Joint Venture Partners and the Company You Keep Under the FCPA

As the father of a teenage daughter I am sometimes, reluctantly, forced to admit that upon rare occasions my parents were right about a few things. One was asking for permission first rather than asking for forgiveness after the fact, or in my case as a teenager the untoward event. Another was my mother’s admonition that you are judged by the company you keep. I thought about that truism when I read an article in the Financial Times (FT) yesterday, entitled “Steinmetz unit won Guinea mining riches corruptly, inquiry says”, by reporter Tom Burgis.

The article relates the long running story of the BSG Resources’ (BSGR) winning of the multi-billion mining concession for the Simandou iron-ore mine in the country of Guinea, which was awarded to the company at the end of the reign of the country’s former dictator Lansana Conté, before he died in 2008. According to a report prepared by the current government of Guinea, BSGR won the contract by paying bribes to his fourth wife Mamadie Touré in the form of cash and shares “to help ensure those rights were stripped from Anglo-Australian miner Rio-Tinto and granted to BSGR.”

Of course there is also the tale of BSGR employee/agent/representative/other Frederic Cilins who contacted Ms. Touré in the US and offered to pay her some $5MM to retrieve the contracts which detailed the payments she was to receive from BSGR. It turned out that there was a Grand Jury investigation going on over BSGR at the time and by now Ms. Touré was a cooperating witness with the Department of Justice (DOJ). Cilins was arrested, charged with and pled guilty to obstruction of justice.

BSGR has denied all of these allegations and says that it received the rights to the mining concession fair and square. Further, it has questioned not only the legitimacy of the report issued by the Guinea government but of the government itself, saying “[current] President Conté has manipulated the process through unconditional technical and financial support from activists line [billionaire transparency advocate] George Soros and NGOs that function as his personal advocacy groups.” The Guinea government report notes recommends that BSGR’s mining concession be cancelled.

So how does all this imbroglio relate to my mother’s admonition? It is because BSGR was in a joint venture (JV) with the Brazilian company Vale for this concession. The FT article reports “After spending $160m on preliminary development of its Guinea assets, BSGR in April 2010 struck its $2.5bn deal with Vale, of which $500m was payable immediately. The balance was to be paid if targets were met but Vale halted payments last year, after the corruption allegations surfaced. The inquiry concluded that, although payments to Ms Touré allegedly continued following the Vale transaction, it was “likely” that the Brazilian group “has not participated in corrupt practices”. Nonetheless, it said the Vale-BSGR joint venture – which BSGR says has spent $1bn at Simandou – should be stripped of its rights to that and other prospects.”

Vale’s response to all of this has been – wait for it – “conducts appropriate due diligence prior to its investments.” Vale had no comment on the Guinea government report released yesterday. I wonder what its due diligence on BSGR turned up?

I wrote last week about the life cycle management of the third party relationship. Those series of articles was primarily aimed at agents and other representatives in the sales channel and vendors in the supply chain. While those same concepts apply to JV’s, there is another level of management when there is a relationship such as a JV. One JV partner must have transparency into the actions of its partner and there must be as much assurance as can be possible that there is no corruption going on. From the time line presented in the FT article it appears that the JV between BSGR and Vale was created (2010) after the payments were contracted to Ms. Touré and the concession granted to BSGR (2008).

However I am sure that is of little comfort to Vale who is now down its $500MM that it paid to BSGR to enter into the JV relationship. How much has it had to spend to circle the wagons to defend itself? And do you think the DOJ has come knocking on their door during its investigation? (The smart money says yes). To top it all off, last week the company announced it might have to write-off its entire investment in Guinea. While Guinea indicated that Vale would not be banned from rebidding if rights for the mining concessions were reopened, what do you thing Vale’s chances would be? (Here the smart money says no).

Did Vale subject itself to Foreign Corrupt Practices Act (FCPA) liability by joining into a JV with BSGR? At this point I have no idea. But you know my Mom was right, in the FCPA world, when it comes to JV’s, you are known by the company you keep.

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, 2014

The Weatherford FCPA Settlement, Part II

Yesterday, I reviewed the Weatherford International Limited (Weatherford) Foreign Corrupt Practices Act (FCPA) settlement. Today I will take a more focused look at the bribery schemes involved and the failure of the company to bring internal controls up to standard or even follow its own compliance program. Weatherford’s compliance program was a joke but worse was its conduct, which many in the company knew was illegal and reported internally but the company did not stop the conduct. The company also, early on in the investigation, actively impeded regulators access to personnel and documents. However, and this is one of the key messages from the Weatherford FCPA enforcement action, the company truly ‘turned it around’. Tomorrow we will explore how the company made this dramatic turnaround.

The bribery schemes had four basic scenarios and, for those of you keeping score at home, I have summarized them below.

I.                   Corrupt Conduct

Weatherford Bribery Box Score

Country	Bribery Scheme	Government or SOE Official Involved	Amount of Bribe Paid
Angola	Payments through 3rd parties	Sonagol Drilling Manager	$250K
Angola	JV Partners	Government Ministers, wives and other relatives	$810K
Congo	Payments thru 3rd parties	SOE officials	$500K
Middle East Countries	Unauthorized distributor discounts	SOE officials	$11.8MM
Algeria	Improper travel and entertainment	SOE officials	$35K
Albania	Misappropriation of company funds	Tax Auditors	$41K

Angola

In Angola two separate bribery schemes were used. The first involved payment of a $250,000 bribe to the Sonagol Drilling Manager. To funnel the bribe the company retained a Swiss agent who paid the money. This Swiss agent billed Weatherford for non-existent and fraudulent services. He would retain a percentage of the total he billed as a commission and would pass the remainder to the Sonagol Drilling Manager. The bribery of the Drilling Manager also included a week long, all-expenses paid trip to Italy and Portugal, where only one of the days was business related.

The company continued this further creativity when it set up a joint venture (JV) which had two local JV partners, JV Partner A and JV Partner B. Partner A consisted of Sonagol government officials, their wives and other relatives and held a 45% stake in the overall JV. JV Partner B’s principals included the relative of an Angolan Minister, the relative’s spouse, and another Angolan official. It held 10% of the overall JV interest. Neither of these JV Partners contributed capital, expertise or labor to the JV. In addition to the straight quid pro quo of awarding Weatherford 100% of the Angolan well screens market, these JV Partners had contracts which were awarded to Weatherford competitors, revoked after the initial award and then awarded them to Weatherford.

Congo

In the Congo, Weatherford made over $500,000 in commercial bribe payments through the same Swiss Agent they had utilized in the initial Angolan bribery scheme to employees of a commercial customer, a wholly-owned subsidiary of an Italian energy company, between March 2002 and December 2008. The Swiss Agent’s role in the scheme included submitting false invoices and sending payments to individuals as directed by Weatherford Services Limited (WSL) employees and others. WSL employees created and sent false work orders to the Swiss Agent. The Swiss Agent, WSL employees and others knew the services would not be performed and that the work orders were a pretext to funnel money to the Swiss Agent. The Swiss Agent forwarded the money, less a commission, once again based on fraudulent invoices for non-existent services.

The Middle East

In certain un-named Middle Eastern countries between the years of 2005 and 2011 another Weatherford subsidiary employed another bribery scheme to funnel payments to officials of state owned National Oil Company (NOC). This bribery scheme entailed the awarding of improper “volume discounts” to a company that served as an agent, distributor and reseller which supplied Weatherford products to a state-owned and controlled NOC, believing that those discounts were being used to create a slush fund with which to make bribe payments to decision makers at the NOC.

The Securities and Exchange Commission (SEC) Complaint noted that as early as 2001, officials at the un-named national oil company directed Weatherford to sell goods to the company through a particular distributor. Prior to entering into the contract with the distributor, Weatherford did not conduct any due diligence on the distributor, despite: (a) the fact that the distributor would be furnishing Weatherford goods directly to an instrumentality of a foreign government; (b) the fact that a foreign official had specifically directed the company to contract with that particular distributor; and (c) the fact that Weatherford executives knew that a member of the country’s royal family had an ownership interest in the distributor. In late 2001, the company entered into a representation agreement with the distributor to sell its Completion and Production Systems products to the NOC.

Thereafter, the distributor created a slush fund by providing the distributor with unauthorized volume and pricing discounts, in addition to the agent’s 5% commission. Company employees intended that the slush fund would be used to pay officials at the un-named NOC. The “volume discounts” to the distributor were typically between 5-l0% of the contact price. The discounts allowed the distributor to accumulate funds which were used to pay bribes to the NOC officials.

Algeria

Weatherford also provided improper travel and entertainment to officials of the Algerian NOC, Sonatrach, which did not have any legitimate business purpose. The SEC Complaint detailed the following improper travel and entertainment provided to Sonatrach officials:

• June 2006 trip by two Sonatrach officials to the FIFA World Cup soccer tournament in Hanover, Germany;
• July 2006 honeymoon trip of the daughter of a Sonatrach official; and
• October 2005 trip by a Sonatrach employee and his family to Jeddah, Saudi Arabia, for religious reasons that were improperly booked as a donation.

In addition, on at least two other occasions, Weatherford provided Sonatrach officials with cash sums while they were visiting Houston. For example, in May 2007, Weatherford paid for four Sonatrach officials, including a tender committee official, to attend a conference in Houston. Further, the company provided an approximate $24,000 cash advance for the trip where there was no evidence of any legitimate business purpose or promotional expenses.

Albania

In Albania, Weatherford had a tax evaluation problem. To deal with this issue the general manager and financial manager of the company’s Italian subsidiary misappropriated over $200,000 of company funds, to fund a bribery scheme involving Albanian tax auditors. The general manager, financial manager and the Albania country manager made $41,000 in payments to Albanian tax auditors who questioned details of the company’s accounts and demanded payment to close out the audit or speed up the certification process in 2001, 2002 and 2004.

The general manager and financial manager misappropriated the funds by taking advantage of Weatherford’s inadequate system of internal accounting controls. They misreported cash advances, diverted payments on previously paid invoices, misappropriated government rebate checks and received reimbursement of expenses that did not relate to business activities. A memo drafted by the general manager and financial manager in the months after their co-worker confronted them discussed the misappropriated funds and indicated that funds were paid to tax auditors in Albania and others for the benefit of Weatherford. This was the bribery scheme which was reported to the company and the internal whistle-blower employee was terminated.

II.                Program Deficiencies Lack of Cooperation

The DPA laid out in equally stark terms the complete and utter disregard, non-existence of and/or complete failure of any systemic compliance program, prior to 2008. These deficiencies included:

• Failure to establish internal accounting controls to prevent bribery and corruption;
• Failure to perform due diligence on any prospective third parties, including who they were, ultimate beneficial ownership and business justifications;
• Failure to perform due diligence or in any meaningful manage joint venture partners;
• Failure to have any meaningful internal controls for gifts, travel and entertainment;
• No effective internal reporting system for FCPA violations or issues; and
• (Most amazingly) No Chief Compliance Officer or even compliance professionals in a multi-billion dollar, multi-national company in the energy industry.

In addition to all of the above, Weatherford engaged in active conduct to impede the investigations of both the SEC and DOJ. In one instance, the company told investigators that a key witness was dead when he was not only still alive and well but working for Weatherford. In other instances, the company, emails were deleted by employees prior to the imaging of their computers. It was also noted that Weatherford failed to secure important computers and documents and allowed potentially complicit employees to collect documents subpoenaed by the staff.

Tomorrow, the Weatherford compliance comeback.

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, 2013

Armistice Day: The Risks and Rewards of Foreign Joint Ventures

Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today looks at Joint Ventures and has some pointers for avoiding pitfalls under the FCPA.

In December 2010, RAE Systems Inc., a publicly-traded U.S. corporation headquartered in San Jose, Calif., has entered into an agreement with the Department of Justice to pay a $1.7 million penalty for violations of the Foreign Corrupt Practices Act. According to information contained in the non-prosecution agreement (NPA), RAE Systems developed and manufactured rapidly deployable, multi-sensor chemical and radiation detection monitors and networks.   From 2005 to 2008, the company had significant operations in the People’s Republic of China (PRC), and sold its products and services primarily through two subsidiaries organized as joint ventures with local Chinese entities: RAE-KLH (Beijing) Co. Limited (RAE-KLH) and RAE Coal Mine Safety Instruments (Fushun) Co. Ltd. (RAE Fushun).

As to RAE-Fushun, the NPA states that “RAE Systems did not conduct pre-acquisition corruption due diligence of RAE Fushun” but that “given RAE’s System’s experience with KLH described above, the high-risk nature of the location, and the existence of numerous government customers, pre-acquisition corruption-focused due diligence was merited. The NPA further states “as was later confirmed, improper business practices had occurred at RAE Fushun before the acquisition and continued post-acquisition, as RAE Systems failed to implement an effective system of internal controls at RAE Fushun.”

The practical pointer for today’s blog is this – FCPA issues can arise in joint venture transactions.  In certain circumstances, it may be necessary to have a “local partner” in order to access local labor, equipment, financing or other resources.  In other instances, you may not be able to work in a particular location without contracting with an arm of the local government.  What types of joint ventures is your company engaged in?  Joint Ventures can take a wide array of forms, from the simple contractual agreement relating to a single project wherein each partner undertakes to perform certain activities and receive certain benefits and compensation in return, to the formation of a new legal entity with joint management shared between the partners.  A joint venture can be modified even further by differentiating partners as either active or passive. Although there is a wide variance in how joint ventures can be structured, the key to remember is that by entering into a joint venture each partner becomes potentially exposed to the FCPA liabilities created by the acts of the other partner.

Joint Venture arrangements are particularly common in the oil and gas industry.  In January of this year, Marubeni Corporation agreed to pay a $54.6 million criminal penalty to resolve FCPA related charges for its participation in a decade-long scheme to bribe Nigerian government officials to obtain engineering, procurement and construction contracts. According to court documents, Marubeni was hired as an agent by the four-company joint venture TSKJ, to help TSKJ obtain and retain EPC contracts to build liquefied natural gas (LNG) facilities on Bonny Island, Nigeria, by offering to pay and paying bribes to Nigerian government officials, among other means. TSKJ was comprised of Technip S.A., Snamprogetti Netherlands B.V., Kellogg Brown & Root Inc. and JGC Corporation.  Between 1995 and 2004, TSKJ was awarded four EPC contracts, valued at more than $6 billion, by Nigeria LNG Ltd. (NLNG) to build the LNG facilities on Bonny Island.  The government-owned Nigerian National Petroleum Corporation (NNPC) was the largest shareholder of NLNG, owning 49 percent of the company. Ultimately, the total fines and penalties arising out of the TSKJ joint venture amounted to $1.7 Billion Dollars.

Generally in Nigeria, all petroleum production and exploration is taken under the auspices of joint ventures between foreign multi-national corporations and the Nigerian National Petroleum Company (Government Owned entity).  Examples include: Chevron Nigeria Limited (CNL): A joint venture between NNPC (60%) and Chevron (40%); Total Petroleum Nigeria Limited (TPNL): A joint venture between NNPC (60%) and Total; and, Mobil Producing Nigeria Unlimited (MPNU): A joint venture between the NNPC (60%) and Exxon-Mobil (40%).

In all of the examples provided above, the Nigerian National Oil Company held the majority ownership in the joint venture, but this fact alone does not release the minority owners from the risk of FCPA liability.  The Anti-Bribery provisions of the FCPA prohibit improper payments on behalf of the joint  venture entity even if the U.S. partner is not the majority holder of the venture.  Under the FCPA’s accounting provisions, which only apply to issuers, an issuer that owns a minority interest in a joint venture may also be liable under accounting provisions. The issuer may, however, avoid liability by demonstrating that it undertook “good faith efforts” to “use its influence, to the extent reasonable under the issuer’s circumstances,” to cause the joint venture to implement controls designed to ensure compliance with the accounting provisions.  15 U.S.C. § 78(m)(b)(6).

Joint Venture Agreements involving National Oil Companies are complex and must be carefully written. Special attention should be paid to the inclusion of compliance clauses into the Joint Venture Agreement.  Here are just a few items to consider including:

1.  Specific clauses prohibiting all forms of bribery and corruption including hospitality/gifts/entertainment/travel/facilitating payments.
2. Clauses requiring proper recordkeeping to comply with the FCPA books and records provision, as well as provisions addressing the implementation of internal accounting controls.
3. Representations and warranties regarding compliance with the anti-bribery and corruption clauses;
4. Right to Audit books and records for compliance with the anti-bribery and corruption clauses
5. Rights of withdrawal from the JV in the event of unethical or illegal conduct by the other partner (or its agents)

On November 8, 2006, Wal-Mart expanded its operations internationally into Canada.  As most of you know, six years later, in 2012, Wal-Mart found itself embroiled in an FCPA investigation due to its expansion into Mexico.  Tomorrow, November 8^th, we will examine some lessons learned from Wal-Mart’s investigation.  Stay Tuned.

 Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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.

Pfizer DPA Part II – Enhanced Compliance Obligations and Corporate Compliance Obligations

Last week I began an exploration of the Pfizer Deferred Prosecution Agreement (DPA) which was announced last week by the Department of Justice (DOJ) in connection with its settlement of Foreign Corrupt Practices Act (FCPA) violations. In Part I, I reviewed the Corporate Compliance Obligations, Attachment C.1. Today we review the Enhanced Compliance Obligations, Attachment C.2 and Corporate Reporting Obligation, Attachment C.3, which Pfizer agreed to implement and operate under. In Part III, I will discuss some of the implications raised by the Pfizer DPA for the compliance practitioner.

 I.                   Attachment C.2 – Pfizer’s Enhanced Compliance Obligations

In addition to the minimum best practices,as set out in Attachment C.1 – Corporate Compliance Obligations, Pfizer agreed to the following additional compliance obligations:

A.     In General. Pfizer will maintain the appointment of a senior corporate executive with significant experience with compliance with the FCPA, including its anti-bribery, books and records, and internal controls provisions, as well as other applicable anticorruption laws and regulations (hereinafter “anti-corruption laws and regulations”) to serve as Chief Compliance and Risk Officer, who will have reporting obligations directly to the Chief Executive Officer. The company will maintain the appointment of heads of compliance with responsibility for each of its business units (“BU Compliance Leads”) who have reporting obligations through the Chief Compliance and Risk Officer or General Counsel. There will be an Executive Compliance Committee to oversee Pfizer’s compliance program.

The company will maintain gifts, hospitality, and travel policies and procedures in each jurisdiction that are appropriately designed to prevent violations of the anti-corruption laws and regulations. Further and at a minimum, these policies and procedures shall contain the following restrictions regarding foreign government officials, including but   not limited to public health care providers, administrators, and regulators: (i) Gifts must be modest in value, appropriate under the circumstances, and given in accordance with anti-corruption laws and regulations, including those of the government official’s home country; (ii) Hospitality shall be limited to reasonably priced meals, accommodations,

and incidental expenses that are part of product education and gaining programs, professional training, and conferences or business meetings; (iii) Travel shall be limited to product education and training programs, professional training and education, and conferences or business meetings; and (iv) Gifts, hospitality, and travel shall not include expenses for anyone other than the relevant officials, unless different standards are required by local law or regulation.

B.     Complaints, Reports and Compliance Issues. The company will maintain “significant” resources for the compliance function. It shall have (a)An international investigations group charged with responding to and investigating anti-corruption compliance issues reported on a global basis acid ensuring that appropriate remedial measures are undertaken after the completion of an investigation; (b) An anti-corruption program office providing centralized assistance and guidance regarding the implementation, updating and revising of the FCPA Procedure, the establishment of systems to enhance compliance with the FCPA Procedure, and the administration of corporate-level training and annual anti-corruption certifications; and (c) A mergers and acquisitions compliance function designed to support early identification of compliance risks associated with complex business transactions and to ensure the integration of Pfizer’s compliance procedures into newly acquired entities.

Lastly the company must maintain its mechanisms for making and handling reports and complaints related to potential violations of anti-corruption laws and regulations, including, when appropriate, referral for review and response by internal audit, finance, legal, compliance and other personnel as appropriate, and will ensure that reasonable access is provided to an anonymous, toll-free hotline as well as to an anonymous electronic complaint form, where anonymous reporting is legally permissible.

C.   Risk Assessments and Proactive Reviews. Pfizer will continue to conduct a risk-based program of annual proactive anti-corruption reviews of high-risk markets. These FCPA proactive reviews are designed to identify anti-corruption con7pliance issues, examine compliance procedures and controls as implemented in the field and identify best practices to be implemented in additional markets. In doing so, Pfizer will identify markets which are at high risk for corruption because of the business and location. Five of these will be identified and reviewed annually. Each review shall contain the minimum: (a) On-site visits by an FCPA review team comprised of qualified personnel from the Compliance and, when appropriate, Legal Divisions who have received FCPA and anti-corruption training;  (b) Where appropriate, participation in the on-site visits by qualified auditors; (c) Review of a representative sample, appropriately adjusted for the risks of the market, of contracts with and payments to individual foreign government officials or health care providers, as well as other high-risk transactions in the market; (d)  Creation of action plans resulting from issues identified during FCPA proactive reviews; these action plans will be shared with appropriate senior management, including when appropriate the Chief Compliance and Risk Officer, and will contain mandatory remedial steps designed to enhance anti-corruption compliance, repair process weaknesses, and deter violations; and € Where appropriate, feasible, and permissible under local law, review of the books and records of a sample of distributors which, in the view of the FCPA proactive review team, may present corruption risk.

D. Acquisitions. The Company will continue to ensure that, when practicable and appropriate on the basis of a FCPA risk assessment, new business entities are only acquired after thorough risk-based FCPA and anti-corruption due diligence was conducted by a suitable combination of legal, accounting, and compliance personnel. When such anti-corruption due diligence is appropriate but not practicable prior to acquisition of a new business for reasons beyond Pfizer’s control, or due to any applicable law, rule, or regulation, Pfizer will continue to conduct anti-corruption due diligence subsequent to the acquisition and report to the Department any corrupt payments or falsified books and records as required by company’s reporting obligations found in Attachment C.3 Pfizer will ensure that Pfizer’s policies, standards and procedures regarding anticorruption laws and regulations apply as quickly as is practicable, but in any event no more than one year post-closing, to newly-acquired businesses, and will promptly: (a) Train directors, officers, and senior managers, and those employees working in positions involving activities covered by Pfizer’s policies regarding anti-corruption and compliance with the FCPA, and, where necessary and appropriate, agents and business partners; and (b) Include all newly-acquired businesses in Pfizer’s regular anti-corruption auditing schedule.

E. Relationships with Third Parties. Based upon its internal risk assessment, the company will conduct risk-based due diligence of sales intermediaries, including agents, consultants, representatives, distributors, and joint venture partners. Such due diligence will be conducted prior to the retention of any new agent, consultant, representative, distributor, or joint venture partner and for all such sales intermediaries will be updated no less than once every three years. At a minimum, such due diligence shall include: (a) a review of the qualifications and business reputation of the sales intermediaries; (b) a rationale for the use of the sales intermediary; and (c) a review of relevant FCPA risk areas.

Where due diligence of a sales intermediary raises a serious red flag, the relevant information shall be reviewed by personnel from the compliance or legal divisions who have received FCPA and anti-corruption training. Where appropriate and where permitted by applicable law, the company will include appropriate compliance terms and conditions in each contract with such third parties.

F. Training. The company will provide biennial training on anti-corruption laws and regulations to directors, officers, executives, and employees working in positions involving activities covered by Pfizer’s policies regarding anti-corruption and compliance with the FCPA. The company will provide enhanced FCPA training for all internal audit, financial, compliance and legal personnel involved in FCPA proactive reviews or anti-corruption due diligence related to the potential acquisition of new businesses, if not already qualified and experienced. When it is appropriate on the basis of a FCPA risk assessment, the company will provide FCPA and anti-corruption training to relevant agents and business partners, at least once every three years.

The company shall maintain a system of annual certifications from senior managers in each of Pfizer’s Business Units, Divisions, and operational functions (at the market or regional level, or the reasonable equivalent) as appropriate, confirming that their standard operating procedures adequately implement Pfizer’s anti-corruption policies, procedures and controls, including training requirements, that they have reviewed and followed up on any issues identified in FCPA trend analyses, and that they are not aware of any FCFA or other corruption issues that have not already been reported to the Compliance Division or the Legal Division.

II.                Attachment C.3 – Corporate Compliance Reporting

Here Pfizer agreed to conduct an initial report and two follow up reports during the pendency of the DPA. These reports would be set forth in a complete description of its FCPA and anti-corruption related remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of Pfizer for ensuring compliance with the FCPA and other applicable anti-corruption laws, and the parameters of the subsequent reviews. The two follow up reports will incorporate any comments provided by the DOJ on the Initial Report, to further monitor and assess whether the policies and procedures of Pfizer are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws.

These enhanced obligations could well become the new minimum best practices in the FCPA compliance arena. You should take a look at these obligations and compare them with your program to see where you might be lacking or need to enhance your compliance coverage.

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, 2012

A Seat at the Table – Compliance in the Contract Tender Process

After all the due diligence on the sales agents and representatives has been completed and they are ready to help you land that large international contract, what is the role of compliance? I would argue that compliance has as central a role to play in any international contract tender process as any other support group in your company; be they legal, tax, HR or another department. If you put compliance at the mix when preparing your response to RFP your company will be much better served than calling them after an issue arises during the contract execution. What are some of the areas that compliance can be of use during contract negotiations?

Subcontractors

It certainly should not surprise anyone to be made aware that your company is legally responsible for its subcontractors in the execution of a contract. This is also true in the anti-corruption context, whether under the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act. This means that any direct tier subcontractor, which your company might use to complete an international contract, needs to be thoroughly vetted under your compliance regime as a foreign business partner. The reason for this is the same as an agent, subcontractors are acting on your company’s behalf, and hence your company is responsible for them. If you can perform due diligence on all parties which your company will need to execute the contract in the pre-contract phase, it will make things run more smoothly and efficiently after your company is awarded the contract and moves into the execution phase.

Travel to Company Facilities

As a part of the tender process, your company may be required to bring a foreign governmental official or group of officials to view your US operations. This can occur for a number of legitimate reasons, yet care must be followed under both the FCPA and Bribery Act. Your company can pay bona fide and reasonable expenses that are directly related to either (1) the promotion, demonstration or explanation of products or services; or (2) the execution or performance of a contract. Bona fide promotional expenses may also include trips to manufacturing facilities to observe your company’s production and quality control processes or to conduct inspection and testing called for in a contract of sale.  There can also be to facilities where the training offers a legitimate opportunity to demonstrate products and services. There are some guidelines that need to be followed and they are as follows:

• Any reimbursement for air fare will be for economy class.

• Do not select the particular officials who will travel. That decision will be made solely by the foreign government.

• Only host the designated officials and not their spouses or family members.

• Pay all costs directly to the service providers; in the event that an expense requires reimbursement, you may do so, up to a modest daily minimum (e.g., $35), upon presentation of a written receipt.

• Any souvenirs you provide the visiting officials should reflect the business and/or logo and would be of nominal value, e.g., shirts or tote bags.

• Apart from the expenses identified above, do not compensate the foreign government or the officials for their visit, do not fund, organize, or host any other entertainment, side trips, or leisure activities for the officials, or provide the officials with any stipend or spending money.

• The training costs and expenses will be only those necessary and reasonable to educate the visiting officials about the operation of your company.

One of the keys is having any such travel approved by your Compliance Department prior to the travel actually occurring. In addition to the above guidelines there should be a written agenda, reviewed and approved by the compliance representative before the travel occurs. Lastly, all costs associated with the travel and entertainment must be recorded in the Company’s books and records as cost of sales and not an operating expense. The written agenda approved by the compliance representative needs to be maintained and verified by after-action reports so that the entire process is documented.

Testing and Evaluation

If your company manufactures a product, your international customer may well ask to test and evaluate products as a part of the contract tender process. These products may only be provided to support such opportunities. The testing and evaluation of samples should only occur if required by a public tender. Exceptions may be made if the samples are formally requested in writing by the potential government customer in connection with a legitimate contract opportunity. Care should be made so that any product samples are delivered to the foreign governmental agency issuing the tender, not to an individual employee or official, or to a third party. There should be a formal written request identifying the specific number of samples to be tested and evaluated from the potential government customer. The number of samples requested should be reasonable in light of the overall potential contract. All costs associated with the provisioning of sample products for testing and evaluation must be recorded in the Company’s books and records as cost of sales and not an operating expense.

Evaluation of Compliance Risk

Just as other types of risk should be evaluated in any internal contract review process, the compliance risks should also be evaluated. What is the Transparency International – Corruption Perceptions Index ranking of the country or government where the contract will be executed? Are there other sources which can be accessed, such as World Check’s Country Check rating, the Mintz Group’s heat map “Where the Bribes Are”, or the FCPA Database, which aggregates several different types of information but specifically the national anti-corruption and anti-bribery laws applicable to local jurisdictions across the globe. Using these sources and perhaps others, you can put together not only a risk evaluation plan but also a risk mitigation plan for management which they can take into account when the decision of Bid/No Bid or pricing is finalized.

The Compliance Department is more than simply the group which performs the due diligence, trains on compliance and responds to inquiries. It can, and should, play an active role in landing contracts. A mature compliance program can be a great benefit for a company, not only in evaluating risk from the compliance perspective but also preparing the necessary steps so that if a contact is awarded, it can be executed in a time efficient manner. But it must have a seat at the table.

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, 2012

An FCPA Exam – Selling Health Insurance in India

If you do not read the FCPA Professor on a daily basis, you should do so as he consistently posts about all things Foreign Corrupt Practices Act (FCPA), from the legal angle, far more often and better than any other of the FCPA commentaries. If you want to hone some legal FCPA points, you can do no better than to engage in some good Socratic dialogue with the Professor via email. I have often mused on how the Professor might obtain his final examination questions for his FCPA class exams. Given the ‘stranger than life’ real world FCPA matters that arise, almost weekly; it might be that he only needs to read the newspapers to get his questions.

So inspired by the FCPA Professor, I would like to have a FCPA exam for the readers of this blog. In this posting, I will set out the hypothetical question and in a subsequent post I will set out some proposed answers. As a law school professor once told me when I (meekly) sought an upward adjustment of my final grade, “Tom, there is no right or wrong answer to my exams, only incomplete ones and yours was not a complete answer.” With that in mind, there will be no right or wrong answers to the question I pose. Hopefully, the above disclaimer will keep me from failing my own exam. It also means that anyone who responds to all or part of the question raised below, will not receive a failing grade. I should also note that, all persons listed in this hypothetical are fictional.

You are the first Chief Compliance Officer (CCO) for a company which sells health insurance products to the consumer market. You were hired to get the company ready to go into the overseas market by setting up a FCPA compliance program. You have been on the job one month.

One lovely Monday morning, the Chief Executive Officer (CEO) calls you into his office and informs you of the following: his legal department has formed a joint venture in India, to sell health insurance policies, with an Indian company which specializes in making and selling cooking equipment to the Indian consumer market. At this point there is no value set for the joint venture but you may assume that it will be a multi-million dollar entity. As a show of good faith, the CEO has established the joint venture ownership, and Board of Directors, as a 50/50 partnership between both companies. The joint venture was formed in India and is governed by the laws of India.

The CEO has met several times with the CEO of the Indian joint venture partner, has looked him in the eye and knows he is a ‘straight shooter’ and someone he wants to do business with. To that end, the CEO of the Indian joint venture has assured him, due to his good relationship with various Indian governmental officials that he has met through his cooking equipment business, that he can get the joint venture through the byzantine Indian licensing process much quicker than some other person. He just needs the funding for the joint venture to come though as the licensing process cannot begin until the joint venture is formed.

The CEO envisions a sales force of employees, agents and other representatives of the joint venture  , banks and other financial institutions which will receive commissions based upon the sales. He is excited because a large market for the products will be a trifecta of Indian public employees; federal, state, regional and local government employees. In other words, a captive market that the Indian partner will set up to tap into. Your CEO believes that each sales representative for the joint venture will need a separate license to sell health insurance for the products to be offered by the joint venture but the CEO of the joint venture partner has assured you gaining the license will not be a problem.

There is a signing ceremony scheduled to conclude the joint venture in two weeks and your CEO is making a final presentation to your company’s Board of Directors next week. This will be the first Board meeting that you will attend and you will present to them your vision for FCPA compliance in the company going forward. Your CEO wants you to give your blessing to the Board of Directors for the joint venture at the Board meeting, from the compliance perspective.

Please discuss the FCPA issues that you can identify in the above hypothetical.

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I hope that you and all of you loved ones have a Happy Thanksgiving!

Also Hook ‘Em Horns in their final battle against Texas A&M on Thanksgiving evening. 

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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, 2011

Questions, Questions, and More Questions

As I wrote last week I certainly do not need to invent compliance stories to blog about and even if I did no one would believe me. I was reminded of this once again last week when I read an article by Sam Rubenfeld, in the August 24, 2010 edition of the Wall Street Journal Corruptions Currents, entitled “Gulfsands In Business With Cousin Of Syrian President”. Rubenfeld reported that the London based company, with offices here in Houston, was working with a company controlled by Mr. Rami Makhlouf, reported to be the first cousin of the President of Syria.

Rubenfeld also referred to a Gulfsands Press Release dated on August 24, 2011; from the information presented in the Press Release, it would appear that Gulfsands has sustained quite a long relationship with Mr. Makhlouf. The release reported the following:

1.         Administrative Services Contract. The original agreement with Mr. Makhlouf, a company owned by the Makhlouf Interests was signed in 2000. Mr. Makhlouf was engaged by a Joint Venture (JV), which consisted of Ocean Energy (80% Owner) and Gulfsands (20% Owner). The original contract stated that Mr. Makhlouf would provide “various support and administrative services” to the JV. There is no total amount of monies paid under this agreement reported in the  Press Release but it reports that total fees paid “aggregate less than $250,000 per annum”. Further, the services agreement entered into with Mr. Makhlouf at that time was done under the oversight of Ocean Energy’s general counsel.

2.         The majority owner of the JV, Ocean Energy was acquired by another company, Devon. This acquisition occurred in 2003. Devon withdrew from the JV in 2005. So the 2000-2005 issues may fall on Devon as part of its acquisition of Ocean Energy.

3.         Milestone Payments: In addition to the payments under the Administrative Services Contract of something of an “aggregate of less than $250,000 per annum” over the past 11 years, Mr. Makhlouf has also received “milestone payments totaling $900,000 from the JVs. The Press Release uses the plural “joint ventures” but does not identify to which JVs these milestone payments were made and does not reference the contract under which these milestone payments were made.

4.         In addition to the above, the Press Release noted that “a company owned beneficially by Makhlouf Interests, owns 5.75% of the Company’s issued share capital. These shares were acquired in August 2007, at a premium to the then prevailing market price.”

5. Lastly, “The Group rents office premises in Damascus from a company owned beneficially by Makhlouf Interests. The lease is on terms negotiated at arms-length and considered normal for a commercial lease of this kind in Syria.”

So, whatever the relationship between Gulfsands and Mr. Makhlouf, they have been long standing and on-going. At least until August 24, 2011, when, as reported by Rubenfeld, Gulfsands said in the statement that it suspended all payments to interests of Makhlouf following sanctions imposed in May, and it “suspended the voting, dividend and transfer rights pertaining to the shares in Gulfsands held by Al Mashreq.”

So what does a compliance officer, or as Jim McGrath would say, ‘specialized outside counsel’ need to review here? Should counsel start with Gulfsands or maybe even Devon? Would it be the Administrative Services Contract or the Milestone Payment Contract? Should you analyze the payments made to Mr. Makhlouf to see if there is sufficient back up documentation to support these payments? What about the milestone payments? Do you review the office lease at all? Does the fact that the Administrative Services Contract was “under the oversight of Ocean Energy’s general counsel” at the time it was executed between the parties in any way protect Gulfsands? And last, but by no means least, should you contact and maybe self-disclose any of this to the Department of Justice? Questions, Questions and More Questions…

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, 2011

The FCPA in Emerging Markets: Evaluating Risks of Bribery and Corruption

I am attending the 2011 Global Ethics Summit this week in New York City. It is presented by Ethisphere and Thomson Reuters. This post will be first of several based upon the comments of the panelists. In today’s posting we will discuss some of the issues faced in emerging markets, regarding anti-bribery and anti-corruption.

The panelist listed several characteristics that appear across the spectrum in emerging markets. These markets usually have a large and multi-leveled bureaucracy which can make many demands for permits, licenses and other types of governmental approvals. In opening any new business in an emerging market there are usually multi-governmental touch points where bribes can be demanded. Due to these factors there is a culture of small time, almost daily corruption in many emerging market which can often impact the attitude of employees.

Another issued touched upon was that many US companies may have a lack of a full understanding of just whom it is doing business with when it goes into an emerging market. This includes not only the catch-phrase of “Know Your Customer” but also “Know Your Agent” and “Know Your Supply-Chain Vendor”. As the FCPA applies to foreign government and their representatives, a key issue in transactions in emerging markets is just who your customer is or who they might be. In countries such as China, the reach of the government is so great that it extends to most commercial enterprises. This means that a US company may be dealing with an agency or instrumentality of a foreign government and not appreciate that fact.

Douglas Nairne, Global Head of World Check discussed some of the difficulties US companies face when attempting to perform due diligence on a foreign business representative or supply chain vendor in an emerging market. It is often difficult to obtain information similar to that available in the US or other western country. Many times public records are not available online so that a much more lengthy and detailed search protocol is required. This can significantly lengthen your due diligence process. The situation can also exist where certain records are simply not in the public realm. Lastly is the issue of the quality of the records. Many times, such records are not updated on any type of regular basis, such as annually. This is particularly true for corporate filings which may list officers and directors so this can also present problems.

Cheryl Hug, an Ethics and Compliance Officer for Hewlett-Packard discussed some of the cultural sensitivities that a US company must demonstrate in emerging markets. Initially, she stated that US companies must train their US employees who will relocate to or work with the emerging markets on such cultural sensitivities. She also indicated that it was important to understand how to deal with your company’s service providers in such an environment. Lastly she spoke to a theme of  “reverse colonialization”. She said that when discussing compliance and ethics with those in emerging markets, she attempt to stay away from citing to the FCPA but uses the broader terms of anti-corruption and anti-bribery. Otherwise it may sound like the rich, western nation is simply imposing its values on the former colony.

There was a lengthy discussion of when a US company should walk away from a transaction in an emerging market. Mark Mendelsohn, partner at Paul, Weiss stated that he viewed transactional due diligence as more “art than science”. He suggested that there is no perfect answer to this question but each deal should be evaluated by a variety of factors, which if they exist should cause your business to walk away from a proposed transaction. The first factor was that the business is not sustainable absence real or perceived corruption.  The second was if the cost to remediate any bribery situation is so great that it destroyed the business value of the transaction. The third factor was lack of full information which would allow a reasonable risk based analysis.

A related topic was that of joint ventures. Deirdre Stanley, General Counsel for Thomson Reuters, discussed the issue of knowing who you joint venture partners actually were. This is to ensure that you had no government officials who might be receiving anything improper under the FCPA. She also stressed key components were transparency in joint venture governance and strong contractual anti-bribery and anti-corruption terms and conditions.

The group emphasized however that the problems were manageable if you have time to navigate this bureaucratic system but if you need something done in a hurry or at the last minute you are subject to being squeezed for money. So good business planning is a definite key.  Your company should go into any venture in an emerging market with its eyes open and with a robust business management plan in place.

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, 2011

 

Haist on Foreign Joint Ventures and the FCPA – Part II

In our most recent post, we wrote about an article by Dennis Haist, General Counsel of the Steele Foundation, which recently appeared in the ACC Docket. The article was entitled, “Guilt by Association: Transnational Joint Ventures and the FCPA”. In our first post we discussed Haist’s list of risk characteristics of a foreign joint venture for a US company. In our concluding post on Haist’s article, we will discuss some of the tactics that Haist suggests a US company engage in, to identify these risks in the due diligence phase and to manage these risks in the contract negotiation stage and thereafter.

Due Diligence
The starting point for any company is to engage in a due diligence investigation on any prospective foreign joint venture partners. Such a foreign entity or persons must provide enough basic information that a reasonable investigation can be performed. Haist breaks down his suggested due diligence inquires as follows:
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.
2. 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 (5 percent threshold more for publicly-listed entity).
• 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.
3. 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.
4. 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.
5. 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 US Foreign Corrupt Practices Act or any 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.
6. References
• Three or more unrelated business references, including a bank and existing client.
7. 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.

Haist emphasized that an over-riding key is to document the entire process that your company goes through in investigated and creating a foreign joint venture. Additionally, it is 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.

Contract Issues
Haist believes that any Joint Venture Agreement with a foreign business partner should include FCPA anti-bribery and corruption representations, warranties and covenants. Theses representations, warranties and covenants not to violate the FCPA should also include reference to the national and local anti-corruption laws of the foreign country, including laws enacted to comply with the OECD anti-bribery Convention and the UK Bribery Act. If the Joint Venture will operate in any other countries, the anti-corruption laws of those jurisdictions should be referenced as well.

Additional clauses that Haist suggests including in the Joint Venture Agreement are the following:
• A right of immediate termination for breach of the warranties or covenants relating to FCPA-anti-bribery and anti-corruption.
• A requirement for annual certification of compliance with such provisions by joint venture partners and joint venture officers, managers and employees.
• Require that the joint venture follow generally accepted accounting principles (GAAP), and conduct an annual audit by an agreed upon independent accounting firm.
• The right to conduct ongoing audits of the joint venture books.
• 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).
• If the foreign joint venture partner has day-to-day management responsibilities, require dual signatures for checks or electronic funds transfers drawn on joint venture bank accounts.
• Require that the joint venture conduct investigative due diligence on agents, consultants and other third parties retained by the joint venture.
• Require the implementation of a code of business conduct by the joint venture and implement an anonymous reporting mechanism for joint venture employees.

Navigating the waters involving a foreign joint venture partner are tricky at best. In addition to all the business issues, the added requirements of the FCPA and the UK Bribery Act for foreign joint ventures make such a category of business relationship a potentially risky step. His article provides to the FCPA practitioner solid advice with which to provide counsel, whether you are in-house counsel or a lawyer in private practice, to your client who may be new to the foreign joint venture arena. Once again, we applaud him for putting together such an article to use as a guidepost when reviewing the creation of foreign joint ventures, from an FCPA perspective.
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, 2011

Foreign Joint Ventures: Dennis Haist and Some Characteristics of FCPA Risk

In an article in the January/February issue of the ACC Docket, entitled “Guilt by Association: Transnational Joint Ventures and the FCPA”; Dennis Haist, General Counsel of The Steele Foundation (Steele) discussed some of the risks US companies can encounter under the Foreign Corrupt Practices Act (FCPA) when doing business overseas through the vehicle of a Joint Venture. After an introduction of the increasing risks to US companies for FCPA enforcement by reviewing some recent Department of Justice (DOJ) enforcement actions, Haist reviews some of the characteristics which may increase FCPA risk. We found his list to be a useful resource in thinking through FCPA compliance. The listed included the following:

1. Sharing of Risk/Reward. The commingling of risk and reward by the joint venture participants. Most generally, a transnational joint venture will 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.
2. Local Content Requirement. A joint venture with a local company may be a jurisdictional requirement to participate in that foreign government’s tendering process. Many times a foreign public tender process will restrict bidders to local companies or joint ventures that include a local company for content. 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.
3. Joint Venture Partner Selection Process. The foreign joint venture partner is usually selected based upon its knowledge of the local playing field and its connections to those players. Typically a business unit will attempt to nominate 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. In many such situations, a company’s law department will be brought into the discussions only after the preliminary negotiations have taken place, and perhaps even after the development of a term sheet, letter of intent or heads of agreement with the prospective partner. If compliance terms and conditions have not been a discussion in these preliminary negotiations, it may well be difficult to introduce them thereafter.
4. The dreaded “Recommendation”. A governmental official may recommend the foreign joint venture partner. Unless the prospective partner was only one entity on a formal list of re-qualified local partners, such a recommendation should raise always red flag.
5. Foreign Law Requirement. It is often the case that when a foreign joint venture entity is formed, it is the local legal requirements that it must be formed under the laws of the foreign country. Such laws will usually dictate a certain percentage equity interest by the foreign partner and the appointment of local personnel to officer and management positions.
6. Locals Dealing with Locals. The foreign joint venture partner often has the designated responsibility for day-to-day interface with local government officials. These joint venture representatives will blanch at the seconding of expensive US or Western European expatriates to the joint venture and may well thwart any such action if the foreign partner has an equal or controlling equity interest in the joint venture.
7. Management Fee. The foreign joint venture partner may receive a “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. Typically there are no substantive billings associated with such fees, they simply become due. Under this type of arrangement, it is almost impossible to justify this fee if requested by the Department Of Justice.
8. Books and Records. The books and records of the joint venture, or portions of them, may be kept in the local language, complicating auditing. The problem becomes more difficult if the foreign joint venture partner is receiving the sponsor or management fees discussed above, and keeps its books of account only in the local language. Even if the books and records are maintained in English they usually are not kept up to a US public company, SOX or other standard. This in and of itself, is a violation of the FCPA.
9. Can you talk the talk? The multinational may not have financial oversight personnel with requisite language skills in the foreign country. Some companies have a policy that English will be used throughout the world in its business dealings. However, even with such an English only policy in place, the risks represented by such lack of effective oversight by the multinational extend not only to potential FCPA violations, but to other corrupt acts, including kickbacks, fraud and theft.
10. Lack of Controls. The joint venture may have local bank accounts or funds that do not require dual signatures, precluding a reasonable level of control over the use of joint venture funds. Once again, such a lack of controls may be a per se FCPA books and records violation.

Haist goes on in his article to list several protections which the FCPA compliance practitioner can put in place to attempt to deal with or manage these risks. We will discuss some of these risk management strategies in a subsequent posting. We recommend Haist’s article for your review and applaud him for putting together such a list to use as a guidepost when reviewing the creation of foreign joint ventures, from an FCPA perspective.

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, 2011