 companies and mid-sized businesses with pragmatic solutions including Regulatory Due Diligence, Third-Party Program Advisory Services, Program Management Services and Compliance Analytics and Benchmarking services. With engagements in over 170 countries, STEELE CIS delivers local and regional expertise with on-the-ground resources. For additional information regarding risk-based third-party management, please contact a STEELE CIS third-party compliance expert directly, call , [email protected], or visit steele compliance & investigation services 15

16 STEELE CIS Inc. Worldwide Headquarters One Sansome Street Suite 3500 San Francisco, CA (415) CIS